form10-k.htm
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
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x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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FOR
THE FISCAL YEAR ENDED DECEMBER 29,
2007
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OR
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o
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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
_______
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Commission
file number:
001-31829
CARTER’S,
INC.
(Exact
name of Registrant as specified in its charter)
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Delaware
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13-3912933
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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The
Proscenium
1170
Peachtree Street NE, Suite 900
Atlanta,
Georgia 30309
(Address
of principal executive offices, including zip code)
(404)
745-2700
(Registrant’s
telephone number, including area code)
SECURITIES
REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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TITLE
OF EACH CLASS
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NAME
OF EACH EXCHANGE ON
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Carter’s,
Inc.’s common stock
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WHICH
REGISTERED:
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par
value $0.01 per share
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New
York Stock Exchange
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SECURITIES
REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
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 o
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 o 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 o
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. o
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the
Exchange Act). Check one:
Large
Accelerated Filer x Accelerated
Filer o Non-Accelerated
Filer o Smaller
Reporting Company o
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
The
approximate aggregate market value of the voting stock held by non-affiliates of
the Registrant as of June 29, 2007 (the last business day of our most recently
completed second quarter) was $1,460,972,006.
There
were 57,671,315 shares of Carter’s, Inc.’s common stock with a par value of
$0.01 per share outstanding as of the close of business on February 27,
2008.
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
Stockholders of Carter’s, Inc., to be held on May 9, 2008, 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 29, 2007.
CARTER’S,
INC.
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INDEX
TO ANNUAL REPORT ON FORM 10-K
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FOR
THE FISCAL YEAR ENDED DECEMBER 29, 2007
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Page
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Business
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1
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Risk
Factors
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7
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Unresolved
Staff Comments
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11
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Properties
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11
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Legal
Proceedings
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11
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Submission
of Matters to a Vote of Security Holders
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11
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Market
for Registrant’s Common Equity, Related Stockholder Matters, and Issuer
Purchases of Equity Securities
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12
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Selected
Financial Data
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14
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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17
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Quantitative
and Qualitative Disclosures about Market Risk
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30
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Financial
Statements and Supplementary Data
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31
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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64
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Controls
and Procedures
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64
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Other
Information
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64
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Directors
and Executive Officers of the Registrant
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65
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Executive
Compensation
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65
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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65
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Certain
Relationships and Related Transactions
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65
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Principal
Accountant Fees and Services
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65
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Exhibits
and Financial Statement Schedules
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66
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67
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CERTIFICATIONS
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Our market share data is based on
information provided by the NPD Group, Inc. Unless otherwise
indicated, references to market share in this Annual Report on Form 10-K mean
our share expressed as a percentage of total retail sales of a
market. NPD has restated historical data, therefore, the market data
reported prior to 2006 is not directly comparable to the data reported
in this Annual Report on Form 10-K. The baby and young children’s
market includes apparel products from sizes newborn to seven.
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.
We are the largest branded marketer in
the United States 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. We have
extensive experience in the young children’s apparel market and focus on
delivering products that satisfy our consumers’ needs. We market
high-quality, essential core products at prices that deliver an attractive value
proposition for consumers.
We have developed a business model that
we believe has multiple platforms for growth and is focused on high volume and
productivity. We believe each of our brands has its own unique
positioning in the marketplace and strong growth potential. Our
brands compete in the $24 billion children’s apparel market, for children sizes
newborn to seven, with our Carter’s brand achieving the
#1 branded position with a 7.4% market share. Our OshKosh brand has a 2.7%
market share. We offer multiple product categories, including baby,
sleepwear, playclothes, and other accessories. Our distribution
strategy enables us to reach a broad range of consumers through channel, price
point, and region. We sell our products to national department
stores, chain and specialty stores, discount retailers, and, as of December 29,
2007, through 228 Carter’s and 163 OshKosh outlet and brand retail
stores.
In fiscal 2005, we acquired OshKosh
B’Gosh, Inc. Established in 1895, OshKosh is recognized and trusted
by consumers for its line of high-quality apparel for children sizes newborn to
16. In fiscal 2007, sales from OshKosh totaled $320.3 million, or
22.7%, of our consolidated net sales. Including OshKosh, over the
past five fiscal years, we have increased consolidated net sales at a compound
annual growth rate of 19.5%.
