Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2016 OR |
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¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO ______ |
Commission file number:
001-31829
CARTER’S, INC.
(Exact name of Registrant as specified in its charter)
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Delaware | | 13-3912933 |
(state or other jurisdiction of | | (I.R.S. Employer Identification No.) |
incorporation or organization) | | |
Phipps Tower
3438 Peachtree Road NE, Suite 1800
Atlanta, Georgia 30326
(Address of principal executive offices, including zip code)
(678) 791-1000
(Registrant's telephone number, including area code)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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Title of each class | | Name of each Exchange on which Registered |
Carter's, Inc.'s common stock par value $0.01 per share | | New York Stock Exchange |
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
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Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (X) No ( )
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ( ) No (X)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No ( )
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (X)
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer (X) Accelerated Filer ( ) Non-Accelerated Filer ( ) Smaller Reporting Company ( )
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ( ) No (X)
The approximate aggregate market value of the voting stock held by non-affiliates of the Registrant as of July 1, 2016 (the last business day of our most recently completed second quarter) was $5,220,125,196.
There were 48,600,818 shares of Carter's, Inc. common stock with a par value of $0.01 per share outstanding as of the close of business on February 17, 2017.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A relating to the Annual Meeting of shareholders of Carter's, Inc., scheduled to be held on May 17, 2017, will be incorporated by reference in Part III of this Form 10-K. Carter's, Inc. intends to file such proxy statement with the Securities and Exchange Commission not later than 120 days after its fiscal year ended December 31, 2016.
CARTER’S, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 2016
This Annual Report on Form 10-K contains certain forward-looking statements regarding future circumstances. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can also be identified by words such as "anticipates," "believes," "estimates," "expects," "intends," "plans," "predicts," and similar terms. These forward-looking statements are based upon current expectations and assumptions of the Company and are subject to various risks and uncertainties that could cause actual results to differ materially from those contemplated in such forward-looking statements including, but not limited to, those discussed in the subsection entitled "Risk Factors" under Part I, Item 1A of this Annual Report on Form 10-K. Actual results, events, and performance may differ significantly from the results discussed in the forward-looking statements. Readers of this Annual Report on Form 10-K are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Except for any ongoing obligations to disclose material information as required by federal securities laws, the Company does not have any intention or obligation to update forward-looking statements after the filing of this Annual Report on Form 10-K. The inclusion of any statement in this Annual Report on Form 10-K does not constitute an admission by the Company or any other person that the events or circumstances described in such statement are material.
PART I
Our market share data is based on information provided by the NPD Group, Inc ("NPD"). Unless otherwise indicated, references to market share in this Annual Report on Form 10-K are expressed as a percentage of total retail sales of the stated market. The baby and young children’s apparel market includes apparel products for ages zero to seven. NPD data is based upon Consumer Panel Track SM (consumer-reported sales) calibrated with selected retailers' point of sale data. Please note that NPD revised its Consumer Tracker methodology, effective with the most recent data release for annual 2016 and restated annual 2015 data. NPD data cited in prior Annual Reports on Form 10-K are based on an alternate methodology no longer employed by NPD and are not comparable to current year presentation.
The NPD market share data presented is based on NPD's definition of the baby and playclothes categories, which are different from the Company's definitions of these categories. The data presented is based upon The NPD Group/Consumer Tracking Service for Children's Apparel in the United States ("U.S.") and represents the twelve month period ending December 31, 2016.
Unless the context indicates otherwise, in this filing on Form 10-K, "Carter's," the "Company," "we," "us," "its," and "our" refers to Carter's, Inc. and its wholly owned subsidiaries.
Our fiscal year ends on the Saturday, in December or January nearest the last day of December, resulting in an additional week of results every five or six years. Fiscal 2016, which ended on December 31, 2016, and fiscal 2015, which ended on January 2, 2016, both contained 52 weeks. Fiscal 2014, which ended on January 3, 2015, contained 53 weeks.
ITEM 1. BUSINESS
OVERVIEW
We are the largest branded marketer in the U.S. and Canada of apparel exclusively for babies and young children. We own two of the most highly recognized and most trusted brand names in the children's apparel industry, Carter's and OshKosh B'gosh (or "OshKosh").
Established in 1865, our Carter's brand is recognized and trusted by consumers for high-quality apparel for children sizes newborn to eight and accessories.
Established in 1895, OshKosh is a well-known brand, trusted by consumers for apparel for children sizes newborn to 14, with a focus on playclothes for toddlers and young children, and accessories.
We believe our brands provide a complementary product offering and aesthetic, and are each uniquely positioned in the marketplace. In the $20.7 billion baby and young children's apparel market ages zero to seven in the U.S., our Carter's brand has the #1 position with a 14.9% market share and our OshKosh brand has a 2.9% market share.
We market high-quality products at an attractive value proposition for consumers, and offer multiple product categories, including baby, sleepwear, playclothes, and related accessories. Our multi-channel international business model - retail stores, online and wholesale - enables us to reach a broad range of consumers around the world. As of December 31, 2016, our channels included approximately 18,000 wholesale locations (including department stores, national chain stores, specialty stores and discount retailers), 792 stores in the U.S., 164 stores in Canada, and our U.S. and Canadian websites (including www.carters.com), all in addition to our other international wholesale, licensing, and online channels.
We have extensive experience in the young children’s apparel market and focus on delivering products that satisfy our consumers’ needs. Our long-term growth strategy is focused on:
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• | providing the best value and experience in young children's apparel; |
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• | extending the reach of our brands by improving the convenience of shopping for our brands and by strengthening our international operations; and |
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• | improving profitability by strengthening distribution and direct-sourcing capabilities, as well as inventory management disciplines. |
For fiscal 2016 and all comparative fiscal periods presented within this Annual Report on Form 10-K, our business was managed and evaluated through five segments: Carter's Retail, Carter's Wholesale, OshKosh Retail, OshKosh Wholesale, and International. Our Carter’s Retail and OshKosh Retail segments consist of income from sales of products in the United States, including Carter’s and OshKosh products, through our Carter’s and OshKosh retail and online stores, respectively. Similarly, our Carter’s Wholesale and OshKosh Wholesale segments consist of income from sales in the United States of Carter’s and OshKosh products, respectively, through our wholesale partners. Finally, our International segment consists of income from sales of Carter’s and OshKosh products through retail and online stores outside the United States, primarily through our retail and online stores in Canada and stores operated by our international partners, as well as sales to our international wholesale partners. Additional financial and geographical information about our segments is contained in Item 8 - “Financial Statements and Supplementary Data”, under Note 13 - “Segment Information” to the accompanying consolidated financial statements. Beginning in 2017, to align with changes in how our executive team currently views and manages the business, we combined our two U.S. retail and two U.S. wholesale segments. Our new segments will be U.S. Retail, U.S. Wholesale, and International. Additional information is contained in Item 8 - "Financial Statements and Supplementary Data", under Note 21 - "Subsequent Events" to the accompanying consolidated financial statements.
Our Brands
Carter's
Under our Carter's brand, we design, source, and market products primarily for sizes newborn to eight. Our focus is on essential, high-volume apparel products for babies and young children. Such products include bodysuits, multi-piece knit sets, pajamas, bibs, blankets, outerwear, shoes, swimwear, playwear, and fashion accessories. We believe that a majority of our products are consumer essentials and are therefore less affected by changes in fashion trends and economic cycles.
Carter’s is the leading brand in the baby category in the U.S.. In fiscal 2016, our multi-channel business model enabled our Carter’s brand to maintain its leading market share in the U.S. of approximately 25.0% for the baby market ages zero to two, which represented nearly five times the market share of the next largest brand.
In fiscal 2016, we sold 355 million units of Carter's and related exclusive-brand products in the U.S. through our retail and wholesale channels, an increase of approximately 3.8% from fiscal 2015.
OshKosh
Under our OshKosh brand, we design, source, and market young children’s apparel and high-quality playclothes primarily for children in sizes newborn to 14. Our OshKosh branded products primarily include denim, overalls, t-shirts, fleece, and other playclothes. Our OshKosh brand is generally positioned towards an older segment relative to the Carter's brand, and at slightly
higher average prices than our Carter’s brand. We believe our OshKosh brand has significant brand name recognition, which consumers associate with high-quality, durable, and authentic playclothes for young children.
We believe our OshKosh brand represents a significant opportunity for us to increase our market share in the playclothes category as the young children’s playclothes market in the U.S. is highly fragmented. For fiscal 2016, this market was nearly four times the size of the baby and sleepwear markets combined. We strive to grow this business by strengthening our product offerings, improving product value, reducing product complexity, and leveraging our strong customer relationships and global supply chain expertise.
In fiscal 2016, we sold 52 million units of OshKosh products in the U.S. through our retail and wholesale channels, an increase of approximately 6.1% from fiscal 2015.
Brand and Product Development
We have cross-functional product teams focused on the development of both our Carter's and our OshKosh brands and products. These teams are skilled and experienced in identifying and developing high-volume, high-value products. Each team includes members from merchandising, art, design, sourcing, product development, and planning. These teams follow a disciplined approach to fabric usage, color selection, and productivity. We also license our brand names to other companies to create a broad collection of lifestyle products, including bedding, hosiery, shoes, room décor, furniture, diaper bags, and toys. The licensing team directs the use of our designs, art, and selling strategies to all licensees.
We believe this disciplined approach to product design results in a compelling product offering to consumers, reduces our exposure to short-term fashion trends, and supports efficient operations. We conduct consumer research as part of our product development process.
Brand Positioning
Our vision is to be the leader in baby and young children's apparel and to consistently provide high-quality products at a compelling value to consumers. We employ a disciplined merchandising strategy that identifies and focuses on essential products. We believe that we have strengthened our brands' image with the consumer by differentiating our products through fabric improvements, new artistic applications, and new packaging and presentation strategies. We also attempt to differentiate our products through in-store fixturing, branding and signage packages, and advertising. We have invested in display fixtures at major wholesale customers that present our products on their floors in a compelling manner intended to enhance brand and product presentation. We also strive to provide our wholesale customers with a consistent, high-level of service, including delivering and replenishing products on time to fulfill customer needs. Our retail stores and websites focus on the customer experience through store and website design, visual aesthetics, clear product presentation, and experienced customer service.
Our Products
Carter's brands
Baby
Carter's brand baby products include bodysuits, pants, dresses, multi-piece sets, blankets, layette essentials, bibs, booties, sleep and play, one-piece rompers and jumpers, which are also sold in multiple compelling configurations. In fiscal 2016, we generated approximately $1.1 billion in net sales of these products in the U.S., representing 34.3% of our consolidated net sales.
We sell a complete range of baby products for newborns, primarily made of cotton. We attribute our leading market position to our brand strength, unique colors, distinctive prints, commitment to quality, and ability to manage our dedicated floor space for our wholesale customers. Our marketing programs are targeted toward experienced mothers, first-time mothers, and gift-givers. Our little baby basics™ product line, the largest component of our baby business, provides parents with essential products and accessories, including value-focused multi-piece sets. Our Little Collections® product line consists of coordinated baby items designed for first-time mothers and gift-givers.
Playclothes
Carter's brand playclothes products include knit and woven apparel, primarily in cotton, for everyday use in sizes newborn to eight. In fiscal 2016, we generated $719.7 million in net sales from the sale of these products in the U.S., representing 22.5% of our consolidated net sales.
We continue to focus on building our Carter's brand in the playclothes market by developing a base of essential, high-volume products that utilize unique, special, or must-have print designs and innovative artistic applications. Our aggregate fiscal 2016 Carter's brand playclothes market share in the U.S. was approximately 13.5% in the $14.3 billion department store, national chain, outlet, specialty store, and off-price sales channels, which represents two times the market share of the next largest brand.
Sleepwear
Carter's brand sleepwear products include a full range of pajamas in cotton, fleece and poly-jersey, primarily in sizes 12 months to eight. In fiscal 2016, we generated $356.5 million in net sales from the sale of these products in the U.S., representing 11.1% of our consolidated net sales.
Our Carter's brand is the leading brand of sleepwear for babies and young children within the department store, national chain, outlet, specialty store, and off-price sales channels in the U.S. In fiscal 2016, in these channels, our Carter's sleepwear brand market share was approximately 31.8%, which represents nearly eight times the market share of the next largest brand. As with our baby product line, we differentiate our sleepwear products by offering high-volume, high-quality, high-value products with distinctive designs and art.
Other Products
Our other product offerings include bedding, outerwear, swimwear, footwear, socks, diaper bags, gift sets, toys, and hair accessories. In fiscal 2016, we generated $209.3 million in net sales from the sale of these other products in the U.S., representing 6.6% of our consolidated net sales.
Additionally, we license our Carter's, Child of Mine, Just One You, and Precious Firsts brands to partners to expand our product offerings. We had 12 licensees in the U.S. as of December 31, 2016. These licensing partners develop and sell products through our multiple sales channels, while leveraging our brand strength, customer relationships, and designs. Licensed products provide our customers and consumers with a range of lifestyle products that complement and expand upon our baby and young children's apparel offerings. Our license agreements require strict adherence to our quality and compliance standards and provide for a multi-step product approval process. We work in conjunction with our licensing partners in the development of their products to ensure that they fit within our brand vision of high-quality products at attractive values to the consumer. In addition, we work closely with our wholesale customers and our licensees to gain dedicated floor space for licensed product categories. In fiscal 2016, our Carter's brand generated $25.1 million in domestic royalty income from these licensees.
OshKosh brands
Playclothes
Our OshKosh brand is best known for its playclothes products. OshKosh brand playclothes products include denim apparel products with multiple wash treatments and coordinating garments, overalls, woven bottoms, knit tops, bodysuits, and playclothes products for everyday use in sizes newborn to 14. In fiscal 2016, we generated $346.3 million in net sales of OshKosh brand playclothes products in the U.S., representing 10.8% of our consolidated net sales. Our fiscal 2016 OshKosh brand playclothes market share in the U.S. was approximately 3.3% of the $14.3 billion young children's playclothes market.
Other Products
The remainder of our OshKosh brand product offering includes baby, sleepwear, outerwear, footwear, hosiery, and accessories. In fiscal 2016, we generated $105.7 million in net sales of these other products in our OshKosh retail stores and online, which represented 3.4% of our consolidated net sales.
Additionally, we partner with a number of domestic licensees to extend the reach of our OshKosh brand. As of December 31, 2016, we had six licensees selling apparel and accessories. Our largest OshKosh licensing agreement is with Target. All Genuine Kids from OshKosh products sold by Target are sold pursuant to this licensing agreement. Our licensed products provide our customers and consumers with a range of OshKosh products including outerwear, underwear, swimwear, socks, shoes, and accessories. In fiscal 2016, we earned approximately $13.9 million in domestic royalty income from our OshKosh brands.
Our Sales Channels
We sell our Carter's and OshKosh branded products through multiple channels - brick-and-mortar stores, online, and wholesale - both in the U.S. and internationally.
U.S. Carter's and OshKosh Retail
Our U.S. retail stores are generally located in high-traffic strip shopping centers in or near major cities or outlet centers that are generally located within 20 to 30 minutes of densely-populated areas. We believe our brand strength and our assortment of products, often localized for climate differences, have made our retail stores a destination for consumers who shop for young children's apparel and accessories.
We operate retail stores in three different formats: Carter's stand-alone stores, OshKosh stand-alone stores, and stores in our dual-branded format. Our dual-branded format includes "side-by-side" locations and "co-branded" locations. The dual-branded format allows customers to shop for both the Carter's and OshKosh brands in a single location. "Side-by-side" locations, which are located only in the U.S., consist of adjacent retail stores for our Carter's and OshKosh brands that are connected and counted as a single dual-branded format location. "Co-branded" locations consist of a single retail store that offers products from our Carter's and Oshkosh brands and are also counted as a single dual-branded format location.
As of December 31, 2016, we operated 495 Carter's stand-alone retail stores in the U.S. These stores carry a complete assortment of baby and young children's apparel, accessories, and gift items. Our stores average approximately 4,400 square feet per location and are distinguished by an easy, consumer-friendly shopping environment.
As of December 31, 2016, we operated 138 OshKosh stand-alone retail stores in the U.S. These stores carry a wide assortment of young children's apparel, accessories, and gift items, and average approximately 4,000 square feet per location.
