Carter’s, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended December 29, 2012 (52 weeks); the filing was signed February 27, 2013. Although the request metadata says “2011 Q4,” this filing reports fiscal 2012, with fiscal 2011 as the principal comparison. Amounts below are in U.S. dollars.
Business context
Carter’s designs, sources, and sells children’s apparel under the Carter’s and OshKosh brands through wholesale, company-operated retail, e-commerce, and licensing channels. At year-end it operated 581 U.S. stores and 82 Canadian stores. The Canadian business, acquired in June 2011, contributed a full year of results in 2012 versus six months in 2011. In February 2013, the company completed a transaction with a former Japanese licensee; its brands were being sold through 97 Japanese retail locations.
Financial performance and liquidity
| Metric | Fiscal 2012 | Fiscal 2011 |
|---|---|---|
| Net sales | $2,381.7 million | $2,109.7 million |
| Gross profit / gross margin | $937.9 million / 39.4% | $692.3 million / 32.8% |
| Operating income / margin | $262.0 million / 11.0% | $187.5 million / 8.9% |
| Net income | $161.2 million | $114.0 million |
| Diluted EPS | $2.69 | $1.94 |
| Operating cash flow | $278.6 million | $81.1 million |
| Capital expenditures | $83.4 million | $45.5 million |
Sales rose 12.9%; management attributed growth to higher sales across most segments and the full-year contribution from Canada. Gross margin improved with higher selling prices, lower product costs, greater direct-to-consumer contribution, and the absence of the 2011 acquisition inventory step-up charge. SG&A rose 31.6% to $713.2 million, including higher performance compensation, Canadian retail costs, e-commerce and marketing spending, and $9.5 million of facility and office closure costs.
Cash and cash equivalents were $382.2 million, working capital was $713.5 million, and total debt was $186.0 million at year-end. Cash exceeded debt by approximately $196 million. The $375 million revolving facility had approximately $189 million available, excluding $12.4 million of letters of credit; the company was in compliance with its financial covenants. Operating cash flow increased substantially, primarily due to higher earnings and favorable working-capital changes. No shares were repurchased under the authorization in 2012, and the company did not anticipate paying dividends in the foreseeable future.
Material changes and fourth-quarter results
- Carter’s retail sales increased 21.9% to $818.9 million, supported by new stores, e-commerce, and 3.9% comparable-store growth. OshKosh retail sales increased 0.9%, but comparable-store sales declined 2.0%, reflecting lower transactions and traffic.
- Carter’s wholesale sales rose 4.5%; OshKosh wholesale sales fell 2.6%. International sales increased 60.2% to $218.3 million, substantially reflecting the full year of Canadian operations.
- Fiscal fourth-quarter 2012 net sales were $689.3 million, operating income was $78.4 million, and net income was $48.7 million, compared with $606.6 million, $55.0 million, and $34.8 million, respectively, in fourth-quarter 2011.
- Fiscal 2012 included $3.1 million of Hogansville distribution-center closure costs and $6.4 million related to the Shelton, Connecticut office consolidation. The company recorded a $3.6 million noncash revaluation charge for Bonnie Togs contingent consideration; the year-end liability was $29.7 million.
Outlook, risks, and contingencies
- Management expected fiscal 2013 product costs to decline from 2012 levels but remain above historical levels. It planned approximately $200 million of 2013 capital expenditures and projected about 60 Carter’s, 15 OshKosh, and 20 Canadian store openings, alongside planned closures.
- The Shelton-to-Atlanta consolidation was expected to be completed by the end of fiscal 2013, with $32–$36 million of additional pretax costs expected in 2013. Additional Hogansville closure costs of approximately $2.2 million were also expected.
- Management stated that cash, operating cash flow, and available revolver borrowings should fund foreseeable working-capital and capital needs, while noting there is no assurance.
- Key risks include dependence on major wholesale customers (the top four accounted for approximately 25% of consolidated sales), fashion and consumer-spending changes, price competition and input costs, and reliance on foreign sourcing. One sourcing agent managed approximately 80% of inventory purchases, and most products were sourced abroad.
- Other risks include disruption to the supply chain or new Braselton distribution center, e-commerce and technology interruptions, execution of direct-sourcing and international expansion, and potential impairment of goodwill or brand assets. No impairment was recorded in 2012.
- The SEC and U.S. Attorney’s Office investigations concerning historical customer margin support remained a disclosed risk. The company had entered into a conditional SEC non-prosecution agreement and expected further legal and indemnification costs. Separately, it said ordinary-course legal proceedings were not expected to have a material adverse effect.
- Contractual operating-lease commitments totaled $659.7 million. Inventory purchase commitments were estimated at $550–$650 million, generally cancellable subject to possible charges.
Most important facts for investors to verify
- Whether the 2012 gross-margin improvement is sustainable as product costs, pricing, promotional activity, and sales mix change.
- How much of sales and cash-flow growth reflects underlying demand versus the Canadian acquisition, store additions, and working-capital timing.
- Whether the Shelton consolidation, Braselton distribution transition, and planned 2013 capital spending meet cost, timing, and operating targets.
- Progress in reducing reliance on the dominant sourcing agent and successfully increasing direct sourcing.
- Future contingent-consideration payments, cash requirements, and covenant headroom under the revolving facility.
- Any developments in the historical investigations, customer concentration, or other legal and compliance matters.