Our pre-tax results have ranged from
income of $38.9 million in fiscal 2003 to a loss of $29.1 million in fiscal
2007. Our pre-tax results were decreased in fiscal 2003 by debt
extinguishment charges of $9.5 million and a management fee termination charge
of $2.6 million, both resulting from the Company’s initial public offering in
October 2003, and closure costs of $1.0 million related to the closure of
two offshore sewing facilities. In fiscal 2007, our pre-tax results
were decreased by OshKosh-related intangible asset impairment charges of $154.9
million and distribution facility closure costs of $7.4 million related to
further integrating OshKosh.
The Company’s principal executive
offices are located at The Proscenium, 1170 Peachtree Street NE, Suite 900,
Atlanta, Georgia 30309, and our telephone number is (404) 745-2700.
OUR
BRANDS, PRODUCTS, AND DISTRIBUTION CHANNELS
CARTER’S
BRANDS
Under our Carter’s brand, we design,
source, and market a broad array of products, primarily for sizes newborn to
seven. Our Carter’s brand is sold in
department stores, national chains, specialty stores, off-price sales channels,
and through our Carter’s retail stores. Additionally, we sell our
Just One Year and Child of Mine brands through
the mass channel at Target and Wal-Mart, respectively. In fiscal
2007, we sold over 205 million selling units of Carter’s, Just One Year, and Child of Mine products to
our wholesale customers, mass channel customers, and through our Carter’s retail
stores, an increase of approximately 8% from fiscal 2006. Under our
Carter’s, Just One Year, and Child of Mine brands, sales
growth has been driven by our focus on essential, high-volume, core apparel
products for babies and young children. Such products include
bodysuits, pajamas, blanket sleepers, gowns, bibs, towels, washcloths, and
receiving blankets. Our top ten baby and sleepwear core products
accounted for 78% of our baby and sleepwear net sales in fiscal 2007, including
the mass channel. We believe these core products are consumer staples
and are insulated from changes in fashion trends. Whether they are
shopping for their own children or purchasing gifts, consumers provide
consistent demand for our products as they purchase the first garments and
related accessories for the more than four million babies born each year
and replace clothing their children outgrow.
We have four cross-functional product
teams focused on the development of our baby, sleepwear, playclothes, and mass
channel products. These teams are skilled in identifying and
developing high-volume, core products. Each team includes members
from merchandising, design, sourcing, product development, forecasting, and
supply chain logistics. These teams follow a disciplined approach to
fabric usage, color rationalization, and productivity and are supported by a
dedicated art department and state-of-the-art design systems. We also
license our brand names to other companies to create a complete collection of
lifestyle products, including bedding, hosiery, underwear, shoes, room décor,
furniture, and toys. The licensing team directs the use of our
designs, art, and selling strategies to all licensees.
We believe this disciplined approach to
core product design reduces fashion risk and supports efficient
operations. We conduct product testing in our own stores, and we
analyze quantitative measurements such as pre-season bookings, weekly
over-the-counter selling results, and daily re-order rates in order to assess
productivity.
CARTER’S
BRAND POSITIONING
Our strategy has been to drive our
brand image as the leader in baby and young children’s apparel and to
consistently provide quality products at a great value to
consumers. We employ a disciplined marketing strategy which
identifies and focuses on core products. We believe that we have
strengthened our brand image with the consumer by differentiating our core
products through fabric improvements, new artistic applications, and new
packaging and presentation strategies. We also attempt to
differentiate our products through store-in-store shops and advertising with
wholesale and mass channel customers. We have invested in display
units for our major wholesale customers that clearly present our core products
on their floors to enhance brand and product presentation. We also
strive to provide our wholesale and mass channel customers with consistent,
premium service, including delivering and replenishing products on time to
fulfill customer and consumer needs.
CARTER’S
PRODUCTS
Baby
Carter’s brand baby products
include bodysuits, undershirts, towels, washcloths, receiving blankets, layette
gowns, bibs, caps, and booties. In fiscal 2007, we generated $342.7
million in net sales of these products, excluding the mass
channel, representing
24.3% of our consolidated net sales.