As of December 31, 2016, we operated 140 “side-by-side” locations in the U.S.
Our “co-branded” stores in the U.S. average approximately 5,000 square feet per location, are slightly larger than our single-brand retail stores in the U.S., and offer a similar product assortment. As of December 31, 2016, we operated 19 “co-branded” stores in the U.S.
We assess all potential new retail store locations based on demographic factors, retail adjacencies, and population density, as part of a real estate selection process.
We also sell our products through our U.S. websites at www.carters.com, www.oshkoshbgosh.com, and www.oshkosh.com. Each online store offers a full assortment of products from each of our brands.
In fiscal 2016, our U.S. Carter’s and OshKosh retail net sales were $1.3 billion and $402.3 million, representing 39.2% and 12.6% of our consolidated net sales, respectively.
U.S. Carter's and OshKosh Wholesale
Our Carter’s brand wholesale customers in the U.S. include major retailers, such as, in alphabetical order, Costco, JCPenney, Kohl’s, Macy’s, and Toys "R" Us. Additionally, we sell our Child of Mine brand at Walmart and our Just One You and Precious Firsts brands at Target. In fiscal 2016, our U.S. Carter’s wholesale net sales were $1.1 billion, representing 35.3% of our consolidated net sales.
Our OshKosh brand wholesale customers in the U.S. include major retailers, such as, in alphabetical order, Costco, JCPenney, Kohl’s, and Toys "R" Us. We also have a licensing agreement with Target Corporation (“Target”) through which Target sells products under our Genuine Kids from OshKosh brand. In fiscal 2016, our U.S. OshKosh wholesale net sales were $49.7 million, representing 1.6% of our consolidated net sales.
We collaboratively plan store assortments with our wholesale customers. We intend to drive continued growth with our wholesale customers through our focus on managing our key accounts’ business through replenishment, product mix, brand presentation, marketing, and frequent meetings with the senior management of our major wholesale customers.
International
Our International segment includes company-operated retail stores and online websites, wholesale operations, and royalty income from our international licensees. In fiscal 2016, our international net sales were $364.7 million, representing 11.3% of our consolidated net sales.
As of December 31, 2016, we operated 164 “co-branded” Carter’s and OshKosh retail stores in Canada and our online store at www.cartersoshkosh.ca. Additionally, we reach consumers in approximately 60 countries through wholesale and licensing relationships and in over 100 countries through our websites.
As of December 31, 2016, we partnered with 34 licensees to sell the Carter’s and OshKosh brands internationally. In fiscal 2016, our international licensees generated Carter’s brand retail sales of $26.8 million, on which we earned $1.9 million in royalty income, and our OshKosh international licensees generated retail sales of $25.9 million, on which we earned approximately $1.9 million in royalty income.
Our Customer and Marketing Strategy
Our marketing is predominately focused on driving brand preference and engagement with millennial customers. As such, we continue to strengthen and evolve our digital programs to keep our brands in front of the consumer. Our multi-channel approach allows the customer to experience the brand as a seamless shopping experience in the channel of their choice. Our investments in marketing, our loyalty program, and new technologies are focused on new customer acquisition, developing stronger connections with our existing customers, and extending their relationship with our brands. Our goal is to have the most top-of-mind, preferred brands in the young children's market and to connect with a diverse, digitally-savvy customer.
In addition, during fiscal 2015, we launched our Rewarding Moments® loyalty and rewards program in the U.S. to drive customer traffic, sales, and brand loyalty. This program is integrated across our retail stores and online businesses. During fiscal 2016, our retail sales were predominantly made to customers who are members of Rewarding Moments®.
Our Global Sourcing Network
We source our garments from an international network of suppliers, primarily from Asia and Central America. Prior to placing production, and on a recurring basis, we conduct assessments of political, social, economic, trade, labor and intellectual property protection conditions in the countries in which we source our products.
We regularly assess the manufacturing facilities we use through periodic on-site facility inspections, including the use of independent monitors to supplement our internal staff. We integrate review data and performance results into our sourcing decisions and suggest improvements as a result. Our vendor code of conduct covers employment practices, such as wages and benefits, working hours, health and safety, working age, and discriminatory practices, as well as environmental, ethical and other legal matters.
Additionally, we are a certified and validated member of the United States Customs and Border Protection's Customs-Trade Partnership Against Terrorism ("C-TPAT") program. We expect all of our suppliers shipping to the United States to adhere to our C-TPAT requirements, including standards relating to facility security, procedural security, personnel security, cargo security and the overall protection of the supply chain. In the event a supplier does not comply with our C-TPAT requirements, or if we determine that the supplier will be unable to correct a deficiency, we may terminate our business relationship with the supplier.
We believe that our sourcing arrangements are sufficient to meet our current operating requirements and provide capacity for growth.
Our Global Distribution Network
Domestically, we operate two distribution centers in Georgia: our approximately 1.1 million square-foot multi-channel facility in Braselton and our facility in Stockbridge. We also outsource distribution activities to a third-party logistics provider in California. Our distribution center activities include receiving finished goods from our vendors, inspecting those products, preparing them for retail and wholesale presentation, and shipping them to our customers and to our own stores.
Internationally, we operate or outsource our distribution activities to third-party logistics providers in Canada and China to support our international wholesale customers, eCommerce operations, and Canadian retail store network.
Competition
The baby and young children's apparel market is highly competitive. Competition is generally based upon product quality, brand name recognition, price, selection, service, and convenience. Both branded and private label manufacturers aggressively compete in the baby and young children's apparel market. Our primary competitors in the wholesale channel include private label product offerings, and, in alphabetical order, Disney, Garanimals and Gerber. Our primary competitors in the retail channel include, in alphabetical order, Disney, Gap, Gymboree, Old Navy, and The Children's Place. Most retailers, including our wholesale customers, have significant private label product offerings that compete with our products. Because of the highly-fragmented nature of the industry, we also compete with many small manufacturers and retailers. We believe that the strength of our Carter's, OshKosh, and related brand names, combined with our breadth of product offerings, distribution footprint and operational expertise, position us well against these competitors.
Seasonality
We experience seasonal fluctuations in our sales and profitability due to the timing of certain holidays and key retail shopping periods, which generally have resulted in lower sales and gross profit in the first half of our fiscal year versus the second half of the year. Accordingly, our results of operations during the first half of the year may not be indicative of the results we expect for the full fiscal year.
Governmental Regulation and Environmental Matters
Our products are subject to regulation of and regulatory standards with respect to quality and safety set by various governmental authorities around the world, including in the United States, Canada, and China. Our operations also are subject to various international trade agreements and regulations. While we believe that we are in compliance in all material respects with all applicable governmental regulations, current governmental regulations may change or become more stringent or unforeseen events may occur, any of which could have a material adverse effect on our financial position or results of operations.
We are also subject to various federal, state, local and foreign laws and regulations that govern our activities, operations and products that may have adverse environmental and health and safety effects, including laws and regulations relating to generating emissions, water discharge, waste, product and packaging content and workplace safety. Noncompliance with these laws and regulations may result in substantial monetary penalties and criminal sanctions.
Our Trademarks and Copyrights
We own many trademarks and copyrights, including Carter's®, OshKosh®, OshKosh B'gosh®, Genuine Kids®, Child of Mine®, Just One You®, Simple Joys®, Precious Firsts®, Little Collections®, little baby basics™, Rewarding Moments®, and Count on Carter’s®, many of which are registered in the U.S. and in more than 140 countries and territories.
Our Employees
As of December 31, 2016, we had approximately 18,300 employees globally. We have no unionized employees and believe that our labor relations are good.
Available Information
Our primary internet address is www.carters.com. The information contained on our website is not included as part of, or incorporated by reference into, this Annual Report on Form 10-K or any other reports we file with or furnish to the SEC. On our website, we make available, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements, director and officer reports on Forms 3, 4, and 5, and any amendments to these reports, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission ("SEC"). Our SEC reports can be accessed through the investor relations section of our website. We also make available on our website the Carter's Code of Ethics, our Corporate Governance Principles, and the charters for the Compensation, Audit, and Nominating and Corporate Governance Committees of the Board of Directors. Our SEC filings are also available for reading and copying at the SEC's Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site, www.sec.gov, containing reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.
Corporate Information
Carter’s, Inc. is a Delaware corporation, with its principal executive offices are located in the U.S. at Phipps Tower, 3438 Peachtree Road NE, Suite 1800, Atlanta, Georgia 30326. Our telephone number is (678) 791-1000. Carter’s, Inc. and its predecessors have been doing business since 1865.
ITEM 1A. RISK FACTORS
You should carefully consider each of the following risk factors as well as the other information contained in this Annual Report on Form 10-K and our other filings with the SEC in evaluating our business. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently consider immaterial may also impact our business operations. If any of the following risks actually occur, our operating results may be affected.
The loss of one or more of our major wholesale customers could result in a material loss of revenues.
We derived approximately 25% of our consolidated net sales from our top six wholesale customers for the fiscal year ended December 31, 2016. We do not enter into long-term sales contracts with our major wholesale customers, relying instead on product performance, long-standing relationships, and on our position in the marketplace. As a result, we face the risk that one or more of these or other customers may significantly decrease their business with us or terminate their relationship with us as a result of competitive forces, consolidation, reorganization, financial difficulties, including bankruptcy or insolvency, or other reasons, which could result in significant levels of excess inventory, a material decrease in our sales, or material impact on our operating results.
Financial difficulties for our major customers or licensees could have a significant impact on us.
A large percentage of our gross accounts receivables are typically from our largest wholesale customers. For example, 74% of our gross accounts receivable at December 31, 2016 were from our ten largest wholesale customers, with two of these customers having individual receivable balances in excess of 10% of our total accounts receivable. Our reserves for doubtful accounts for estimated losses resulting from the inability of our customers to make payments may prove not to be sufficient if any one or more of our customers are unable to meet outstanding obligations to us, which could materially adversely affect our operating results. If the financial condition or credit position of one or more of our customers or licensees were to deteriorate, or such customer or licensee fails, or is unable to pay the amounts owed to us in a timely manner, this could have a significant adverse impact on our business and results of operations.
The acceptance of our products in the marketplace is affected by consumers’ tastes and preferences, along with fashion trends.
We believe that continued success depends on our ability to provide a compelling value proposition for our consumers in our distribution channels. There can be no assurance that the demand for our products will not decline, or that we will be able to successfully and timely evaluate and adapt our products to changes in consumer tastes and preferences or fashion trends. If demand for our products declines, promotional pricing may be required to move seasonal merchandise, and our gross margins and results of operations could be adversely affected.
The value of our brands, and our sales, could be diminished if we are associated with negative publicity, including through actions by our vendors, independent manufacturers and licensees, over whom we have limited control.
Although we maintain policies with our vendors, independent manufacturers and licensees that promote ethical business practices and our employees, agents, and third-party compliance auditors periodically visit and monitor the operations of these entities, we do not control our vendors, independent manufacturers, or licensees, or their labor practices. A violation of our vendor policies, licensee agreements, health and safety standards, labor laws, anti-bribery laws, or other policies or laws by these vendors, independent manufacturers, or licensees could damage the image and reputation of our brands and could subject us to liability. As a result, negative publicity regarding us or our brands or products, including licensed products, could adversely affect our reputation and sales. Further, while we take steps to ensure the reputation of our brands is maintained through license and vendor agreements, there can be no guarantee that our brand image will not be negatively affected through its association with products or actions of our licensees or vendors.
Our failure to protect our intellectual property rights could diminish the value of our brand, weaken our competitive position, and adversely affect our results.
We currently rely on a combination of trademark, unfair competition, and copyright laws, as well as licensing and vendor arrangements, to establish and protect our intellectual property rights. The steps taken by us or by our licensees and vendors to
protect our proprietary rights may not be adequate to prevent either the counterfeit production of our products or the infringement of our trademarks or proprietary rights by others. In addition, intellectual property protection may be unavailable or limited in some foreign countries where laws or law enforcement practices may not protect our proprietary rights and where third parties may have rights to conflicting marks, and it may be more difficult for us to successfully challenge the use of our proprietary rights by other parties in those countries. If we fail to protect and maintain our intellectual property rights, the value of our brands could be diminished and our competitive position may suffer. Further, third parties may assert intellectual property claims against us, particularly as we expand our business geographically, and any such claim could be expensive and time consuming to defend, regardless of its merit. Successful infringement claims against us could result in significant monetary liability or prevent us from selling some of our products, which could have an adverse effect on our results of operations.
We are subject to various claims and pending or threatened lawsuits, including as a result of investigations or other proceedings related to previously disclosed investigations, and as a result, may incur substantial costs that adversely affect our business, financial condition, and results of operations.
As previously reported, in 2009 the SEC and the U.S. Attorney's Office began conducting investigations, with which the Company cooperated, related to customer margin support provided by the Company, including undisclosed margin support commitments and related matters. In December 2010, the Company and the SEC entered into a non-prosecution agreement pursuant to which the SEC agreed not to charge the Company with any violations of federal securities laws, commence any enforcement action against the Company, or require the Company to pay any financial penalties in connection with the SEC investigation of customer margin support provided by the Company, conditioned upon the Company's continued cooperation with the SEC's investigation and with any related proceedings. The Company has incurred, and may continue to incur, substantial expenses for legal services due to the SEC and U.S. Attorney's Office investigations and any related proceedings. These matters may continue to divert management's time and attention away from operations. The Company also expects to bear additional costs pursuant to its advancement and indemnification obligations to directors and officers under our organizational documents in connection with proceedings related to these matters. Our insurance may not provide coverage to offset all of the costs incurred in connection with these proceedings.
In addition, we are subject to various other claims and pending or threatened lawsuits in the course of our business. We are including with respect to claims that our designs infringe on a third party's intellectual property rights. We are also affected by trends in litigation, including class action litigation brought under various consumer protection, employment, and privacy and information security laws. In addition, litigation risks related to claims that technologies we use infringe intellectual property rights of third parties have been amplified by the increase in third parties whose primary business is to assert such claims. Reserves are established based on our best estimates of our potential liability. However, we cannot accurately predict the ultimate outcome of any such proceedings due to the inherent uncertainties of litigation. Regardless of the outcome or whether the claims are meritorious, legal and regulatory proceedings may require that management devote substantial time and expense to defend the Company. In the event we are required or determine to pay amounts in connection with any such lawsuits, such amounts could exceed any applicable insurance coverage or contractual rights available to us. As a result, such lawsuits could be significant and have a material adverse impact on our business, financial condition, and results of operations.
Our and our vendors' systems containing personal information and payment card data of our retail store and eCommerce customers, employees and other third parties could be breached, which could subject us to adverse publicity, costly government enforcement actions or private litigation, and expenses.
We rely on the security of our networks, databases, systems and processes and, in certain circumstances, those of third parties, such as vendors, to protect our proprietary information and information about our customers, employees, and vendors. Criminals are constantly devising schemes to circumvent information technology security safeguards and other retailers have recently suffered serious data security breaches. If unauthorized parties gain access to our networks or databases, or those of our vendors, they may be able to steal, publish, delete, or modify our private and sensitive third-party information including credit card information and personal identification information. In addition, employees may intentionally or inadvertently cause data or security breaches that result in unauthorized release of personal or confidential information. In such circumstances, we could be held liable to our customers, other parties, or employees as well as be subject to regulatory or other actions for breaching privacy law or failing to adequately protect such information. This could result in costly investigations and litigation exceeding applicable insurance coverage or contractual rights available to us, civil or criminal penalties, operational changes or other response measures, loss of consumer confidence in our security measures, and negative publicity that could adversely affect our financial condition, results of operations, and reputation. Further, if we are unable to comply with the security
standards, established by banks and the payment card industry, we may be subject to fines, restrictions, and expulsion from card acceptance programs, which could adversely affect our retail operations.
Our profitability may decline as a result of increasing pressure on margins, including deflationary pressures on our selling price and increases in production costs.
The apparel industry is subject to pricing pressure caused by many factors, including intense competition, the promotional retail environment and changes in consumer demand. In addition, our product costs are subject to a number of factors, such as the costs related to manufacturing, cotton, labor, fuel, importation, and transportation. If external pressures cause us to reduce our sales prices and we fail to sufficiently reduce our product costs or operating expenses, our profitability could decline. This could have a material adverse effect on our results of operations, liquidity, and financial condition.
