Carter’s, Inc. — Form 10-Q Summary
Period clarification: The request metadata says 2016 Q3, but the supplied filing is for the fiscal quarter ended September 30, 2017, with comparisons to the quarter ended October 1, 2016. The first three fiscal quarters are also compared year over year.
Business context and reporting period
Carter’s designs, sources, and markets children’s apparel and related products through wholesale, retail stores, and eCommerce. At September 30, 2017, it operated 1,033 retail stores in North America. Fiscal 2017 reporting segments were U.S. Retail, U.S. Wholesale, and International.
The company acquired Skip Hop in February 2017 and its Mexican licensee and a related entity in August 2017. Their results are included from their respective acquisition dates; acquisition accounting remained subject to revision.
Key financial metrics
| Metric | Fiscal Q3 2017 | First three quarters 2017 | Comparable 2016 period |
|---|---|---|---|
| Net sales | $948.2 million (+5.2%) | $2,373.1 million (+4.8%) | $901.4 million; $2,265.0 million |
| Gross profit / margin | $403.8 million / 42.6% | $1,023.1 million / 43.1% | $375.5 million / 41.7%; $968.7 million / 42.8% |
| Operating income / margin | $130.7 million / 13.8% | $273.8 million / 11.5% | $130.9 million / 14.5%; $287.1 million / 12.7% |
| Net income | $82.5 million (+2.1%) | $167.1 million (-2.3%) | $80.8 million; $171.0 million |
| Diluted EPS | $1.71 | $3.43 | $1.60; $3.34 |
| Operating cash flow | Not presented for the quarter alone | $117.5 million | $116.6 million |
Year-to-date investing cash outflow was $211.0 million, including $159.4 million for acquisitions and $51.7 million of capital expenditures. Financing cash outflow was $101.0 million. Cash declined by $194.0 million from year-end 2016 to $105.4 million.
At September 30, 2017, total assets were $2.10 billion, current assets $1.05 billion, current liabilities $327.9 million, and long-term debt net of issuance costs $687.1 million. Debt comprised $400 million principal of 5.25% senior notes due 2021 and $291.0 million drawn on the revolving facility. Net debt using reported cash was approximately $581.7 million. The company reported $454.5 million available under its revolving facility and compliance with its covenants.
Quarterly dividends were $0.37 per share; year-to-date dividends were $1.11 per share. The company repurchased 1.73 million shares for $151.0 million year to date.
Changes versus prior comparable periods
- Quarterly sales increased, but operating income was nearly unchanged and operating margin fell 0.7 percentage points. Year-to-date sales and gross profit rose, while operating income fell 4.6% and net income fell 2.3%.
- Gross margin improved, supported by higher-margin retail mix and favorable product costs, partly offset by lower wholesale margins and higher inventory provisions. SG&A rose faster than sales, reflecting store operations and openings, eCommerce, and Skip Hop-related costs.
- U.S. Retail sales increased 7.7% in the quarter and 7.2% year to date. eCommerce comparable sales grew 20.9% and 22.5%, respectively, while comparable store sales declined 3.2% and 4.3%.
- U.S. Wholesale sales declined 1.1% in the quarter and were nearly flat year to date. International sales grew 17.6% in the quarter and 11.0% year to date, substantially reflecting acquisitions; International operating margin declined year over year.
- Year-to-date cash from operations was nearly unchanged from 2016. Acquisition spending was significant, while capital expenditures and share repurchases were lower than in the prior-year period.
Outlook, commentary, and risks
- Management estimated a fiscal 2017 effective tax rate of approximately 34% and planned approximately $90 million of capital expenditures for the full year. The filing does not provide a clear full-year revenue or earnings forecast.
- Management cited hurricanes affecting Texas, the Southeast, and Puerto Rico, and unusually warm weather, as factors contributing to weaker comparable store sales. It also noted seasonal variation, with sales and profitability generally lower in the first half.
- Variable-rate revolving borrowings were $291.0 million; a 1 percentage-point rate change would change annual pretax interest expense by approximately $2.9 million. Foreign exchange movements may also affect results.
- Gross unrecognized tax benefits were approximately $12.8 million; $8.4 million could affect the effective tax rate if recognized. Acquisition purchase-price allocations and certain tax and working-capital matters remained open.
- The company reported no legal proceedings it believed would materially adversely affect its financial position, results, or cash flows, and no material changes to the risk factors in its 2016 Form 10-K. It was integrating controls for the two acquisitions; disclosure controls were reported effective.
Important facts for investors to verify
- Confirm the intended filing period: the supplied 10-Q covers 2017 Q3, not 2016 Q3.
- Assess whether eCommerce and acquisition-led growth can offset declining comparable store sales and weakness in U.S. Wholesale.
- Monitor SG&A growth, segment operating margins—particularly International—and inventory provisions.
- Track cash conversion, inventory and receivables, acquisition integration, and the effect of debt-funded spending and shareholder returns on liquidity.
- Review subsequent updates to acquisition valuations, tax exposures, the fiscal-year tax and capital-spending outlook, and the ability to maintain dividends and repurchases under debt restrictions.