Our Carter’s brand is the leading
brand in the baby category. In fiscal 2007, in the department store,
national chain, outlet, specialty store, and off-price sales channels, our
aggregate market share under the Carter’s brand was
approximately 21.6% for baby, which represents greater than three times the
market share of the next largest brand. We sell a complete range of
baby products for newborns, primarily made of cotton. We attribute
our leading market position to our brand strength, distinctive print designs,
artistic applications, reputation for quality, and ability to manage our
dedicated floor space for our retail customers. We tier our products
through marketing programs targeted toward gift-givers, experienced mothers, and
first-time mothers. Our Carter's Starters product
line, the largest component of our baby business, provides mothers with
essential core products and accessories, including value-focused
multi-packs. Our Carter's Classics product
line consists of coordinated baby programs designed for first-time mothers and
gift-givers.
Playclothes
Carter’s brand playclothes
products include knit and woven cotton apparel for everyday use in sizes three
months to size seven. In fiscal 2007, we generated $297.3 million in
net sales of these products, excluding the mass channel, or 21.1%, of our
consolidated net sales.
We have focused on building our Carter’s brand in the playclothes market by
developing a base of essential, high-volume, core products that utilize original
print designs and innovative artistic applications. Our 2007 Carter’s brand playclothes
market share was 7.3% in the $9.8 billion department store, national chain,
outlet, specialty store, and off-price sales channels.
Sleepwear
Carter’s brand sleepwear
products include pajamas, cotton long underwear, and blanket sleepers in sizes
12 months to size seven. In fiscal 2007, we generated $152.3 million
in net sales of these products, excluding the mass channel, or 10.8%, 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
United States. In fiscal 2007, in these channels, our Carter’s brand market share
was approximately 22.9%. As in our baby product line, we
differentiate our sleepwear products by offering high-volume, core products with
creative artwork and soft fabrications.
Mass
Channel Products
Our mass channel product team focuses
on baby, sleepwear, and playclothes and develops differentiated products
specifically for the mass channel, including different fabrications, artwork,
and packaging. Our 2007 market share was 5.9% in the $9.5 billion
mass channel children’s apparel market. Our Child of Mine product line,
which is sold in substantially all Wal-Mart stores nationwide, includes layette,
sleepwear, and playclothes along with a range of licensed products, such as
hosiery, bedding, toys, and gifts. We also sell our Just One Year brand to
Target, which includes baby, sleepwear, and baby playclothes along with a range
of licensed products, such as hosiery, bedding, toys, and gifts. In
fiscal 2007, we generated $243.3 million in net sales of our Child of Mine and Just One Year products, or
17.2%, of our consolidated net sales.
Other
Products
Our other product offerings include
bedding, outerwear, shoes, socks, diaper bags, gift sets, toys, room décor, and
hair accessories. In fiscal 2007, we generated $56.3 million in net
sales of these other products in our Carter’s retail stores, or 4.0%,
of our consolidated net sales.
Royalty
Income
We currently extend our Carter’s, Child of Mine,
and Just One
Year product offerings by licensing our brands to 13 domestic marketers
in the United States. 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 products that complement and
expand upon our core baby and young children’s apparel offerings. Our
license agreements require strict adherence to our quality and compliance
standards and to a multi-step product approval process. We work in
conjunction with our licensing partners in the development of their products and
ensure that they fit within our vision of high-quality, core products at
attractive values to the consumer. In addition, we work closely with
our wholesale and mass channel customers and our licensees to gain dedicated
floor space for licensed product categories. In fiscal 2007, our
Carter’s brand and mass
channel licensees generated wholesale and mass channel net sales of $174.4
million on which we earned $15.3 million in royalty income.
CARTER’S
DISTRIBUTION CHANNELS
As described above, we sell our Carter’s brand products to
leading retailers throughout the United States in the wholesale and mass
channels and through our own Carter’s retail outlet and brand
stores. In fiscal 2007, sales of our Carter’s brand products
through the wholesale channel, including off-price sales, accounted for 34.2% of
our consolidated net sales, sales through our retail stores accounted for 25.9%
of our consolidated net sales, and sales through the mass channel accounted for
17.2% of our consolidated net sales.