Our business is sensitive to overall levels of consumer spending, particularly in the young children apparel market.
Consumers' demand for young children's apparel, specifically brand name apparel products, is affected by the overall level of consumer spending. Discretionary consumer spending is affected by a number of factors such as the uncertainty in the political climate, overall economy, employment levels, weather, gasoline and utility costs, business conditions, foreign currency exchange rates, availability of consumer credit, tax rates, the availability of tax credits, interest rates, levels of consumer indebtedness, and overall levels of consumer confidence. Reductions, or lower-than-expected growth, in the level of discretionary or overall consumer spending may have a material adverse effect on our sales and results of operations.
Our revenues, product costs and other expenses are subject to foreign economic and currency risks due to our operations outside of the U.S.
We have operations in Canada and Asia and our vendors, independent manufacturers, and licensees are located around the world. The value of the U.S. dollar against other foreign currencies has seen significant volatility recently. While our business is primarily conducted in U.S. dollars, we source substantially all of our production from Asia, and we generate significant revenues in Canada. Cost increases caused by currency exchange rate fluctuations could make our products less competitive or have a material adverse effect on our profitability. Currency exchange rate fluctuations could also disrupt the business of our independent manufacturers that produce our products by making their purchases of raw materials or products more expensive and more difficult to finance. Additionally, fluctuations in exchange rates impact the amount of our reported sales and expenses, which could have a material adverse effect on our financial position, results of operations, and cash flows.
We source substantially all of our products through foreign production arrangements. Our dependence on foreign supply sources are subject to risks associated with global sourcing and manufacturing which could result in disruptions to our operations.
We source substantially all of our products through a network of vendors primarily in Asia, principally coordinated by our Hong Kong sourcing office. Our foreign supply chain could be negatively affected due to a number of factors, including:
• financial instability, including bankruptcy or insolvency, of one or more of our major vendors;
• the imposition of new regulations relating to imports, duties, taxes, and other charges on imports;
• political instability or other international events resulting in the disruption of trade in foreign countries from which we source our products;
• interruptions in the supply of raw materials, including cotton, fabric, and trim items;
• increases in the cost of labor in our sourcing locations;
• the occurrence of a natural disaster, unusual weather conditions, or a disease epidemic in foreign countries from which we source our products;
• changes in the U.S. customs procedures concerning the importation of apparel products;
• unforeseen delays in customs clearance of any goods;
• disruptions in the global transportation network such as a port strike, work stoppages or other labor unrest, capacity withholding, world trade restrictions, acts of terrorism or war;
• the application of adverse foreign intellectual property laws;
• the ability of our vendors to secure sufficient credit to finance the manufacturing process including the acquisition of raw materials;
• potential social compliance concerns resulting from our use of international vendors, independent manufacturers, and licensees, over whom we have limited control;
• manufacturing delays or unexpected demand for products may require the use of faster, but more expensive, transportation methods such as air-freight services;
• the use of "conflict minerals" sourced from the Democratic Republic of the Congo or its surrounding countries in our products; and
• other events beyond our control that could interrupt our supply chain and delay receipt of our products into the U.S.
The occurrence of one or more of these events could result in disruptions to our operations, which in turn could increase our cost of goods sold, decrease our gross profit, or impact our ability to get products to our customers.
A small number of vendors supply a significant amount of our products, and losing one or more of these vendors could have a material adverse effect on our business, results of operations, and financial condition.
In fiscal 2016, we purchased approximately 62% of our products from ten vendors, of which approximately half comes from three vendors. We expect that we will continue to source a significant portion of our products from these vendors. We do not have agreements with our major vendors that would provide us with assurances on a long-term basis as to adequate supply or pricing of our products. If any of our major vendors decide to discontinue or significantly decrease the volume of products they manufacture for us, raise prices on products we purchase from them, or become unable to perform their responsibilities (e.g., if our vendors experience financial difficulties, lack of capacity or significant labor disputes) our business, results of operations, and financial condition may be adversely affected.
We have limited control over our vendors and we may experience delays, product recalls, or loss of revenues if our products do not meet our quality standards.
Because we do not control our vendors, our vendors may not continue to provide products that are consistent with our standards. We have occasionally received, and may in the future continue to receive, shipments of product that fail to conform to our quality control standards. A failure in our quality control program may result in diminished product quality, which in turn may result in increased order cancellations and returns, decreased consumer demand for our products, or product recalls, any of which may have a material adverse effect on our results of operations and financial condition. In addition, products that fail to meet our standards, or other unauthorized products, could end up in the marketplace without our knowledge. This could materially harm our brand and our reputation in the marketplace.
Labor or other disruptions along our supply chain may adversely affect our relationships with customers, reputation with consumers, and results of operations.
Our business depends on our ability to source and distribute products in a timely manner. Labor disputes at independent factories where our goods are produced, the shipping ports we use, or our transportation carriers create significant risks for our business, particularly if these disputes result in work slowdowns, lockouts, strikes, or other disruptions during our peak manufacturing and importing times. For example, we source a significant portion of our products through a single port on the west coast of the U.S. Work slowdowns and stoppages relating to labor agreement negotiations involving the operators of our west coast port and unions have in the past resulted in a significant backlog of cargo containers. Additionally, the insolvency of a major shipping company in 2016 also had an impact on our supply chain. As a result, we have in the past experienced delays in the shipment of our products. In the event that these slow-downs, disruptions or strikes occur in the future in connection with labor agreement negotiations or otherwise, it may have a material adverse effect on our financial position, results of operations, or cash flows.
We may experience delays, product recalls, or loss of revenues if our products do not meet regulatory requirements.
Our products are subject to regulation of and regulatory standards with respect to quality and safety set by various governmental authorities around the world, including in the U.S., Canada, China, and the European Union. These regulations and standards may change from time to time. Our inability, or that of our vendors, to comply on a timely basis with regulatory requirements could result in significant fines or penalties, which could adversely affect our reputation and sales. Issues with the compliance of merchandise we sell with these regulations and standards, regardless of our culpability, or customer concerns about such issues, could result in damage to our reputation, lost sales, uninsured product liability claims or losses, merchandise recalls, and increased costs.
Our inability to effectively source inventory directly could negatively impact our ability to timely deliver our inventory supply and disrupt our business, which may adversely affect our operating results.
We source a significant amount of inventory directly and plan to continue to further increase such amounts. If we experience significant increases in demand or need to replace an existing vendor, there can be no assurance that additional manufacturing capacity will be available when required on terms that are acceptable to us or that any vendor would allocate sufficient capacity to us in order to meet our requirements. In addition, for any new vendors, we may encounter delays in production and added costs as a result of the time it takes to train our vendors in producing our products and adhering to our quality control standards. Moreover, in the event of a significant disruption in the supply of the fabrics or raw materials used by our vendors in the manufacture of our products, our vendors might not be able to locate alternative suppliers of materials of comparable quality at an acceptable price. Any delays, interruption, or increased costs in the manufacture of our products could have a material adverse effect on our operating results.
Profitability and our reputation and relationships could be negatively affected if we do not adequately forecast the demand for our products and, as a result, create significant levels of excess inventory or insufficient levels of inventory.
There can be no assurance that we will be able to successfully anticipate changing consumer preferences and product trends or economic conditions and, as a result, we may not successfully manage inventory levels to meet our future order requirements. If we fail to accurately forecast consumer demand, we may experience excess inventory levels or a shortage of product required to meet the demand. Inventory levels in excess of consumer demand may result in inventory write-downs and the sale of excess inventory at discounted prices, which could have an adverse effect on the image and reputation of our brands and negatively impact profitability. On the other hand, if we underestimate demand for our products, our manufacturing facilities or third-party manufacturers may not be able to produce products to meet consumer requirements, and this could result in delays in the shipment of products and lost revenues, as well as damage to our reputation and relationships. These risks could have a material adverse effect on our brand image as well as our results of operations and financial condition.
We operate in a highly competitive market and the size and resources of some of our competitors may allow them to compete more effectively than we can, resulting in a loss of market share and, as a result, a decrease in revenue and gross profit.
The baby and young children's apparel market is very competitive, and includes both branded and private label manufacturers. Because of the fragmented nature of the industry, we also compete with many other manufacturers and retailers. Some of our competitors have greater financial resources and larger customer bases than we have. As a result, these competitors may be able to adapt to changes in customer requirements more quickly; take advantage of acquisition and other opportunities more readily; devote greater resources to the marketing and sale of their products; and adopt more aggressive pricing strategies than we can.
We expect to make significant capital investments and have significant expenses related to our multi-channel sales strategy and failure to execute our strategy could have a material adverse effect on our business, results of operations, and how we meet consumer expectations.
We distribute our products through multiple channels in the U.S. children's apparel market, which, as of December 31, 2016, included approximately 18,000 wholesale locations (including department stores, national chain and specialty stores, and discount retailers), 792 stores in the U.S., 164 stores in Canada, and our U.S. and Canadian websites (including www.carters.com), all in addition to our other international wholesale, licensing, and online channels. Our multi-channel strategy allows our customers to shop across all sales channels globally, and allows us to meet changing customer experience expectations.
This strategy has and will continue to require significant investment in cross-functional operations and management focus, along with investment in supporting technologies. Multi-channel retailing is rapidly evolving and we must anticipate and meet changing customer expectations and counteract new developments and technology investments by our competitors. Our multi-channel retailing strategy includes implementing new technology, software, and processes to be able to fulfill customer orders from any point within our system of stores and distribution centers, which is extremely complex and may not meet customer expectations for timely and accurate deliveries. If we are unable to attract and retain team members or contract with third-parties having the specialized skills needed to support our multi-channel efforts, implement improvements to our customer‑facing technology in a timely manner, allow real-time and accurate visibility to product availability when customers are ready to purchase, quickly and efficiently fulfill our customers orders using the fulfillment and payment methods they demand, or provide a convenient and consistent experience for our customers regardless of the ultimate sales channel, our ability to compete and our results of operations could be adversely affected. In addition, if carters.com, oshkosh.com, or our other customer‑facing technology systems do not appeal to our customers, reliably function as designed, or maintain the privacy of customer data, or if we are unable consistently meet our brand promise to our customers, we may experience a loss of customer confidence or lost sales, or be exposed to fraudulent purchases, which could adversely affect our reputation and results of operations.
Our retail success and future growth is dependent upon identifying locations and negotiating appropriate lease terms for retail stores.
A significant portion of our revenues are through our retail stores in leased retail locations across the U.S. and Canada. Successful operation of a retail store depends, in part, on the overall ability of the retail location to attract a consumer base sufficient to make store sales volume profitable. If we are unable to identify new retail locations with consumer traffic sufficient to support a profitable sales level, our retail growth may be limited. Further, if existing stores do not maintain a sufficient customer base that provides a reasonable sales volume or we are unable to negotiate appropriate lease terms for the retail stores, there could be a material adverse impact on our sales, gross margin, and results of operations. In addition, if consumer habits transition more from brick-and-mortar stores to online retail experiences, any increase we may see in our eCommerce sales may not be sufficient to offset the decreases in sales from our brick-and-mortar stores.
We also must be able to effectively renew our existing store leases on acceptable terms. In addition, from time to time, we may seek to downsize, consolidate, reposition, or close some of our real estate locations, which in most cases requires a modification of an existing store lease. Failure to renew existing store leases, secure adequate new locations or successfully modify existing locations, or failure to effectively manage the profitability of our existing fleet of stores, could have a material adverse effect on our results of operations.
Additionally, the economic environment may at times make it difficult to determine the fair market rent of real estate properties within the U.S. and internationally. This could impact the quality of our decisions to exercise lease options at previously negotiated rents and the quality of our decisions to renew expiring leases at negotiated rents. Any adverse effect on the quality of these decisions could impact our ability to retain real estate locations adequate to meet our targets or efficiently manage the profitability of our existing fleet of stores and could have a material adverse effect on our results of operations.
Our eCommerce business faces distinct risks, and our failure to successfully manage it could have a negative impact on our profitability.
The successful operation of our eCommerce business as well as our ability to provide a positive shopping experience that will generate orders and drive subsequent visits depends on efficient and uninterrupted operation of our order-taking and fulfillment operations. Risks associated with our eCommerce business include:
• risks associated with the failure of the computer systems, including those of third-party vendors, that operate our website including, among others, inadequate system capacity, computer viruses, human error, changes in programming, security breaches, system upgrades or migration of these services to new systems;
• disruptions in telephone service or power outages;
• reliance on third parties for computer hardware and software, as well as delivery of merchandise to our customers;
• rapid technology changes;
• credit or debit card fraud;
• the diversion of sales from our physical stores;
• natural disasters or adverse weather conditions;
• changes in applicable federal, state and international regulations;
• liability for online content; and
• consumer privacy concerns and regulation.
Problems in any of these areas could result in a reduction in sales, increased costs and damage to our reputation and brands, which could adversely affect our business and results of operations.
We may be unsuccessful in expanding into international markets.
We cannot be sure that we can successfully complete any planned international expansion or that new international business will be profitable or meet our expectations. We do not have significant experience operating in markets outside of the U.S. and Canada. Consumer demand, behavior, tastes, and purchasing trends may differ in international markets and, as a result, sales of our products may not be successful or meet our expectations, or the margins on those sales may not be in line with those we currently anticipate. We may encounter differences in business culture and the legal environment that may make working with commercial partners and hiring and retaining an adequate employee base more challenging. We may also face difficulties integrating foreign business operations with our current operations. Any of these challenges could hinder our success in new markets. Our entry into new markets may have upfront investment costs that may not be accompanied by sufficient revenues to achieve typical or expected operational and financial performance and such costs may be greater than expected. If our international expansion plans are unsuccessful, our results could be materially adversely affected.
We may not achieve sales growth plans, cost savings, and other assumptions that support the carrying value of our intangible assets.
The carrying value of our goodwill, tradename assets, and brands are subject to annual impairment reviews as of the last day of each fiscal year or more frequently, if deemed necessary, due to any significant events or changes in circumstances. Estimated future cash flows used in these impairment reviews could be negatively affected if we do not achieve our sales plans, planned cost savings, and other assumptions that support the carrying value of these intangible assets, which could result in impairment of the remaining asset values. Any material impairment would adversely affect our results of operations.
We have substantial debt, which could adversely affect our financial health and our ability to obtain financing in the future and to react to changes in our business.
As of December 31, 2016, we had $585.0 million aggregate principal amount of debt outstanding (excluding $4.8 million of outstanding letters of credit), and $310.2 million of undrawn availability under our senior secured revolving credit facility after giving effect to $4.8 million of letters of credit issued under our senior secured revolving credit facility. As a result, our ability to obtain additional financing for working capital, capital expenditures, acquisitions, debt service requirements, or general corporate or other purposes may be limited, and we may be unable to renew or refinance our debt on terms as favorable as our existing debt or at all.
If our cash flows and capital resources are insufficient to fund our debt service obligations and other cash requirements, we could be forced to reduce or delay investments and capital expenditures or to sell assets or operations, seek additional capital, or restructure or refinance our indebtedness. We may not be able to effect any such alternative measures, if necessary, on commercially reasonable terms or at all and, even if successful, such alternative actions may not allow us to meet our scheduled debt service obligations. In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations.
In addition, both our senior secured revolving credit facility and indenture governing the senior notes contain restrictive covenants that, subject to specified exemptions, restrict our ability to incur indebtedness, grant liens, make certain investments (including business acquisitions), pay dividends or distributions on our capital stock, engage in mergers, dispose of assets and use the proceeds from any such dispositions, and raise debt or equity capital to be used to repay other indebtedness when it becomes due. These restrictions may limit our ability to engage in acts that may be in our long-term best interests, and may make it difficult for us to execute our business strategy successfully or effectively compete with companies that are not
similarly restricted. In particular, we cannot assure you that we will have sufficient cash from operations, borrowing capacity under our debt documents, or the ability to raise additional funds in the capital markets to pursue our growth strategies as a result of these restrictions or otherwise. We may also incur future debt obligations that might subject us to additional restrictive covenants that could affect our financial and operational flexibility.
Our success is dependent upon retaining key individuals within the organization to execute our strategic plan.
