Carter’s, Inc. — Form 10-Q Summary
Reporting-period note: The request metadata says 2011 Q3, but the filing is for the quarter ended September 29, 2012 (fiscal 2012 Q3), compared with the quarter ended October 1, 2011. The financial statements are unaudited.
Business context and period
Carter’s designs, sources, and markets children’s apparel under Carter’s, OshKosh, and other brands through wholesale, retail, eCommerce, and licensing channels. At quarter-end it operated 644 retail stores: 398 Carter’s, 167 OshKosh, and 79 in Canada. The 2012 nine-month comparison includes a longer period of Bonnie Togs’ Canadian operations than the prior year, following its June 2011 acquisition; reported international growth is therefore not wholly comparable.
Key financial metrics
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $668.7 million | $639.6 million | $1,692.5 million | $1,503.1 million |
| Gross profit / margin | $270.1 million / 40.4% | $192.1 million / 30.0% | $648.1 million / 38.3% | $485.2 million / 32.3% |
| Operating income / margin | $95.4 million / 14.3% | $56.8 million / 8.9% | $183.6 million / 10.8% | $132.4 million / 8.8% |
| Net income | $59.4 million | $34.4 million | $112.5 million | $79.2 million |
| Diluted EPS | $0.99 | $0.58 | $1.88 | $1.35 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $129.2 million | $(85.8) million |
Q3 sales rose 4.5% and nine-month sales rose 12.6%; net income increased 72.4% and 41.9%, respectively. Q3 gross margin benefited from approximately $41 million of lower product costs and higher prices. Nine-month growth also reflects the Bonnie Togs acquisition. SG&A rose to 27.7% of sales in Q3 and 29.0% for the nine months, driven by store and eCommerce expansion, performance compensation, marketing, and distribution costs.
At September 29, 2012, cash was $254.3 million, current assets were $876.5 million, and current liabilities were $204.2 million. Long-term revolving debt was $186.0 million, down from $236.0 million at both prior comparison dates. The company had $11.4 million of letters of credit outstanding and stated it was in compliance with debt covenants. Nine-month capital expenditures were $59.8 million. Cash increased $20.8 million during the nine months to $254.3 million.
Material changes and management commentary
- Carter’s retail sales grew 17.8% in Q3, supported by new stores, eCommerce, and 2.7% comparable-store growth. OshKosh retail sales fell 3.0%, with comparable-store sales down 4.3% as traffic declined.
- Carter’s wholesale sales declined 4.6% in Q3, mainly due to fewer units shipped and lower off-price channel shipments; higher average prices partly offset the decline. International sales grew 16.9% in Q3 and 87.2% for the nine months, with the latter comparison significantly affected by Bonnie Togs.
- Management said operating cash flow improved primarily because of higher earnings and favorable working-capital changes. It expected cash on hand, operating cash flow, and revolver availability to fund foreseeable working-capital and capital needs.
- Fiscal 2012 capital expenditures were expected to be approximately $90 million, principally for store openings and remodels and distribution capacity. Planned store activity for fiscal 2012: approximately 63 Carter’s openings and nine closures; eight OshKosh openings and 13 closures; and 18 Canadian openings with no anticipated closures.
- The company planned to close its Hogansville, Georgia distribution facility in 2013 and open a larger facility in Braselton. It had recorded $2.6 million of closure costs through the first nine months and expected additional costs.
- After quarter-end, Carter’s announced consolidation of Shelton, Connecticut retail and financial operations with Atlanta. It expected $35–$40 million of pre-tax costs over 12–18 months, including approximately $34 million cash costs and $3 million non-cash accelerated depreciation.
Guidance, risks, contingencies, and unusual items
- No specific full-year earnings or revenue guidance is provided. Management cautioned that interim results are not necessarily indicative of full-year results; sales and profitability are seasonal, with a greater share of sales typically in the second half.
- Product costs were expected to decline for the remainder of 2012 versus the prior year but remain elevated. Risks include pricing competition, consumer demand, foreign sourcing and supply-chain disruptions, vendor quality, customer concentration, and store-location economics.
- Variable-rate debt exposes earnings and cash flow to interest-rate movements: management estimated a 1% rate change would change annual interest cost by approximately $1.9 million. Foreign-exchange movements, particularly U.S. dollar/Canadian dollar exposure, are also a risk.
- Bonnie Togs contingent consideration was valued at $29.4 million at quarter-end, based on a high probability of meeting earnings targets; the liability is subject to remeasurement and changes in assumptions could materially affect its fair value.
- Gross unrecognized tax benefits were approximately $10.1 million, of which $6.9 million would affect the effective tax rate if recognized. The filing also describes continuing legal and investigative matters related to previously reported customer margin support; their duration, cost, and outcome were not predictable.
- The credit facility restricts certain subsidiary dividends to the parent, and management did not anticipate paying common dividends in the foreseeable future. The company reported no legal proceedings it believed would materially adversely affect its financial position, results, or cash flows.
Important facts for investors to verify
- Confirm the reporting-period discrepancy: the filing covers fiscal 2012 Q3, not 2011 Q3.
- Assess how much reported sales growth reflects underlying demand versus the Bonnie Togs acquisition, store additions, eCommerce, pricing, and off-price channel changes.
- Monitor whether lower product costs and higher prices can sustain gross-margin improvement as product costs remain elevated and SG&A rises.
- Track operating cash flow, inventory, capital spending, debt reduction, and remaining revolver availability through seasonal periods.
- Review the eventual cash cost and execution effects of the Shelton consolidation and distribution-facility transition, as well as the Bonnie Togs earnout and tax exposures.