Business segment financial information
for our Carter’s brand
wholesale, Carter’s
brand retail, and Carter’s brand mass channel
segments is contained in ITEM 8 “Financial Statements and Supplementary Data,”
Note 13 -- “Segment Information” to the accompanying audited consolidated
financial statements.
Our Carter’s brand wholesale
customers include major retailers, such as Kohl’s, Toys “R” Us, Costco,
JCPenney, Macy’s, and Sam’s Club. Our mass channel customers are
Wal-Mart and Target. Our sales professionals work with their
department or specialty store accounts to establish annual plans for our baby
products, which we refer to as core basics. Once we establish an
annual plan with an account, we place the majority of our accounts on our
automatic reorder plan for core basics. This allows us to plan our
sourcing requirements and benefits both us and our wholesale and mass channel
customers by maximizing our customers’ in-stock positions, thereby improving
sales and profitability. We intend to drive continued growth with our
wholesale and mass channel customers through our focus on managing our key
accounts' business through product mix, fixturing, brand presentation, and
advertising. We believe that we maintain strong account relationships
and drive brand growth through frequent meetings with the senior management of
our major wholesale and mass channel customers.
As of December 29, 2007, we operated
228 Carter’s retail stores, of which 163 were outlet stores and 65 were brand
stores. These stores carry a complete assortment of first-quality
baby and young children’s apparel, accessories, and gift items. Our
stores average approximately 4,700 square feet per location and are
distinguished by an easy, consumer-friendly shopping environment. We
believe our brand strength and our assortment of core products has made our
stores a destination location within many outlet and strip
centers. Our outlet stores are generally located within 20 to 30
minutes of densely-populated areas. Our brand stores are generally
located in high-traffic, strip centers located in or near major
cities.
We have established a real estate
selection process whereby we fully assess all new locations based on demographic
factors, retail adjacencies, and population density. We believe that
we are located in many of the premier outlet centers in the United States and we
continue to add new strip center locations to our real estate
portfolio.
OSHKOSH
BRANDS
Under our OshKosh brand, we design,
source, and market a broad array of young children’s apparel, primarily for
children in sizes newborn to 16. Our OshKosh brand is currently
sold in our OshKosh retail stores, department stores, national chains, specialty
stores, and through off-price sales channels. In fiscal 2007, we sold
over 42 million selling units of OshKosh products to our retail
stores and through our wholesale customers. We also have a licensing
agreement with Target through which Target sells products under our Genuine Kids from OshKosh
brand. Given its long history of durability, quality, and style, we
believe our OshKosh
brand continues to be a market leader in the children’s branded apparel industry
and represents a significant long-term growth opportunity for us, especially in
the $9.8 billion young children’s playclothes market, excluding the mass
channel. While we have made significant progress integrating the
OshKosh business, our plans to grow the OshKosh brand in the
wholesale and retail store channels have not met our expectations to
date. We continue to focus on our core product development and
marketing disciplines, leveraging our relationships with major wholesale
accounts, leveraging our infrastructure and supply chain, and improving the
productivity of our OshKosh retail stores.
OSHKOSH
BRAND POSITIONING
We believe our OshKosh brand stands for
high-quality, authentic, active products for children sizes newborn to
16. Our core OshKosh brand products
include denim, overalls, fleece tops and bottoms, and other playclothes for
children. Our OshKosh brand is generally
positioned towards an older age segment (ages two to seven) and at higher
average prices than our Carter’s brand. We
believe our OshKosh
brand has significant brand name recognition, which consumers associate with
rugged, durable, and active playclothes for young children.
OSHKOSH
PRODUCTS
Playclothes
Our OshKosh brand is best known
for its playclothes products. In fiscal 2007, we generated $229.3
million in net sales of OshKosh brand playclothes
products, which accounted for approximately 16.2% of our consolidated net
sales. OshKosh brand playclothes
products include denim apparel products with multiple wash treatments and
coordinating garments, overalls, woven tops and bottoms, and apparel products
for everyday use in sizes newborn to 16. We plan to grow this
business by continuing to reduce product complexity, leveraging our strong
customer relationships and global supply chain expertise, and improving product
value.