Our ability to attract and retain qualified executive management, marketing, merchandising, design, sourcing, operations, and support function staffing is key to our success. If we are unable to attract and retain qualified individuals in these areas, this may result in an adverse impact on our growth and results of operations. Our inability to retain personnel could cause us to experience business disruption due to a loss of historical knowledge and a lack of business continuity and may adversely affect our results of operations, financial position, and cash flows.
Our failure to properly manage strategic projects in order to achieve our objectives may negatively impact our business.
The implementation of our business strategy periodically involves the execution of complex projects, such as our Rewarding Moments® rewards program, which may require that we make significant estimates and assumptions about a project, and these projects could place significant demands on our accounting, financial, information and other systems and on our business overall. In addition, we are dependent on our management’s ability to oversee these projects effectively and implement them successfully. If our estimates and assumptions about a project, such as our Rewarding Moments® program, are incorrect, or if we miscalculate the resources or time we need to complete a project or fail to implement a project effectively, our business and operating results could be adversely affected.
We may be unable to successfully integrate acquired businesses and such acquisitions may fail to achieve the financial results we expected.
From time to time we may acquire other businesses as part of our growth strategy. We may partially or fully fund such acquisitions by taking on additional debt. We may be unable to successfully integrate businesses we acquire and such acquisitions may fail to achieve the financial results we expected. Integrating completed acquisitions into our existing operations, particularly larger acquisitions, involves numerous risks, including diversion of our management’s attention, failure to retain key personnel, and failure of the acquired business to be financially successful. In addition, we cannot be certain of the extent of any unknown or contingent liabilities of any acquired business, including liabilities for failure to comply with applicable laws, including those relating to product safety. We may incur material liabilities for past activities of acquired businesses. Also, depending on the location of the acquired business, we may be required to comply with laws and regulations that may differ from those of the jurisdictions in which our operations are currently conducted. Our inability to successfully integrate businesses we acquire, or if such businesses do not achieve the financial results we expect, may increase our costs and have a material adverse impact on our financial condition and results of operations.
Failure to implement new information technology systems or needed upgrades to our systems, including operational and financial systems, could adversely affect our business.
As our business has grown in size, complexity, and geography, we have enhanced and upgraded our information technology infrastructure and we expect there to be a regular need for additional enhancements and upgrades as we continue to grow. Failure to implement new systems or upgrade systems, including operation and financial systems, as needed or complications encountered in implementing new systems or upgrading existing systems could cause disruptions that may adversely affect our business and results of operations. Further, additional investment needed to upgrade and expand our information technology infrastructure will require significant investment of additional resources and capital, which may not always be available or available on favorable terms.
Our Braselton, Georgia distribution facility handles a large portion of our merchandise distribution. If we encounter problems with this facility, our ability to deliver our products to the market could be adversely affected.
We handle a large portion of our merchandise distribution for all of our stores, and our online retail operations from a single facility in Braselton, Georgia. Our ability to meet consumer expectations, manage inventory, complete sales, and achieve objectives for operating efficiencies depends on proper operation of this facility. If we are not able to distribute merchandise to our stores or customers because we have exceeded our capacity at the distribution facility (such as due to a high level of
demand during peak periods) or because of natural disasters, accidents, system failures, disruptions, or other events, our sales could decline, which may have a materially adverse effect on our earnings, financial position, and our reputation. In addition, we use an automated system that manages the order processing for our eCommerce business. In the event that this system becomes inoperable for any reason, we may be unable to ship direct-to-consumer orders in a timely manner, and as a result, we could experience a reduction in our direct-to-consumer business, which could negatively impact our sales and profitability.
Our business could suffer a material adverse effect from extreme or unseasonable weather conditions.
Our business is susceptible to unseasonable weather conditions, which could influence customer trends, consumer traffic and shopping habits. For example, extended periods of unseasonably warm temperatures during the winter season or cool temperatures during the summer season could reduce demand and thereby would have an adverse effect on our operational results, financial position, and cash flows. In addition, extreme weather conditions in the areas in which our stores are located could negatively affect our business, operational results, financial position, and cash flows. Frequent or unusually heavy snowfall, ice storms, rainstorms, or other extreme weather conditions over an extended period could make it difficult for our customers to travel to our stores, which could negatively impact our operational results.
Failure to comply with the various laws and regulations as well as changes in laws and regulations could have an adverse impact on our reputation, consolidated financial condition or results of operations.
We must comply with various laws and regulations, including applicable employment and consumer protection laws. Our policies, procedures and internal controls are designed to help us comply with all applicable foreign and domestic laws, accounting and reporting requirements, regulations and tax requirements, including those imposed by the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC and the New York Stock Exchange ("NYSE") as well as other laws. Our failure to comply with these various laws and regulations could have an adverse impact on our reputation, consolidated financial condition or results of operations. In addition, any changes in regulations, the imposition of additional regulations or the enactment of any new legislation that affects employment and labor, trade, product safety, transportation and logistics, health care, tax, privacy, operations or environmental issues, among other things, may increase the complexity of the regulatory environment in which we operate and the related cost of compliance. Although we undertake to monitor changes in these laws, if these laws change without our knowledge, or are violated by importers, designers, manufacturers, distributors or agents, we could experience delays in shipments and receipt of goods, or be subject to fines or other penalties under the controlling regulations, any of which could negatively affect the our business and results of operations.
Our results of operations, financial position, and cash flows, and our ability to conduct business in international markets may be affected by legal, regulatory, political, and economic risks.
Our ability to conduct business in new and existing international markets is subject to legal, regulatory, political, and economic risks. These include the burdens of complying with foreign laws and regulations, including trade and labor restrictions; unexpected changes in regulatory requirements; and new tariffs or other barriers in some international markets. Additionally, the U.S. Foreign Corrupt Practices Act, and similar world-wide anti-bribery laws, prohibit companies and their intermediaries from making improper payments to government officials for the purpose of obtaining or retaining business. Our policies mandate compliance with anti-bribery laws. Our internal control policies and procedures, or those of our vendors, may not adequately protect us from reckless or criminal acts committed by our employees, agents, or vendors. Violations of these laws, or allegations of such violations, could disrupt our business and result in a material adverse effect on our financial condition, results of operations, and cash flows.
We are also subject to general political and economic risks in connection with our international operations, including political instability and terrorist attacks; differences in business culture; different laws governing relationships with employees and business partners; changes in diplomatic and trade relationships; and general economic fluctuations in specific countries or markets.
We may experience fluctuations in our tax obligations and effective tax rate.
We are subject to income taxes in federal and applicable state and local tax jurisdictions in the U.S., Canada, and other foreign jurisdictions. We record tax expense based on our estimates of current and future payments, which include reserves for estimates of uncertain tax positions. At any time, many tax years are subject to audit by various taxing jurisdictions. The results
of these audits and negotiations with taxing authorities may impact the ultimate settlement of these tax positions. As a result, there could be ongoing variability in our quarterly tax rates as taxable events occur and exposures are re-evaluated. Further, our effective tax rate in any financial statement period may be materially affected by changes in the mix and level of earnings.
The current United States political agenda has identified tax reform as a key priority. A variety of tax proposals that would significantly impact US taxation for multinational corporations have been developed, including proposals around a border adjustment tax, changes to repatriation, reductions in the US corporate tax rate, introduction of a capital expense deduction and elimination of the interest deduction. We cannot predict whether or not any of these tax reform proposals will ultimately be adopted and, until the details of each proposal have been developed and reviewed, we cannot determine the impact of the proposed legislation on our tax expense. However, based on our initial understanding, the impact of certain proposals on our tax expense and profitability could be material, and we may not be able to fully offset any such incremental tax increase through product price increases or otherwise.
Furthermore, we cannot predict whether quotas, duties, taxes, or other similar restrictions will be imposed by the U.S. or foreign countries upon the import or export of our products in the future, or what effect any of these actions would have, if any, on our business, financial condition, or results of operations. Changes in regulatory, geopolitical, social or economic policies, and other factors may have a material adverse effect on our business in the future or may require us to exit a particular market or significantly modify our current business practices.
Failure to continue to pay quarterly cash dividends to our shareholders could cause the market price for our common stock to decline.
In 2013, we initiated a quarterly cash dividend. Future declarations of quarterly cash dividends and the establishment of future record and payment dates are at the discretion of our Board of Directors based on a number of factors, including our future financial performance and other investment priorities. Additionally, provisions in our senior credit facility and the indenture governing our senior notes could have the effect of restricting our ability to pay future cash dividends on, or make future repurchases of, our common stock. Any reduction or discontinuance by us of the payment of quarterly cash dividends could cause the market price of our common stock to decline.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We utilize space for retail stores, distribution centers, and offices, principally in the U.S. and Canada. All but one of our premises are leased.
The following sets forth information with respect to our key properties:
|
| | | | | | | |
Location | | Approx. floor space in square feet | | Principal use | | Lease expiration date |
Braselton, Georgia | | 1,062,000 |
| | Distribution/warehousing | | September 2026 |
Stockbridge, Georgia | | 505,000 |
| | Distribution/warehousing | | April 2018 |
Chino, California | | 413,000 |
| | Distribution/warehousing (1) | | July 2017 |
Atlanta, Georgia | | 304,000 |
| | Corporate headquarters | | April 2030 |
Griffin, Georgia | | 224,000 |
| | Information technology/warehousing | | Owned |
Fayetteville, Georgia | | 30,000 |
| | Information technology | | September 2020 |
Cambridge, Ontario | | 277,000 |
| | Distribution/warehousing | | March 2020 |
Mississauga, Ontario | | 28,000 |
| | Canadian corporate office | | October 2026 |
Hong Kong | | 56,000 |
| | Sourcing office (2) | | February 2019/ December 2019 |
(1) This space is leased and operated by a third party service provider.
(2) This includes three spaces leased in two adjoining buildings. The lease for the two spaces with 40,000 square feet expires in February 2019, while the lease for the third space with 16,000 square feet expires in December 2019.
Beginning in fiscal 2016, we use a different convention for stating our retail store count data. See Item 7, Management's Discussion and Analysis - Store Count Data, for more information.
At December 31, 2016, we operated 792 leased retail store locations in 48 states in the U.S. and in Puerto Rico. In Canada, we operated 164 leased retail stores. The majority of the lease terms for our retail stores range between 5 and 10 years.
ITEM 3. LEGAL PROCEEDINGS
We are subject to various claims and pending or threatened lawsuits in the normal course of our business. The Company is not currently a party to any legal proceedings that it believes would have a material adverse effect on our financial position, results of operations, or cash flows.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
HISTORICAL STOCK PRICE AND NUMBER OF RECORD HOLDERS
Our common stock trades on the New York Stock Exchange (NYSE) under the symbol CRI. The last reported sale price per share of our common stock on February 17, 2017 was $83.72. On that date there were 179 holders of record of our common stock.
The high and low market price per share for the Company's common stock in fiscal 2016 and 2015, by quarter, were as follows:
|
| | | | | | | | |
2016 | | High | | Low |
First quarter | | $ | 105.93 |
| | $ | 83.44 |
|
Second quarter | | $ | 108.20 |
| | $ | 97.54 |
|
Third quarter | | $ | 112.58 |
| | $ | 86.37 |
|
Fourth quarter | | $ | 94.83 |
| | $ | 84.06 |
|
|
| | | | | | | | |
2015 | | High | | Low |
First quarter | | $ | 94.21 |
| | $ | 79.85 |
|
Second quarter | | $ | 109.30 |
| | $ | 91.01 |
|
Third quarter | | $ | 109.53 |
| | $ | 87.22 |
|
Fourth quarter | | $ | 94.56 |
| | $ | 82.22 |
|
Note: The high and low market prices in the above table were compiled from prices that considered intra-day high and low prices as well as closing prices on the NYSE. Previously, the company presented high and low prices compiled only from closing prices on the NYSE.
SHARE REPURCHASES
The following table provides information about shares repurchased through our repurchase program described below during the fourth quarter of fiscal 2016:
|
| | | | | | | | | | | | | | |
Period | | Total number of shares purchased (1) | | Average price paid per share | | Total number of shares purchased as part of publicly announced plans or programs (2) | | Approximate dollar value of shares that may yet be purchased under the plans or programs |
| | | | | | | | |
October 2, 2016 through October 29, 2016 | | 342,900 |
| | $ | 87.23 |
| | 342,900 |
| | $ | 305,797,623 |
|
| | | | | | | | |
October 30, 2016 through November 26, 2016 | | 152,120 |
| | $ | 88.08 |
| | 152,995 |
| | $ | 292,398,702 |
|
| | | | | | | | |
November 27, 2016 through December 31, 2016 | | 195,414 |
| | $ | 92.09 |
| | 195,414 |
| | $ | 274,402,516 |
|
| | | | | | | | |
Total | | 690,434 |
| |
|
| | 691,309 |
| | |
| |
(1) | Includes shares of our common stock surrendered by our employees to satisfy required tax withholding upon the vesting of restricted stock awards. There were 875 shares surrendered between October 2, 2016 and December 31, 2016. |
| |
(2) | Amounts purchased during the fiscal year were made in accordance with the share repurchase authorizations described below. |
Share Repurchase Program
Prior to 2014, our Board of Directors authorized the repurchase of shares of our common stock in amounts up to $462.5 million. On February 26, 2016, our Board of Directors authorized an additional $500 million of share repurchases, thereby authorizing total repurchase amounts up to $962.5 million.
Open-market repurchases of our common stock during fiscal years 2016, 2015 and 2014 were as follows:
|
| | | | | | | | | | | |
| Fiscal year ended |
| December 31, 2016 | | January 2, 2016 | | January 3, 2015 |
Number of shares repurchased | 3,049,381 |
| | 1,154,288 |
| | 1,111,899 |
|
Aggregate cost of shares repurchased (dollars in thousands) | $ | 300,445 |
| | $ | 110,290 |
| | $ | 82,099 |
|
Average price per share | $ | 98.53 |
| | $ | 95.55 |
| | $ | 73.84 |
|
In addition to the open-market repurchases completed in fiscal years 2016, 2015 and 2014, we completed open-market repurchases totaling $195.3 million in fiscal years prior to 2014.
The total remaining capacity under the repurchase authorizations was $274.4 million as of December 31, 2016.
Repurchases under the authorizations may be made in the open market or in privately-negotiated transactions, with the level and timing of such activity at the discretion of our management depending on market conditions, stock price, other investment priorities, and other factors. The share repurchase authorizations have no expiration dates.
DIVIDENDS
On February 15, 2017, our Board of Directors authorized a quarterly cash dividend payment of $0.37 per common share, payable on March 24, 2017 to shareholders of record at the close of business on March 10, 2017.
In fiscal 2016, we paid quarterly cash dividends of $0.33 per share each quarter. In fiscal 2015, we paid quarterly cash dividends of $0.22 per share each quarter. Future declarations of quarterly dividends and the establishment of future record and payment dates are at the discretion of our Board of Directors based on a number of factors, including our future financial performance and other investment priorities.
Provisions in our secured revolving credit facility and indenture governing our senior notes could have the effect of restricting our ability to pay future cash dividends on or make future repurchases of our common stock. For more information concerning these dividend restrictions, refer to the "Financial Condition, Capital Resources, and Liquidity" section of Item 7 in this Annual Report on Form 10-K.
RECENT SALES OF UNREGISTERED SECURITIES
Not applicable.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial and other data has been derived from our consolidated financial statements for each of the five fiscal years presented. The following information should be read in conjunction with Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Item 8-"Financial Statements and Supplementary Data" which includes the consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K, or the respective prior fiscal years' Form 10-K.
