Carter’s, Inc. — FY2014 Form 10-K Summary
Reporting period: Fiscal year ended January 3, 2015, comprising 53 weeks, compared with 52 weeks in FY2013. The extra week added approximately $44.1 million of revenue. The filing also provides unaudited fourth-quarter results.
Business context and results
Carter’s designs, sources, and markets children’s apparel under Carter’s and OshKosh brands through wholesale, company-operated stores, eCommerce, and licensing. It operated 855 U.S. stores and 124 Canadian stores at year-end. Carter’s reported a 14.3% share of the U.S. baby and young children’s apparel market; OshKosh reported 2.2%.
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Net sales | $2,893.9 million | $2,638.7 million | +9.7% |
| Gross profit / margin | $1,184.4 million / 40.9% | $1,095.4 million / 41.5% | Profit +8.1%; margin −0.6 pts |
| Operating income / margin | $333.3 million / 11.5% | $264.2 million / 10.0% | +26.2% |
| Net income | $194.7 million | $160.4 million | +21.4% |
| Diluted EPS | $3.62 | $2.75 | +31.6% |
| Operating cash flow | $282.4 million | $209.7 million | +$72.7 million |
| Capital expenditures | $103.5 million | $182.5 million | −43.3% |
Fourth-quarter FY2014 unaudited sales were $869.2 million versus $769.7 million; operating income was $114.0 million versus $73.4 million; net income was $68.6 million versus $42.7 million. Quarterly diluted EPS was $1.29 versus $0.78.
Financial position and material year-over-year changes
- Year-end cash was $340.6 million, current assets $1,041.5 million, current liabilities $248.0 million, and working capital $793.5 million. Total debt was $586.0 million, unchanged from FY2013; cash exceeded debt by approximately $245 million.
- Debt comprised $400 million of 5.25% senior notes due 2021 and $186 million drawn on the revolving facility. Revolver availability was approximately $182.5 million after letters of credit; the company reported covenant compliance.
- Gross margin declined mainly from higher product costs and unfavorable foreign exchange, partly offset by a favorable direct-to-consumer mix and freight costs. SG&A rose 2.5% to $890.3 million but fell from 32.9% to 30.8% of sales, helped by lower office-consolidation, Japan-exit, marketing, and benefit costs.
- Operating cash flow increased, reflecting higher earnings and favorable working-capital changes. Cash used in investing was $104.7 million. Operating cash flow less capital expenditures was approximately $178.9 million.
- Sales increased across Carter’s retail and wholesale, OshKosh retail, and International; OshKosh wholesale declined 1.8%. Carter’s retail grew 13.9%, including eCommerce growth, while comparable store sales declined 1.0%. OshKosh retail grew 15.8% and comparable store sales rose 3.3%.
Outlook, risks, and unusual items
- Management expected cash, operating cash flow, and revolver availability to fund foreseeable working-capital and investment needs, while noting there was no assurance. FY2015 capital expenditures were planned at approximately $120 million. Planned openings included about 65 Carter’s U.S. stores, 45 OshKosh side-by-side locations, and 20 Canadian stores; planned closures were five Carter’s and six OshKosh stand-alone stores.
- The Board authorized a quarterly dividend of $0.22 per share in February 2015; FY2014 dividends were $0.19 per share each quarter. Future dividends and buybacks remain subject to Board discretion and debt restrictions.
- Key risks include price and margin pressure, consumer demand and fashion shifts, foreign exchange and sourcing costs, customer concentration, vendor and sourcing-agent reliance, supply-chain and port disruption, and cybersecurity. The top five customers represented about 25% of sales; ten vendors supplied about 60% of products, and one sourcing agent managed about 70% of inventory purchases. West Coast port delays had already affected shipments and inventory allocations.
- Debt and lease commitments are significant: contractual operating-lease payments totaled $912.7 million; cancellable inventory purchase commitments were estimated at $400–$500 million. Variable-rate debt was $186 million; a 1% rate change would affect annual pretax interest expense by approximately $1.9 million.
- The Japan retail exit was completed in FY2014; exit costs were approximately $1.5 million in FY2014 and $4.1 million in FY2013. Office consolidation charges were $6.6 million in FY2014, with a $3.6 million remaining accrual. The company acquired Carter’s Chile trademark rights for about $3.6 million and sold its Hogansville distribution facility for $2.1 million, approximately book value.
- The company disclosed ongoing potential costs and management distraction from proceedings related to earlier SEC and U.S. Attorney investigations into customer margin support; it had entered a non-prosecution agreement with the SEC in 2010. It reported no current legal proceeding expected to materially affect its financial position, results, or cash flows.
- Management reported effective disclosure controls and internal control over financial reporting. The auditor issued an unqualified opinion on the financial statements and internal controls.
Investor verification priorities
- Separate underlying sales and earnings growth from the extra fiscal week’s approximately $44.1 million revenue contribution.
- Assess whether sales momentum and margins can persist given gross-margin compression, promotional competition, currency exposure, and current shipping disruptions.
- Review debt-service capacity, covenant and dividend restrictions, and the impact of substantial lease and inventory commitments.
- Track inventory growth, wholesale receivable concentration, and credit exposure to major customers.
- Verify FY2015 store-expansion and capital-spending plans against realized returns, particularly for OshKosh retail and international operations.
- Monitor remaining office-consolidation costs, contingent Bonnie Togs consideration, and costs associated with the previously disclosed investigations.