The Company's fiscal year ends on the Saturday, in December or January, nearest the last day of December, resulting in an additional week of results every five or six years. All fiscal years for which financial information is set forth below contained 52 weeks, except for the fiscal year ended January 3, 2015, which contained 53 weeks.
|
| | | | | | | | | | | | | | | | | | | | |
| For the fiscal years ended |
(dollars in thousands, except per share data) | | December 31,
2016 | | January 2,
2016 | | January 3, 2015 |
| December 28,
2013 | | December 29, 2012 |
| | | | | | | | | | |
Operating Data: | | | | | | | | | | |
Retail sales - Carter's | | $ | 1,254,140 |
| | $ | 1,151,268 |
| | $ | 1,087,165 |
| | $ | 954,160 |
| | $ | 818,909 |
|
Wholesale sales - Carter's | | 1,128,371 |
| | 1,107,706 |
| | 1,081,888 |
|
| 1,035,420 |
| | 981,445 |
|
Retail sales - OshKosh | | 402,274 |
| | 363,087 |
| | 335,140 |
|
| 289,311 |
| | 283,343 |
|
Wholesale sales - OshKosh | | 49,663 |
| | 65,607 |
| | 73,201 |
|
| 74,564 |
| | 79,752 |
|
International | | 364,736 |
| | 326,211 |
| | 316,474 |
|
| 285,256 |
| | 218,285 |
|
Total net sales | | $ | 3,199,184 |
| | $ | 3,013,879 |
| | $ | 2,893,868 |
|
| $ | 2,638,711 |
| | $ | 2,381,734 |
|
Cost of goods sold | | $ | 1,820,035 |
| | $ | 1,755,855 |
| | $ | 1,709,428 |
|
| $ | 1,543,332 |
| | $ | 1,443,786 |
|
| | | | | | | | | | |
Gross profit | | $ | 1,379,149 |
| | $ | 1,258,024 |
| | $ | 1,184,440 |
|
| $ | 1,095,379 |
| | $ | 937,948 |
|
Operating income (a) | | $ | 426,558 |
| | $ | 392,857 |
| | $ | 333,345 |
|
| $ | 264,151 |
| | $ | 261,986 |
|
Income before income taxes | | $ | 396,070 |
| | $ | 368,188 |
| | $ | 302,906 |
|
| $ | 249,465 |
| | $ | 255,391 |
|
Net income | | $ | 258,106 |
| | $ | 237,822 |
| | $ | 194,670 |
|
| $ | 160,407 |
| | $ | 161,150 |
|
| | | | | |
|
| | |
|
Per Common Share Data: | | | | | |
|
| | |
|
Basic net income | | $ | 5.13 |
| | $ | 4.55 |
| | $ | 3.65 |
|
| $ | 2.78 |
| | $ | 2.73 |
|
Diluted net income | | $ | 5.08 |
| | $ | 4.50 |
| | $ | 3.62 |
|
| $ | 2.75 |
| | $ | 2.69 |
|
Balance Sheet Data: | | | | | |
|
| | |
|
Working capital (b) (c) | | $ | 779,476 |
| | $ | 867,890 |
| | $ | 792,675 |
|
| $ | 700,473 |
| | $ | 713,468 |
|
Total assets (c) | | $ | 1,946,597 |
| | $ | 2,003,654 |
| | $ | 1,886,825 |
|
| $ | 1,805,444 |
| | $ | 1,630,109 |
|
Total debt (c) | | $ | 580,376 |
| | $ | 578,972 |
| | $ | 579,728 |
|
| $ | 578,960 |
| | $ | 186,000 |
|
Stockholders' equity | | $ | 788,124 |
| | $ | 875,051 |
| | $ | 786,684 |
|
| $ | 700,731 |
| | $ | 985,479 |
|
Cash Flow Data: | | | | | |
|
| | |
|
Net cash provided by operating activities | | $ | 369,229 |
| | $ | 307,987 |
| | $ | 282,397 |
|
| $ | 209,696 |
| | $ | 278,619 |
|
Net cash (used in) investing activities | | $ | (88,340 | ) | | $ | (103,425 | ) | | $ | (104,732 | ) |
| $ | (220,532 | ) | | $ | (83,392 | ) |
Net cash (used in) financing activities | | $ | (363,507 | ) | | $ | (162,005 | ) | | $ | (122,438 | ) |
| $ | (84,658 | ) | | $ | (46,317 | ) |
Other Data: | | | | | |
|
| | |
|
Capital expenditures | | $ | 88,556 |
| | $ | 103,497 |
| | $ | 103,453 |
|
| $ | 182,525 |
| | $ | 83,398 |
|
Dividend declared and paid per common share | | $ | 1.32 |
| | $ | 0.88 |
| | $ | 0.76 |
| | $ | 0.48 |
| | $ | — |
|
NOTES TO SELECTED FINANCIAL DATA
(a)The following selling, general, & administrative expenses were included in the calculation of operating income: |
| | | | | | | | | | | | | | | | | | | | |
| For the fiscal years ended |
(dollars in thousands) | | December 31,
2016 | | January 2,
2016 | | January 3,
2015 | | December 28,
2013 | | December 29, 2012 |
Amortization of H.W. Carter and Sons tradenames | | $ | 1,742 |
| | $ | 6,239 |
| | $ | 16,437 |
| | $ | 13,588 |
| | $ | — |
|
Workforce reduction, facility write-down, and closure costs | | $ | — |
| | $ | — |
| | $ | 9,126 |
| | $ | 38,214 |
| | 9,490 |
|
Accretion and adjustment of contingent consideration | | $ | — |
| | $ | 1,886 |
| | $ | 1,348 |
| | $ | 2,825 |
| | 3,589 |
|
Direct sourcing initiative | | $ | 720 |
| | $ | — |
| | $ | — |
| | $ | — |
| | — |
|
Acquisition-related costs | | $ | 2,353 |
| | $ | — |
| | $ | — |
| | $ | — |
| | — |
|
| |
(b) | Represents total current assets less total current liabilities. |
| |
(c) | All periods have been adjusted to reflect the retrospective adoption of Accounting Standards Update No. 2015-03, Presentation of Debt Issuance Cost for Term Debt. at the beginning of fiscal 2016. For additional information, see Note 2, "Summary of Significant Accounting Policies," to the consolidated financial statements contained in Item 8 of this Annual Report on Form 10-K. |
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of our results of operations and current financial condition. You should read this discussion in conjunction with our consolidated historical financial statements and notes included elsewhere in this Annual Report on Form 10-K. Our discussion of our results of operations and financial condition includes various forward-looking statements about our markets, the demand for our products and services, and our future results. We based these statements on assumptions that we consider reasonable. Actual results may differ materially from those suggested by our forward-looking statements for various reasons including those discussed in the "Risk Factors" in Item 1A of this Annual Report on Form 10-K. Those risk factors expressly qualify all subsequent oral and written forward-looking statements attributable to us or persons acting on our behalf. Except for any ongoing obligations to disclose material information as required by the federal securities laws, we do not have any intention or obligation to update forward-looking statements after we file this Annual Report on Form 10-K.
Fiscal Years
Our fiscal year ends on the Saturday, in December or January nearest the last day of December, resulting in an additional week of results every five or six years. Fiscal 2016, which ended on December 31, 2016, and Fiscal 2015, which ended on January 2, 2016, both contained 52 calendar weeks. Fiscal 2014, which ended on January 3, 2015, contained 53 calendar weeks.
The 53rd week in fiscal 2014 contributed approximately $44.1 million of incremental consolidated revenue. Certain expenses increased in relationship to the additional revenue from the 53rd week, while other expenses, such as fixed costs and expenses incurred on a calendar-month basis, did not increase. The consolidated gross margin for the incremental revenue was comparable to our consolidated gross margin for all of fiscal 2014.
Our Business
We are the largest branded marketer in the U.S. and Canada of apparel exclusively for babies and young children. We own two of the most highly recognized and most trusted brand names in the children's apparel industry, Carter's and OshKosh B'gosh (or "OshKosh").
Established in 1865, our Carter's brand is recognized and trusted by consumers for high-quality apparel for children sizes newborn to eight and accessories.
Established in 1895, OshKosh is a well-known brand, trusted by consumers for apparel for children sizes newborn to 14, with a focus on playclothes for toddlers and young children, and accessories.
We market high-quality products at an attractive value proposition for consumers, and offer multiple product categories, including baby, sleepwear, playclothes, and related accessories. We believe our brands provide a complementary product offering and aesthetic, and are each uniquely positioned in the marketplace. In the $20.7 billion baby and young children's apparel market ages zero to seven in the U.S., our Carter's brand has the #1 position with a 14.9% market share and our OshKosh brand has a 2.9% market share.
We have extensive experience in the young children’s apparel market and focus on delivering products that satisfy our consumers’ needs. Our long-term growth strategy is focused on:
| |
• | providing the best value and experience in young children's apparel; |
| |
• | extending the reach of our brands by improving the convenience of shopping for our brands and by strengthening our international operations; and |
| |
• | improving profitability by strengthening distribution and direct-sourcing capabilities, as well as inventory management disciplines. |
Our multi-channel international business model - retail stores, online and wholesale - enables us to reach a broad range of consumers around the world. As of December 31, 2016, our channels included the following:
| |
• | approximately 18,000 wholesale locations (including department stores, national chain stores, specialty stores and discount retailers) in the U.S.; |
| |
• | 495 Carter's stand-alone stores in the U.S.; |
| |
• | 138 OshKosh stand-alone stores in the U.S.; |
| |
• | 159 dual-branded stores in the U.S., including 140 side-by-side stores and 19 co-branded stores; |
| |
• | 164 co-branded stores in Canada; |
and our U.S. and Canadian websites, all in addition to our other international wholesale, licensing, and online channels.
STORE COUNT DATA
We operate retail stores in three different formats: Carter's stand-alone stores, OshKosh stand-alone stores, and stores in our dual-branded format. Our dual-branded format includes "side-by-side" locations and "co-branded" locations. The dual-branded format allows customers to shop for both the Carter's and OshKosh brands in a single location. "Side-by-side" locations, which are located only in the U.S., consist of adjacent retail stores for our Carter's and OshKosh brands that are connected and counted as a single dual-branded format location. "Co-branded" locations consist of a single retail store that offers products from our Carter's and Oshkosh brands and are also counted as a single dual-branded format location. Ending store count data for the U.S. dual-branded formats include 140, 97, and 51 "side-by-side" locations as of December 31, 2016, January 2, 2016, and January 3, 2015, respectively, and 19 "co-branded" locations as of December 31, 2016. All Canada retail stores are in the "co-branded" format and are also counted as a single location.
|
| | | | | | | | | | | |
| | U.S. Carter's Stand-alone | | U.S. OshKosh Stand-alone | | U.S. Dual-Branded Formats | | Canada Co-Branded Format | | Total Retail Stores | |
| | | | | | | | | | | |
Store count at January 3, 2015 | | 480 | | 149 | | 51 | | 124 | | 804 | |
Openings | | 34 | | 3 | | 31 | | 23 | | 91 | |
Closings | | (4) | | (6) | | — | | — | | (10) | |
Conversions to dual-branded formats | | (13) | | (2) | | 15 | | — | | — | |
Store count at January 2, 2016 | | 497 | | 144 | | 97 | | 147 | | 885 | |
Openings | | 23 | | 1 | | 40 | | 17 | | 81 | |
Closings | | (4) | | (5) | | — | | — | | (9) | |
Conversions to dual-branded formats | | (21) | | (2) | | 22 | | — | | (1) | * |
Store count at December 31, 2016 | | 495 | | 138 | | 159 | | 164 | | 956 | |
| | | | | | | | | | | |
Approximate new store projections for fiscal 2017: | | | | | | | | | | | |
Openings | | 14 | | — | | 48 | | 15 | | 77 | |
Closings | | (5) | | (6) | | — | | (2) | | (13) | |
Conversions to dual-branded formats | | (25) | | — | | 25 | | — | | — | |
Total projections at December 30, 2017 | | 479 | | 132 | | 232 | | 177 | | 1020 | |
* (1) due to two U.S. stand-alone retail stores being converted into one dual-branded format retail store.
In prior years, we used a different convention for stating our store count data, and as a result, the fiscal 2015 and 2014 data above has been restated to conform to the present convention. In particular, "side-by-side" locations were previously reported as two separate locations (one Carter's retail store location and one OshKosh retail store location).
Segments
For fiscal 2016 and all comparative fiscal periods presented within this Annual Report on Form 10-K, our business was managed and evaluated through five segments: Carter's Retail, Carter's Wholesale, OshKosh Retail, OshKosh Wholesale, and International. These segments were deemed to be our operating segments and reportable segments for the fiscal periods.
Our Carter’s Retail and OshKosh Retail segments consist of income from sales of products in the United States, including Carter’s and OshKosh products, through our Carter’s and OshKosh retail and online stores, respectively. Similarly, our Carter’s Wholesale and OshKosh Wholesale segments consist of income from sales in the United States of Carter’s and OshKosh products, respectively, through our wholesale partners. Finally, our International segment consists of income from sales of Carter’s and OshKosh products through retail and online stores outside the United States, primarily through our retail and
online stores in Canada and stores operated by our international partners, as well as sales to our international wholesale partners. Additional financial and geographical information about our segments is contained in Item 8 - “Financial Statements and Supplementary Data,” under Note 13 - “Segment Information” to the accompanying consolidated financial statements.
Subsequent Events
For information occurring after December 31, 2016, see Note 21, Subsequent Events, to the audited consolidated financial statements contained in Item 8 of the Annual Report on Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated selected statement of operations data expressed as a percentage of consolidated net sales.
|
| | | | | | | | |
| For the fiscal years ended |
| December 31, 2016 (52 Weeks) | | January 2, 2016 (52 Weeks) | | January 3, 2015 (53 Weeks) |
Net sales | | | | | |
Carter’s Retail | 39.2 | % | | 38.2 | % | | 37.6 | % |
Carter’s Wholesale | 35.3 | % | | 36.8 | % | | 37.4 | % |
Total Carter’s (U.S.) | 74.5 | % | | 75.0 | % | | 75.0 | % |
OshKosh Retail | 12.6 | % | | 12.0 | % | | 11.6 | % |
OshKosh Wholesale | 1.6 | % | | 2.2 | % | | 2.5 | % |
Total OshKosh (U.S.) | 14.2 | % | | 14.2 | % | | 14.1 | % |
International | 11.3 | % | | 10.8 | % | | 10.9 | % |
Consolidated net sales | 100.0 | % | | 100.0 | % | | 100.0 | % |
Cost of goods sold | 56.9 | % | | 58.3 | % | | 59.1 | % |
Gross profit | 43.1 | % | | 41.7 | % | | 40.9 | % |
Selling, general, and administrative expenses | 31.1 | % | | 30.2 | % | | 30.8 | % |
Royalty income | (1.3 | )% | | (1.5 | )% | | (1.4 | )% |
Operating income | 13.3 | % | | 13.0 | % | | 11.5 | % |
Interest expense | 0.8 | % | | 0.9 | % | | 1.0 | % |
Interest income | n/m |
| | n/m |
| | n/m |
|
Other (income) expense, net | 0.1 | % | | (0.1 | )% | | 0.1 | % |
Income before income taxes | 12.4 | % | | 12.2 | % | | 10.4 | % |
Provision for income taxes | 4.3 | % | | 4.3 | % | | 3.7 | % |
Net income | 8.1 | % | | 7.9 | % | | 6.7 | % |
| | | | | |
n/m - rounds to less than 0.1%, therefore not material.
Note: Results may not be additive due to rounding.
COMPARABLE SALES METRICS
For all periods presented herein, our comparable store sales metrics include sales for all stores and eCommerce websites that were open during the comparable fiscal period, including stand-alone format stores that converted to dual-branded format stores and certain remodeled or relocated stores. A store becomes comparable following 13 consecutive full fiscal months of operations. If a store relocates within the same center with no business interruption or material change in square footage, the sales of such store will continue to be included in the comparable store metrics. If a store relocates to another center, or there is a material change in square footage, such store is treated as a new store. Stores that are closed during the relevant fiscal period are included in the comparable store sales metrics up to the last full fiscal month of operations.
Our fiscal years 2016 and 2015 each contained 52 weeks, while our fiscal year 2014 contained 53 weeks. When presenting U.S. and Canada comparable retail sales, comparable 52-week periods were used for all fiscal years. However, in all other discussion and analysis related to fiscal years 2016, 2015, and 2014, the net sales amounts are based on the same fiscal-year periods used to prepare the consolidated financial statements.
The method of calculating sales metrics varies across the retail industry. As a result, our method of calculating comparable sales may not be the same as that of other retailers.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
2016 FISCAL YEAR ENDED DECEMBER 31, 2016 (52 WEEKS) COMPARED TO 2015 FISCAL YEAR ENDED JANUARY 2, 2016 (52 WEEKS)
U.S. COMPARABLE RETAIL SALES
Changes in comparable sales for our two U.S. retail segments, Carter's Retail and Oshkosh Retail, were as follows:
|
| | | | |
| | Comparable Sales |
| | | | |
| | Change from 2015 to 2016 |
Increase (Decrease) | | | | |
| | Carter's Retail | | OshKosh Retail |
| | | | |
Retail stores | | (1.7)% | | (2.6)% |
eCommerce | | +20.4% | | +25.3% |
Total | | +3.1% | | +3.3% |
The decreases in Carter's Retail store and OshKosh Retail store comparable sales during fiscal 2016 were primarily due to decreases in the number of transactions due to lower demand for seasonal products and a lower average price per unit.
The increase in eCommerce comparable sales during fiscal 2016 was primarily due to an increase in the number of transactions.
During fiscal 2016 and similar to fiscal 2015, we believe that Carter's and OshKosh retail comparable sales continued to be negatively affected overall by lower demand from international consumers shopping in our U.S. stores and eCommerce websites, likely influenced by the strength of the U.S. dollar relative to other currencies. However, we believe these effects were less pronounced in the second half of fiscal 2016 as our U.S. retail business experienced some stabilization in demand from international customers.
CONSOLIDATED NET SALES
Compared to fiscal 2015, consolidated net sales in fiscal 2016 increased $185.3 million, or 6.1%, to $3.2 billion. This improvement reflected sales growth in all of our operating segments except OshKosh Wholesale, as presented below. Changes in foreign currency exchange rates in fiscal 2016 as compared to fiscal 2015 had an unfavorable impact on our consolidated net sales of approximately $7.1 million.
|
| | | | | | | | | | | | | |
| For the fiscal years ended |
(dollars in thousands) | December 31, 2016 | | % of
Total Net Sales | | January 2, 2016 | | % of
Total Net Sales |
Net sales: | | | | | | | |
Carter’s Retail | $ | 1,254,140 |
| | 39.2 | % | | $ | 1,151,268 |
| | 38.2 | % |
Carter’s Wholesale | 1,128,371 |
| | 35.3 | % | | 1,107,706 |
| | 36.8 | % |
Total Carter’s (U.S.) | 2,382,511 |
| | 74.5 | % | | 2,258,974 |
| | 75.0 | % |
| | | | | | | |
OshKosh Retail | 402,274 |
| | 12.6 | % | | 363,087 |
| | 12.0 | % |
OshKosh Wholesale | 49,663 |
| | 1.6 | % | | 65,607 |
| | 2.2 | % |
Total OshKosh (U.S.) | 451,937 |
| | 14.2 | % | | 428,694 |
| | 14.2 | % |
International | 364,736 |
| | 11.3 | % | | 326,211 |
| | 10.8 | % |
Total net sales | $ | 3,199,184 |
| | 100.0 | % | | $ | 3,013,879 |
| | 100.0 | % |
CARTER’S RETAIL SALES (U.S.)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Carter’s Retail segment net sales increased $102.9 million, or 8.9%, in fiscal 2016 to $1.3 billion. The growth in net sales in fiscal 2016 was primarily driven by an/a:
| |
• | Increase of $70.4 million from new stores; |
| |
• | Increase of $50.6 million in eCommerce sales; |
| |
• | Decrease of $14.9 million in comparable store sales; and |
| |
• | Decrease of $3.7 million due to the impact of store closings. |
CARTER’S WHOLESALE SALES (U.S.)
Carter’s Wholesale segment net sales increased $20.7 million, or 1.9%, in fiscal 2016 to $1.1 billion. Compared to fiscal 2015, the 2016 growth reflected a 2.3% increase in average price per unit due to favorable product mix, partially offset by a 0.4% decrease in number of units shipped.
OSHKOSH RETAIL SALES (U.S.)
OshKosh Retail segment net sales increased $39.2 million, or 10.8%, in fiscal 2016 to $402.3 million. The growth in net sales in fiscal 2016 was primarily driven by an/a:
| |
• | Increase of $36.0 million from new stores; |
| |
• | Increase of $18.7 million in eCommerce sales; |
| |
• | Decrease of $7.8 million due to the impact of store closings; and |
| |
• | Decrease of $7.3 million in comparable store sales. |
OSHKOSH WHOLESALE SALES (U.S.)
OshKosh Wholesale segment net sales decreased $15.9 million, or 24.3%, in fiscal 2016 to $49.7 million. Compared to fiscal 2015, this decrease reflected a 22.9% decline in units shipped mainly due to a decline in seasonal bookings, and a 1.4% decrease in the average price per unit.
INTERNATIONAL SALES
International segment net sales increased $38.5 million, or 11.8%, in fiscal 2016 to $364.7 million. Changes in foreign currency exchange rates, primarily between the U.S. dollar and the Canadian dollar, had an unfavorable impact on International segment net sales of approximately $7.1 million in fiscal 2016.
This overall increase in net sales in our International segment for fiscal 2016 mainly reflected an/a:
| |
• | Increase of $24.6 million from our Canadian retail stores; |
| |
• | Increase of $11.4 million from eCommerce, primarily driven by our eCommerce website in China; |
| |
• | Increase of $3.5 million from international wholesale businesses other than Canada; and |
| |
• | Decrease of $1.0 million in our Canada wholesale business due, in part, to the Target Canada bankruptcy that occurred in early 2015. |
Compared to fiscal 2015, our Canadian total retail comparable sales increased 8.4% in fiscal 2016, primarily due to retail stores sales growth of 5.9% and eCommerce sales growth of 46.4%.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
GROSS PROFIT AND GROSS MARGIN
Our consolidated gross profit increased $121.1 million, or 9.6%, to $1.4 billion in fiscal 2016, primarily due to the increase in net sales and favorable product costs. Consolidated gross margin increased from 41.7% in fiscal 2015 to 43.1% in fiscal 2016, primarily due to favorable product costs and channel mix.
We include distribution costs in selling, general, and administrative ("SG&A") expenses. Accordingly, our gross profit and gross margin may not be comparable to other entities that include such distribution costs in their cost of goods sold.
SELLING, GENERAL, AND ADMINISTRATIVE ("SG&A") EXPENSES
Consolidated SG&A expenses in fiscal 2016 increased $86.2 million, or 9.5%, to $995.4 million. As a percentage of consolidated net sales, consolidated SG&A expenses increased from 30.2% in fiscal 2015 to 31.1% in fiscal 2016.
The increase in SG&A expenses, as a percentage of net sales, in fiscal 2016 primarily reflected a:
| |
• | $53.3 million increase in expenses related to retail store operations, primarily due to new store openings; |
| |
• | $15.8 million increase in expenses related to our domestic and international eCommerce operations; |
| |
• | $7.8 million increase in expenses related to marketing and brand management; |
| |
• | $7.1 million increase in expenses related to information technology and systems; |
| |
• | $5.0 million increase in expenses related to distribution and freight; |
| |
• | $2.6 million increase in expenses related to other general and administrative expenses; and |
| |
• | $1.7 million increase in provisions for accounts receivable; |
which were partially offset by a:
| |
• | $5.9 million decrease in insurance and employer-related costs; |
| |
• | $4.5 million decrease in amortization of the H.W. Carter & Sons trademarks; and |
| |
• | $0.8 million decrease in performance-based compensation expenses. |
ROYALTY INCOME
We license the use of our Carter’s, Just One You, Child of Mine, OshKosh B’gosh, OshKosh, Genuine Kids from OshKosh, and Precious Firsts brand names. Royalty income from these brands decreased $1.3 million, or 2.8%, to $42.8 million in fiscal 2016. The decrease compared to fiscal 2015 was attributable to a decrease in income from certain licensees due in part to the insourcing of formerly licensed product categories, partially offset by sales growth from other domestic licensees. We also benefited from favorable settlements in the first quarter of fiscal 2015.
OPERATING INCOME
Compared to fiscal 2015, consolidated operating income for fiscal 2016 increased $33.7 million, or 8.6%, to $426.6 million. Consolidated operating margin increased from 13.0% in fiscal 2015 to 13.3% in fiscal 2016. The table below summarizes the changes in each of our segments' operating results and unallocated corporate expenses between the fiscal years:
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | | Carter's Retail | | Carter's Wholesale | | OshKosh Retail | | OshKosh Wholesale | | International | | Unallocated Corporate Expenses | | Total |
Operating income for fiscal 2015 | | $ | 199,040 |
| | $ | 232,497 |
| | $ | 11,931 |
| | $ | 13,270 |
| | $ | 47,004 |
| | $ | (110,885 | ) | | $ | 392,857 |
|
Favorable (unfavorable) change in fiscal 2016: | | | | | | | | | | | | | | |
Gross profit | | 59,650 |
| | 21,520 |
| | 19,442 |
| | (5,238 | ) | | 25,438 |
| | 313 |
| | 121,125 |
|
Royalty income | | 415 |
| | (1,632 | ) | | 109 |
| | 227 |
| | (370 | ) | | — |
| | (1,251 | ) |
SG&A expenses | | (56,941 | ) | | (2,253 | ) | | (21,065 | ) | | 2,562 |
| | (12,878 | ) | | 4,402 |
| | (86,173 | ) |
Operating income for fiscal 2016 | | $ | 202,164 |
| | $ | 250,132 |
| | $ | 10,417 |
| | $ | 10,821 |
| | $ | 59,194 |
| | $ | (106,170 | ) | | $ | 426,558 |
|
| | | | | | | | | | | | | | |
The following table presents changes in the operating margin for each of our five operating segments between fiscal 2015 and fiscal 2016. The primary drivers of these change are presented in terms of the difference in each driver's margin (based on net sales) between fiscal years, in each case expressed in basis points ("bps").
|
| | | | | | | | | | | | | | | |
| | Carter's Retail | | Carter's Wholesale | | OshKosh Retail | | OshKosh Wholesale | | International |
Operating margin for fiscal 2015 | | 17.3 | % | | 21.0 | % | | 3.3 | % | | 20.2 | % | | 14.4 | % |
Favorable (unfavorable) bps changes in fiscal 2016: | | | | | |
|
| |
|
| |
|
|
Gross profit | | 40 bps |
| | 140 bps |
| | 20 bps |
| | (290) bps |
| | 220 bps |
|
Royalty income | | — |
| | (20) bps |
| | (10) bps |
| | 530 bps |
| | (30) bps |
|
SG&A expenses | | (160) bps |
| | — |
| | (80) bps |
| | (80) bps |
| | (10) bps |
|
Operating margin for fiscal 2016 | | 16.1 | % | | 22.2 | % | | 2.6 | % | | 21.8 | % | | 16.2 | % |
| | (a) |
| | (b) |
| | (c) |
| | (d) |
| | (e) |
|
(a) Carter's Retail segment operating income in fiscal 2016 increased $3.1 million, or 1.6%, from fiscal 2015 to $202.2 million. The segment's operating margin decreased 120 bps from 17.3% in fiscal 2015 to 16.1% in fiscal 2016. The primary drivers of the change in the operating margin were a:
| |
• | 40 bps increase in gross profit primarily due to favorable product costs, partially offset by lower average price per unit due to an increased promotional environment; and |
| |
• | 160 bps increase in SG&A expenses mainly due to a: |
| |
• | 90 bps increase in expenses associated with new retail stores; |
| |
• | 30 bps increase in marketing expenses; |
| |
• | 20 bps increase in freight and distribution expenses; and |
| |
• | 20 bps increase in performance-based compensation expenses. |
(b) Carter's Wholesale segment operating income in fiscal 2016 increased $17.6 million, or 7.6%, from fiscal 2015 to $250.1 million. The segment's operating margin increased 120 bps from 21.0% in fiscal 2015 to 22.2% in fiscal 2016. The primary drivers of the change in the operating margin were a:
| |
• | 140 bps increase in gross profit due to favorable product costs and improved pricing due to changes in product mix; and |
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
| |
• | 20 bps decrease in royalty income primarily due to insourcing formerly licensed product categories. |
(c) OshKosh Retail segment operating income in fiscal 2016 decreased $1.5 million, or 12.7%, from fiscal 2015 to $10.4 million. The segment's operating margin decreased 70 bps from 3.3% in fiscal 2015 to 2.6% in fiscal 2016. The primary drivers of the change in the operating margin were a:
| |
• | 20 bps increase in gross profit primarily due to favorable product costs, partially offset lower average price per unit due to an increased promotional environment; and |
| |
• | 80 bps increase in SG&A expenses primarily due to a: |
| |
• | 120 bps increase in expenses associated with new retail stores; |
| |
• | 20 bps increase in marketing expenses; |
| |
• | 20 bps decrease in freight and distribution expenses; and |
| |
• | 20 bps decrease in performance-based compensation expenses. |
(d) OshKosh Wholesale segment operating income in fiscal 2016 decreased $2.4 million, or 18.5%, from fiscal 2015 to $10.8 million. The segment's operating margin increased 160 bps from 20.2% in fiscal 2015 to 21.8% in fiscal 2016. The primary drivers of the change in the operating margin were a:
| |
• | 290 bps decrease in gross profit primarily due to unfavorable sales channel mix, partially offset by favorable product costs; |
| |
• | 80 bps increase in SG&A expenses due to lower sales volume; and |
| |
• | 530 bps increase in royalty income primarily due to sales growth from our licensees. |
(e) International segment operating income in fiscal 2016 increased $12.2 million, or 25.9%, from fiscal 2015 to $59.2 million. This segment's operating margin increased 180 bps from 14.4% in fiscal 2015 to 16.2% in fiscal 2016. The primary drivers of the change in the operating margin were a:
| |
• | 220 bps increase in gross profit, primarily driven by growth in higher margin retail store and eCommerce channels, partially offset by unfavorable foreign exchange rates and higher provisions for inventory; and |
| |
• | 30 bps decrease in royalty income due to a reduction in licensees. |
Unallocated Corporate Expenses
Unallocated corporate expenses decreased by $4.7 million, or 4.3%, from $110.9 million in fiscal 2015 to $106.2 million in fiscal 2016. Unallocated corporate expenses, as a percentage of consolidated net sales, decreased from 3.7% in fiscal 2015 to 3.3% in fiscal 2016. The decrease primarily reflected a/an:
| |
• | Decrease of $4.8 million in insurance and other employer-related costs; |
| |
• | Decrease of $4.5 million in amortization expense for the H.W. Carter & Sons tradenames; |
| |
• | Decrease of $3.2 million in performance-based compensation expenses; |
| |
• | Increase of $6.3 million in other general and administrative expenses primarily due to advisory fees; and |
| |
• | Increase of $1.4 million in expenses related to information technology and systems. |
INTEREST EXPENSE
Interest expense and effective interest rate calculations include the amortization of debt issuance costs.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Interest expense in fiscal 2016 and fiscal 2015 were both approximately $27.0 million. Weighted-average borrowings for fiscal 2016 were $585.2 million at an effective interest rate of 4.57%, compared to weighted-average borrowings for fiscal 2015 of $585.8 million at an effective interest rate of 4.59%. The decrease in the effective interest rate for fiscal 2016 compared to fiscal 2015 was primarily due to lower borrowing costs on the U.S. and Canadian borrowings outstanding under our secured revolving credit facility which was amended and restated in September 2015. The change in weighted-average borrowings between fiscal 2016 and fiscal 2015 was due solely to changes in foreign currency exchange rates between the U.S. and Canadian dollars. On our consolidated balance sheets, unamortized debt issuance costs associated with our senior notes is presented as a direct reduction in the carrying value of the associated debt liability for all periods presented.
OTHER EXPENSE (INCOME), NET
Other expense (income), net is comprised primarily of gains and losses on foreign currency transactions and foreign currency forward contracts. These net amounts represented a net loss of $3.9 million for fiscal 2016 and a net gain of $1.8 million for fiscal 2015. As of December 31, 2016, all foreign currency forward contracts were settled.
INCOME TAXES
Our consolidated effective tax rates for fiscal 2016 and 2015 were 34.8% and 35.4%, respectively. The lower effective rate for fiscal 2016 was primarily due to expansion of our business outside the U.S. to countries with generally lower applicable income tax rates, partially offset by favorable settlements of federal and state tax audits for 2011, 2012 and 2013 during fiscal 2015.
NET INCOME
Our consolidated net income for fiscal 2016 increased $20.3 million, or 8.5%, to $258.1 million as compared to $237.8 million in fiscal 2015. This increase was due to the factors previously discussed.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
2015 FISCAL YEAR ENDED JANUARY 2, 2016 (52 WEEKS) COMPARED TO 2014 FISCAL YEAR ENDED JANUARY 3, 2015 (53 WEEKS)
COMPARABLE SALES METRICS
Our fiscal year 2015 contained 52 weeks while our fiscal year 2014 contained 53 weeks. When presenting U.S. and Canada comparable retail sales, comparable 52-week periods were used. However, in all other discussion and analysis related to fiscal years 2015 and 2014, the net sales amounts are based on the same fiscal-year periods used to prepare the consolidated financial statements.
U.S. COMPARABLE RETAIL SALES
Changes in comparable sales for our two U.S. retail segments, Carter's Retail and Oshkosh Retail, were as follows:
|
| | | | |
| | Comparable Sales |
| | | | |
| | Change from 2014 to 2015 |
Increase (Decrease) | | | | |
| | Carter's Retail | | OshKosh Retail |
| | | | |
Retail stores | | (3.1)% | | (2.5)% |
eCommerce | | +18.9% | | +24.0% |
Total | | +1.2% | | +2.4% |
The increases in eCommerce comparable sales during the 2015 period were primarily due to an increase in the number of transactions.
CONSOLIDATED NET SALES
Compared to fiscal 2014, consolidated net sales in fiscal 2015 increased $120.0 million, or 4.1%, to 3.0 billion. This improvement was primarily due to sales growth in all of our segments except OshKosh Wholesale. The 53rd week in fiscal 2014 contributed approximately $44.1 million in additional consolidated net sales in fiscal 2014. Fiscal 2015 contained 52 weeks. Changes in foreign currency exchange rates in fiscal 2015 as compared to fiscal 2014 negatively affected consolidated net sales by approximately $35.1 million.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
|
| | | | | | | | | | | | | |
| For the fiscal years ended |
(dollars in thousands) | January 2, 2016 (52 Weeks) | | % of Total Net Sales | | January 3, 2015 (53 Weeks) | | % of Total Net Sales |
Net sales: | | | | | | | |
Carter’s Retail | $ | 1,151,268 |
| | 38.2 | % | | $ | 1,087,165 |
| | 37.6 | % |
Carter’s Wholesale | 1,107,706 |
| | 36.8 | % | | 1,081,888 |
| | 37.4 | % |
Total Carter’s | 2,258,974 |
| | 75.0 | % | | 2,169,053 |
| | 75.0 | % |
| | | | | | | |
OshKosh Retail | 363,087 |
| | 12.0 | % | | 335,140 |
| | 11.6 | % |
OshKosh Wholesale | 65,607 |
| | 2.2 | % | | 73,201 |
| | 2.5 | % |
Total OshKosh | 428,694 |
| | 14.2 | % | | 408,341 |
| | 14.1 | % |
International | 326,211 |
| | 10.8 | % | | 316,474 |
| | 10.9 | % |
Total net sales | $ | 3,013,879 |
| | 100.0 | % | | $ | 2,893,868 |
| | 100.0 | % |
CARTER’S RETAIL SALES
Carter’s Retail net sales increased $64.1 million, or 5.9%, in fiscal 2015 to $1.2 billion. The increase in fiscal 2015 was primarily driven by an/a:
| |
• | Increase of $68.9 million from new store openings; |
| |
• | Increase of $38.5 million in eCommerce sales; |
| |
• | Decrease of $25.9 million in comparable store sales; and |
| |
• | Decrease of $4.0 million due to the impact of store closings. |
The 53rd week of fiscal 2014 contributed additional net sales of approximately $13.7 million to fiscal 2014.
CARTER’S WHOLESALE SALES
Carter’s Wholesale net sales increased $25.8 million, or 2.4%, in fiscal 2015 to $1.1 billion. Compared to fiscal 2014, the 2015 growth reflected a 1.5% increase in average price per unit and a 0.9% increase in units shipped, primarily driven by increased seasonal product demand, a new playwear initiative, and favorable replenishment trends. The 53rd week of fiscal 2014 contributed approximately $19.4 million in additional net sales to fiscal 2014.
OSHKOSH RETAIL SALES
OshKosh Retail net sales increased $27.9 million, or 8.3%, in fiscal 2015 to $363.1 million. The growth in net sales in fiscal 2015 was primarily driven by an/a:
| |
• | Increase of $30.9 million from new store openings; |
| |
• | Increase of $14.2 million in eCommerce sales; |
| |
• | Decrease of $6.5 million in comparable store sales; and |
| |
• | Decrease of $6.0 million due to the impact of store closings. |
The 53rd week of fiscal 2014 contributed additional net sales of approximately $4.8 million to fiscal 2014.
OSHKOSH WHOLESALE SALES
OshKosh Wholesale net sales decreased $7.6 million, or 10.3%, in fiscal 2015 to $65.6 million. Compared to fiscal 2014, this decrease reflected a 15.8% decline in units shipped, partially offset by a 5.4% increase in the average price per unit, primarily
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
driven by lower seasonal bookings and a decline in sales to the off-price channel. The 53rd week of fiscal 2014 contributed additional net sales of approximately $1.9 million to fiscal 2014.
INTERNATIONAL SALES
Net sales in our International segment include our Canada operations, wholesale sales to our international licensees, China eCommerce and other international eCommerce sales.
International net sales increased $9.7 million, or 3.1%, in fiscal 2015 to $326.2 million. Changes in foreign currency exchange rates in fiscal 2015 as compared to fiscal 2014, primarily between the U.S. dollar and the Canadian dollar, negatively affected the International segment net sales by approximately $35.1 million.
This overall increase in sales for fiscal 2015 primarily reflected an/a:
| |
• | Increase of $9.6 million from international wholesale locations, excluding Canada; |
| |
• | Increase of $7.2 million from eCommerce driven primarily by our Canadian website; |
| |
• | Increase of $6.9 million from our Canadian retail stores; |
| |
• | Increase of $5.9 million from eCommerce primarily due to the 2015 launch of our website in China; |
| |
• | Decrease of $15.0 million in our wholesale business primarily due to the Target Canada bankruptcy that occurred in early 2015; and |
| |
• | Decrease of $4.4 million related to the exit of retail operations in Japan during the first quarter of fiscal 2014. |
The changes noted above include approximately $4.3 million of additional net sales that occurred in the 53rd week of fiscal 2014.
Comparable store sales in Canada, which were measured based on aligned years as previously discussed, increased 6.4% during the 2015 compared to 2014. Because 2014 did not contain a full year of sales from our Canadian eCommerce website, comparable eCommerce metrics are not presented for 2015.
GROSS PROFIT AND GROSS MARGIN
Our consolidated gross profit increased $73.6 million, or 6.2%, to $1.3 billion in fiscal 2015, primarily due to increased sales. Consolidated gross margin increased from 40.9% in fiscal 2014 to 41.7% in fiscal 2015. The increase was primarily attributable to margin improvements in our domestic wholesale and international segments.
We include distribution costs in selling, general, and administrative ("SG&A") expenses. Accordingly, our gross profit and gross margin may not be comparable to other entities that include such distribution costs in their cost of goods sold.
SELLING, GENERAL, AND ADMINISTRATIVE ("SG&A") EXPENSES
Consolidated SG&A expenses in fiscal 2015 increased $19.0 million, or 2.1%, to $909.2 million. As a percentage of consolidated net sales, consolidated SG&A expenses decreased from 30.8% in fiscal 2014 to 30.2% in fiscal 2015.
The decrease in SG&A expenses, as a percentage of net sales, in fiscal 2015 primarily reflected a:
| |
• | $10.2 million decrease in amortization expense for the H.W. Carter & Sons trademarks; |
| |
• | $6.7 million decrease in provisions for doubtful receivables; |
| |
• | $6.6 million decrease in expenses associated with office consolidations occurring in prior periods; |
| |
• | $6.5 million decrease in expenses for legal and consulting services; |
| |
• | $6.3 million decrease in fulfillment and distribution expenses; |
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
| |
• | $4.0 million decrease in expenses related to our exit from Japan retail operations in the first quarter of fiscal 2014; and |
| |
• | $2.0 million decrease in incentive compensation expenses; |
which were partially offset by a:
| |
• | $29.8 million increase in expenses related to retail store operations, primarily due to new stores; |
| |
• | $10.5 million increase in expenses related to marketing and brand management; |
| |
• | $6.3 million increase in insurance and other benefits primarily due to higher health insurance costs; and |
| |
• | $1.8 million increase in the Company's match of 401(k) contributions due to higher employee participation. |
ROYALTY INCOME
We license the use of our Carter’s, Just One You, Child of Mine, OshKosh B’gosh, OshKosh, Genuine Kids from OshKosh, and Precious Firsts brand names. Royalty income from these brands increased $4.9 million, or 12.5%, to $44.1 million in fiscal 2015. The increase in fiscal 2015 primarily reflected growth in both our domestic Carter's and OshKosh licensing revenues, along with the timing of favorable settlements with our licensees in the first half of fiscal 2015.
OPERATING INCOME
Compared to 2014, consolidated operating income for fiscal 2015 increased $59.5 million, or 17.9%, to $392.9 million. Consolidated operating margin increased from 11.5% in fiscal 2014 to 13.0% in fiscal 2015. The table below summarizes the changes in each of our segments' operating results and unallocated corporate expenses during fiscal 2015:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | | Carter's Retail | | Carter's Wholesale | | OshKosh Retail | | OshKosh Wholesale | | International | | Unallocated Corporate Expenses | | Total |
Operating income for fiscal 2014 | | $ | 211,297 |
| | $ | 185,463 |
| | $ | 8,210 |
| | $ | 8,842 |
| | $ | 39,470 |
| | $ | (119,937 | ) | | $ | 333,345 |
|
Favorable (unfavorable) change in fiscal 2015: | | | | | | | | | | | | | | |
Gross profit | | 20,214 |
| | 32,872 |
| | 12,073 |
| | 2,114 |
| | 7,974 |
| | (1,663 | ) | | 73,584 |
|
Royalty income | | 1,627 |
| | 1,832 |
| | 969 |
| | 1,438 |
| | (956 | ) | | — |
| | 4,910 |
|
SG&A expenses | | (34,098 | ) | | 12,330 |
| | (9,321 | ) | | 876 |
| | 516 |
| | 10,715 |
| | (18,982 | ) |
Operating income for fiscal 2015 | | $ | 199,040 |
| | $ | 232,497 |
| | $ | 11,931 |
| | $ | 13,270 |
| | $ | 47,004 |
| | $ | (110,885 | ) | | $ | 392,857 |
|
| | | | | | | | | | | | | | |
The following table summarizes the operating margin for each of our five operating segments in fiscal 2014 and fiscal 2015, as well as the primary drivers of the change in operating margin between those two periods. Each driver is presented in terms of the difference in that driver's margin (based on net sales) between fiscal 2014 and fiscal 2015, in each case expressed in basis points ("bps").
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
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| | | | | | | | | | | | | | | |
| | Carter's Retail | | Carter's Wholesale | | OshKosh Retail | | OshKosh Wholesale | | International |
Operating margin for fiscal 2014 | | 19.4 | % | | 17.1 | % | | 2.4 | % | | 12.1 | % | | 12.5 | % |
Favorable (unfavorable) bps change in fiscal 2015: | | | | | | | | | | |
Gross profit | | (130) bps |
| | 240 bps |
| | (40) bps |
| | 540 bps |
| | 110 bps |
|
Royalty income | | 10 bps |
| | 10 bps |
| | 20 bps |
| | 350 bps |
| | (40) bps |
|
SG&A expenses | | (90) bps |
| | 140 bps |
| | 110 bps |
| | (80) bps |
| | 120 bps |
|
Operating margin for fiscal 2015 | | 17.3 | % | | 21.0 | % | | 3.3 | % | | 20.2 | % | | 14.4 | % |
| | (a) |
| | (b) |
| | (c) |
| | (d) |
| | (e) |
|
(a) Carter's Retail operating income in fiscal 2015 decreased $12.3 million, or 5.8%, from fiscal 2014 to $199.0 million. The segment's operating margin decreased 210 bps from 19.4% in fiscal 2014 to 17.3% in fiscal 2015. The primary drivers of the change in the operating margin were a:
| |
• | 130 bps decrease in gross profit primarily due to lower average price per unit; and |
| |
• | 90 bps increase in SG&A expenses mainly due to a: |
| |
• | 60 bps increase in marketing expenses; and |
| |
• | 50 bps increase in expenses associated with new stores. |
(b) Carter's Wholesale operating income in fiscal 2015 increased $47.0 million, or 25.4%, from fiscal 2014 to $232.5 million. The segment's operating margin increased 390 bps from 17.1% in fiscal 2014 to 21.0% in fiscal 2015. The primary drivers of the change in the operating margin were a:
| |
• | 240 bps increase in gross profit primarily due to strong demand and product performance, supply chain efficiencies, favorable product costs, and higher average price per unit as a result of product mix; and |
| |
• | 140 bps decrease in SG&A expenses consisting primarily of a: |
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• | 100 bps decrease in distribution and other expenses driven by efficiencies at our Braselton, Georgia distribution center; and |
| |
• | 20 bps decrease related to provisions for accounts receivable. |
(c) OshKosh Retail operating income in fiscal 2015 increased $3.7 million, or 45.3%, from fiscal 2014 to $11.9 million. The segment's operating margin increased 90 bps from 2.4% in fiscal 2014 to 3.3% in fiscal 2015. The primary drivers of the change in the operating margin were a:
| |
• | 110 bps decrease in SG&A expenses primarily due to a: |
| |
• | 70 bps decrease in retail administration expenses; |
| |
• | 60 bps decrease in fulfillment and distribution expenses; and |
| |
• | 40 bps increase in marketing expenses; |
| |
• | 20 bps increase in royalty income from our licensees; and |
| |
• | 40 bps decrease in gross profit due to lower average price per unit. |
(d) OshKosh Wholesale operating income in fiscal 2015 increased $4.4 million, or 50.1%, from fiscal 2014 to $13.3 million. The segment's operating margin increased 810 bps from 12.1% in fiscal 2014 to 20.2% in fiscal 2015. The primary drivers of the change in the operating margin were a:
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
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• | 540 bps increase in gross profit primarily due to favorable product costs and a higher average price per unit as a result of product mix; |
| |
• | 350 bps increase in royalty income primarily due to sales growth from our licensees; and |
| |
• | 80 bps increase in SG&A expenses primarily due to a: |
| |
• | 190 bps increase in customer service expenses; and |
| |
• | 80 bps decrease in distribution and freight expenses. |
(e) International operating income in fiscal 2015 increased $7.5 million, or 19.1%, from fiscal 2014 to $47.0 million. This segment's operating margin increased 190 bps from 12.5% in fiscal 2014 to 14.4% in fiscal 2015. The primary drivers of the change in the operating margin were a:
| |
• | 110 bps increase in gross profit driven primarily by growth in our eCommerce channel; |
| |
• | 40 bps decrease in royalty income; and |
| |
• | 120 bps decrease in SG&A expenses consisting mainly of a: |
| |
• | 210 bps decrease due to the exit of retail operations in Japan in the first quarter of fiscal 2014; |
| |
• | 60 bps decrease in customer service expenses; |
| |
• | 40 bps decrease related to provisions for accounts receivable; |
| |
• | 90 bps increase in retail expenses associated with new stores in Canada; |
| |
• | 60 bps increase in marketing expenses; and |
| |
• | 60 bps increase in distribution and freight expenses. |
Unallocated corporate expenses decreased by $9.1 million, from $119.9 million in fiscal 2014 to $110.9 million in fiscal 2015. Unallocated corporate expenses as a percentage of consolidated net sales decreased from 4.1% in fiscal 2014 to 3.7% in fiscal 2015. The decrease primarily reflected a/an:
| |
• | Decrease of $10.2 million in amortization expense for the H.W. Carter & Sons tradenames; |
| |
• | Decrease of $6.6 million in expenses related to office consolidations that occurred in prior periods; |
| |
• | Decrease of $4.0 million in administrative and legal expenses; |
| |
• | Increase of $8.0 million in insurance and other benefits, primarily driven by higher employee health insurance costs and higher 401-K match expense due to higher employee participation; and |
| |
• | Increase of $4.2 million in expenses related to information technology. |
INTEREST EXPENSE
Interest expense and effective interest rate calculations include the amortization of debt issuance costs.
Interest expense in fiscal 2015 decreased $0.6 million from fiscal 2014 to $27.0 million. Weighted-average borrowings for fiscal 2015 were $585.9 million at an effective interest rate of 4.59%, compared to weighted-average borrowings for fiscal 2014 of $586.0 million at an effective interest rate of 4.68%. The decrease in the effective interest rate for fiscal 2015 compared to fiscal 2014 was primarily due to a lower interest rate on the U.S. borrowings outstanding under our amended revolving credit agreement, partially offset by a higher interest rate on the new Canadian portion of the outstanding borrowings on our amended revolving credit agreement and higher debt issuance costs.
During fiscal 2015, we amended our revolving credit agreement to, among other things, achieve better pricing terms. The change in weighted-average borrowings between fiscal 2015 and fiscal 2014 was due solely to changes in foreign currency exchange rates between the U.S. and Canadian dollars.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
OTHER EXPENSE (INCOME), NET
Other expense (income), net is comprised primarily of net gains and losses on foreign currency transactions and foreign currency contracts. The net amounts related to foreign currency represented a gain of $1.8 million for fiscal 2015 and a loss of $3.2 million for fiscal 2014.
INCOME TAXES
Our consolidated effective tax rates for fiscal 2015 and 2014 were 35.4% and 35.7%, respectively.
NET INCOME
Our consolidated net income for fiscal 2015 increased $43.2 million, or 22.2%, to $237.8 million as compared to $194.7 million in fiscal 2014, due to the factors previously discussed.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
FINANCIAL CONDITION, CAPITAL RESOURCES, AND LIQUIDITY
Our ongoing cash needs are primarily for working capital and capital expenditures. We expect that our primary sources of liquidity will continue to be cash and cash equivalents on hand, cash flow from operations, and borrowings available under our secured revolving credit facility. We expect that these sources will fund our ongoing requirements for the foreseeable future, and we believe that we also have access to the capital markets. Further, we do not expect current economic conditions to prevent us from meeting our cash requirements. These sources of liquidity may be affected by events described in our risk factors, as further discussed in Part I, Item 1.A., Risk Factors, in this Annual Report on Form 10-K for the fiscal year ended December 31, 2016.
As of December 31, 2016, we had approximately $299.4 million of cash and cash equivalents in major financial institutions, including approximately $58.5 million in financial institutions located outside of the U.S. We maintain cash deposits with major financial institutions that exceed the insurance coverage limits provided by the Federal Deposit Insurance Corporation in the U.S. and by similar insurers for deposits located outside the U.S. To mitigate this risk, we utilize a policy of allocating cash deposits among major financial institutions that have been evaluated by us and third-party rating agencies.
BALANCE SHEET
Net accounts receivable at December 31, 2016 were $202.5 million compared to $207.6 million at January 2, 2016. The decrease of $5.1 million, or 2.5%, as compared to January 2, 2016 was primarily due to the timing of payments from customers, partially offset by higher net sales in fiscal 2016. Net accounts receivable at January 2, 2016 were $207.6 million compared to $184.6 million at January 3, 2015. The increase of $23.0 million, or 12.5%, primarily reflected higher sales in fiscal 2015 and higher non-trade receivables such as supply chain rebates and tenant allowances.
Inventories at December 31, 2016 were $487.6 million compared to $469.9 million at January 2, 2016. The increase of $17.7 million, or 3.8%, compared to January 2, 2016, primarily reflected business growth and timing of inventory purchases. Inventories at January 2, 2016 were $469.9 million compared to $444.8 million at January 3, 2015. The increase of $25.1 million, or 5.6%, compared to January 3, 2015 primarily reflected an increase in inventory levels to support business growth and higher product costs as compared to the prior year.
CASH FLOW
Net cash provided by operating activities for fiscal 2016 was $369.2 million compared to net cash provided by operating activities of $308.0 million in fiscal 2015. The increase in operating cash flow primarily reflected an increase in net income and favorable changes in working capital. The timing of payments and receipts in the normal course of business can impact our working capital.
Net cash provided by operating activities for fiscal 2015 was $308.0 million compared to net cash provided by operating activities of $282.4 million in fiscal 2014. This increase in operating cash flow for fiscal 2015 primarily reflected an increase in net income and favorable changes in net working capital.
Our capital expenditures were approximately $88.6 million in fiscal 2016 reflecting expenditures of $55.5 million for our U.S. and international retail store openings and remodelings, $20.0 million for information technology initiatives, $4.2 million for the Braselton, Georgia distribution facility, and $2.2 million for wholesale fixtures.
Our capital expenditures were approximately $103.5 million for both fiscal 2015 and fiscal 2014. Expenditures in fiscal 2015 primarily reflected expenditures of $66.7 million for our U.S. and international retail store openings and remodelings, $19.5 million for information technology initiatives, $6.3 million for the Braselton, Georgia distribution facility, and $4.9 million for wholesale fixtures.
We plan to invest approximately $100 million in capital expenditures in fiscal 2017, primarily for U.S. and international retail store openings and remodelings, and information technology initiatives.
Net cash used in financing activities was $363.5 million in fiscal 2016 compared to $162.0 million in fiscal 2015. This increase in cash used for financing activities in fiscal 2016 reflected more repurchases of our common stock and higher cash dividend payments to our shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Net cash used in financing activities was $162.0 million in fiscal 2015 compared to $122.4 million in fiscal 2014. This increase in fiscal 2015 primarily reflected increases in repurchases of our common stock, increases in payments of withholding taxes for vested restricted shares issued under our employee stock-based compensation plan, and increases in the payment of cash dividends. In the first quarter in fiscal 2015, we replaced $20.0 million of outstanding borrowings with CAD $25.5 million of borrowings, which approximated $20.3 million. In the third quarter of fiscal 2015, we amended and extended our revolving credit agreement and, because of a change in the lead administrative agent and certain changes in commitment amounts among the lenders in the syndication, the amendment led to the repayment and simultaneous re-borrowing of the then-outstanding balance on the revolving credit agreement of $185.2 million.
AMENDED AND RESTATED CREDIT FACILITY
On September 16, 2015, we and a syndicate of lenders amended and restated our secured revolving credit facility (the "amended revolving credit facility") to, among other things: (i) refinance amounts outstanding on our existing credit facility in order to achieve better pricing terms and (ii) provide additional liquidity to be used for our ongoing working capital and for other general corporate purposes. The aggregate principal amount of the amended credit facility was increased from $375 million to $500 million to provide for (i) a $400 million U.S. dollar revolving facility (including a $175 million sub-limit for letters of credit and a swing line sub-limit of $50 million) and (ii) a $100 million multicurrency revolving facility (including a $40 million sub-limit for letters of credit and a swing line sub-limit of $15 million), available for borrowings denominated in U.S. dollars, Canadian dollars, Euros, Pounds Sterling, or other currencies agreed to by the applicable lenders. In connection with the amendment and restatement, we incurred approximately $1.7 million in debt issuance costs which, together with the certain existing unamortized debt issuance costs, is being amortized over the remaining term of the amended facility. Our amended revolving credit facility matures September 16, 2020.
The interest rate margins applicable to our amended revolving credit facility were, as of the date here of, 1.375% for LIBOR-rate loans (which may be adjusted based on a leverage-based pricing grid ranging from 1.125% to 1.875%) and 0.375% for base-rate loans (which may be adjusted based on a leverage-based pricing grid ranging from 0.125% to 0.875%).
Our amended revolving credit facility also provides for incremental facilities in an aggregate amount not to exceed $250 million, either in the form of a commitment increase under the existing credit facility or the incurrence of one or more tranches of term loans (with the aggregate U.S. dollar amount available to us not to exceed $200 million and the aggregate multicurrency amount available not to exceed $50 million).
As of December 31, 2016, we had approximately $185.0 million in outstanding borrowings under our amended revolving credit facility, exclusive of $4.8 million of outstanding letters of credit. As of December 31, 2016, there was approximately $310.2 million available for future borrowings.
As of December 31, 2016, U.S. dollar borrowings outstanding under the amended revolving credit facility accrued interest at a LIBOR rate plus the applicable base rate, which was 2.08% on that date, and Canadian borrowings accrued interest at a CDOR (Canadian Dollar Offered Rate) rate plus the applicable base rate, which was 2.28% on that date.
Covenants
Subject to certain customary exceptions, the amended revolving credit facility contains covenants that restrict The William Carter Company's ("TWCC") and certain of its subsidiaries' ability to, among other things: (i) create or incur liens, debt, guarantees or other investments, (ii) engage in mergers and consolidations, (iii) pay dividends or other distributions to, and redemptions and repurchases from, equity holders, (iv) prepay, redeem or repurchase subordinated or junior debt, (v) amend organizational documents, and (vi) engage in certain transactions with affiliates.
The amended revolving credit facility also contains affirmative financial covenants. Specifically, we will not (i) permit at the end of any four consecutive fiscal quarters the Lease Adjusted Leverage Ratio (defined as, with certain adjustments, the ratio of the Company's consolidated indebtedness plus six times rent expense, as defined, to consolidated net income before interest, taxes, depreciation, amortization, and rent expense ("EBITDAR")) to exceed 4.00:1.00 (provided, however, that if any "Material Acquisition" occurs and the Lease Adjusted Leverage Ratio on a pro forma basis giving effect to the consummation of the Material Acquisition is less than 4.00:1.00, then the maximum Lease Adjusted Leverage Ratio may be increased to 4.50:1.00 for the fiscal quarter in which such Material Acquisition is consummated and the three fiscal quarters immediately following the fiscal quarter in which such Material Acquisition occurs) or (ii) permit at the end of any four consecutive fiscal quarters the Consolidated Fixed Charge Coverage Ratio (defined as, with certain adjustments, the ratio of consolidated
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
EBITDAR to consolidated fixed charges (defined as interest plus rent expense)), for any such period to be less than 2.25:1.00 (provided, however, that if any Material Acquisition occurs and the Consolidated Fixed Charge Coverage Ratio on a pro forma basis giving effect to the consummation of the Material Acquisition is at least 2.25:1.00, then the minimum Consolidated Fixed Charge Coverage Ratio may be decreased to 2.00:1.00 for the fiscal quarter in which such Material Acquisition is consummated and the three fiscal quarters immediately following the fiscal quarter in which such Material Acquisition occurs). As of December 31, 2016, we were in compliance with our financial debt covenants.
SENIOR NOTES
On August 12, 2013, our 100% owned subsidiary, TWCC issued $400 million principal amount of senior notes at par, bearing interest at a rate of 5.25% per annum, and maturing on August 15, 2021, all of which were outstanding as of December 31, 2016. TWCC received net proceeds from the offering of the senior notes of approximately $394.2 million, after deducting bank fees. Approximately $7.0 million, including both bank fees and other third party expenses, has been capitalized in connection with the issuance and is being amortized over the term of the senior notes.
The senior notes are unsecured and are fully and unconditionally guaranteed by Carter's, Inc. and certain subsidiaries of TWCC.
At any time prior to August 15, 2017, TWCC may redeem all or part of the senior notes at 100% of the principal amount redeemed plus an applicable premium and accrued and unpaid interest. On and after August 15, 2017, TWCC may redeem all or part of the senior notes at the redemption prices (expressed as percentages of principal amount of the senior notes to be redeemed) set forth below, plus accrued and unpaid interest. The redemption price applicable where the redemption occurs during the twelve-month period beginning on August 15 of each of the years indicated is as follows:
|
| |
Year | Percentage |
2017 | 102.63% |
2018 | 101.31% |
2019 and thereafter | 100.00% |
Upon the occurrence of specific kinds of changes of control, unless a redemption notice with respect to all the outstanding senior notes has previously or concurrently been mailed or delivered, we will be required to make an offer to purchase the senior notes at 101% of their principal amount. In addition, if we or any of our restricted subsidiaries engages in certain asset sales, under certain circumstances we will be required to use the net proceeds to make an offer to purchase the senior notes at 100% of their principal amount.
The indenture governing the senior notes includes a number of covenants, that, among other things and subject to certain exceptions, restrict TWCC's ability to: (i) incur, assume or guarantee additional indebtedness; (ii) issue disqualified stock and preferred stock; (iii) pay dividends, among other things, or make distributions or other restricted payments; (iv) prepay, redeem or repurchase certain debt; (v) make loans and investments (including joint ventures); (vi) incur liens; (vii) create restrictions on the payment of dividends or other amounts from restricted subsidiaries that are not guarantors of the notes; (viii) sell or otherwise dispose of assets, including capital stock of subsidiaries; (ix) consolidate or merge with or into, or sell substantially all of TWCC's assets to, another person; (x) designate subsidiaries as unrestricted subsidiaries; and (xi) enter into transactions with affiliates. Additionally, the terms of the notes contain customary affirmative covenants and provide for events of default which, if certain of them occur, would permit the trustee or the holders of at least 25% in principal amount of the then total outstanding senior notes to declare all amounts owning under the notes to be due and payable. Carter's, Inc. is not subject to these covenants.
During June 2014, TWCC completed the registration of the exchange offer for the senior notes that was required under the terms of such notes.
BONNIE TOGS ACQUISITION (CANADA)
On June 30, 2011, we purchased Bonnie Togs in Canada for total consideration of up to CAD $95 million, of which $61.2 million was paid in cash at closing and the balance was to be paid contingent upon achieving certain earnings targets. In fiscal 2014, we paid approximately $8.9 million after achieving interim earnings targets. In fiscal 2015, we made a final contingent consideration payment of approximately $8.6 million of which approximately $7.6 million was reported in the our consolidated
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
statement of cash flows as a financing use of cash and the remaining portion, which represented a contingency adjustment, was reported as an operating use of cash. We have no remaining contingent consideration liability related to the Bonnie Togs acquisition.
SHARE REPURCHASES
In years prior to fiscal 2014, our Board of Directors authorized the repurchase of shares of our common stock in amounts totaling approximately $462.5 million. On February 24, 2016, our Board of Directors authorized an additional $500 million of share repurchases, for total authorizations of amounts up to $962.5 million.
Open-market repurchases of our common stock during fiscal years 2016, 2015 and 2014 were as follows:
|
| | | | | | | | | | | |
| Fiscal year ended |
| December 31, 2016 | | January 2, 2016 | | January 3, 2015 |
Number of shares repurchased | 3,049,381 |
| | 1,154,288 |
| | 1,111,899 |
|
Aggregate cost of shares repurchased (dollars in thousands) | $ | 300.445 |
| | $ | 110,290 |
| | $ | 82,099 |
|
Average price per share | $ | 98.53 |
| | $ | 95.55 |
| | $ | 73.84 |
|
In addition to the open-market repurchases completed in fiscal years 2016, 2015 and 2014, open-market repurchases totaling $195.3 million were made in fiscals year prior to 2014.
Total remaining capacity under the repurchase authorizations as of December 31, 2016 was $274.4 million.
Future share repurchases may be made in the open market or in privately negotiated transactions, with the level and timing of activity being at our discretion depending on market conditions, share price, other investment priorities, and other factors. Our share repurchase authorizations have no expiration dates.
DIVIDENDS
Our Board of Directors authorized quarterly cash dividends of $0.33 per share in each quarter of fiscal 2016, and cash dividends of $0.22 per share in each quarter of fiscal 2015. The dividends were paid during the fiscal quarter in which they were declared.
On February 15, 2017, our Board of Directors authorized a quarterly cash dividend payment of $0.37 per common share, payable on March 24, 2017 to shareholders of record at the close of business on March 10, 2017.
Future declarations of quarterly dividends and the establishment of future record and payment dates are at the discretion of our Board of Directors, and are based on a number of factors, including our future financial performance and other investment priorities.
Provisions in our secured revolving credit facility and indenture governing our senior notes could have the effect of restricting our ability to pay future cash dividends on or make future repurchases of our common stock.
COMMITMENTS
The following table summarizes as of December 31, 2016, the maturity or expiration dates of mandatory contractual obligations and commitments for the following fiscal years:
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
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(dollars in thousands) | 2017 | | 2018 | | 2019 | | 2020 | | 2021 | | Thereafter | | Total |
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Long-term debt (a) | $ | — |
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