We believe our OshKosh brand represents a
significant opportunity for us to increase our share in the $16.7 billion young
children’s playclothes market, which includes the mass channel. The
market for baby and young children’s playclothes in fiscal 2007 was more than
five times the size of the baby and sleepwear markets combined. The
$16.7 billion playclothes market for babies and young children is highly
fragmented.
Our OshKosh brand’s playclothes
market share in the department store, national chain, outlet, specialty store,
and off-price sales channels in fiscal 2007, exclusive of the mass channel, was
approximately 4.8% in the $9.8 billion market in these channels. We
are continuing to develop a base of high-volume, core playclothes products for
our OshKosh
brand.
Baby
In fiscal 2007, we generated
approximately $47.7 million in net sales from our OshKosh brand baby products
in our OshKosh retail stores, which accounted for approximately 3.4% of our
consolidated net sales.
Other
Products
The remainder of our OshKosh brand product
offering includes outerwear, shoes, hosiery, and accessories. In
fiscal 2007, we generated $43.3 million in net sales of these other products in
our OshKosh retail stores, which accounted for 3.1% of our consolidated net
sales.
Royalty
Income
We partner with a number of domestic
and international licensees to extend the reach of our OshKosh brand. We
currently have nine domestic licensees, as well as 24 international licensees
selling apparel and accessories products in approximately 16
countries. Our largest 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, bedding, and
accessories. In fiscal 2007, our licensees generated
wholesale and mass channel net sales of approximately $288.5 million on which we
earned approximately $15.4 million in royalty income.
OSHKOSH
DISTRIBUTION CHANNELS
In fiscal 2007, sales of our OshKosh brand products
through our OshKosh retail stores accounted for 16.6% of our consolidated net
sales and sales through the wholesale channel, including off-price sales,
accounted for 6.1% of our consolidated net sales.
Business segment financial information
for our OshKosh brand
wholesale and OshKosh
brand retail segments is contained in ITEM 8 “Financial Statements and
Supplementary Data,” Note 13 -- “Segment Information” to the accompanying
audited consolidated financial statements.
As of December 29, 2007, we operated
163 OshKosh retail stores, of which 154 were outlet stores and nine were brand
stores. These stores carry a wide assortment of young children’s
apparel, accessories, and gift items and average approximately 4,800 square feet
per location.
Our OshKosh brand wholesale
customers include major retailers, such as Kohl’s, Costco, JCPenney, Bon Ton,
and Babies “R” Us. We continue to work with our department and
specialty store accounts to establish seasonal plans for playclothes
products. The majority of our OshKosh brand playclothes
products will be planned and ordered seasonally as we introduce new
products.
GLOBAL SOURCING
NETWORK
We have significant
experience in sourcing products from the Far East, with expertise that includes
the ability to evaluate vendors, familiarity with foreign supply sources, and
experience with sourcing logistics particular to the Far East. We
also have relationships with both leading and certain specialized sourcing
agents in the Far East.
Our sourcing network consists of
approximately 130 vendors located in approximately 15 countries. We
believe that our sourcing arrangements are sufficient to meet our current
operating requirements and provide capacity for growth.
DEMOGRAPHIC
TRENDS
In the United States, there were
approximately 4.3 million births reported in 2006, and demographers project
an increase in births over the next 20 years. Favorable
demographic trends support continued strength in the market for baby and young
children's products. Highlights of these trends include:
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the young children’s apparel market grew over two times faster than the
adult apparel market in 2006;
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parents are having children later in life and are earning higher incomes
when their children are born;
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40% of all births are first children, which we believe leads to higher
initial spending; and
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grandparents are a large and growing market and are spending more money on
their grandchildren than previous
generations.
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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 compete in
the baby and young children's apparel market. Our primary competitors
in the wholesale and mass channels include Disney, Gerber, and private label
product offerings. Our primary competitors in the retail store
channel include Old Navy, The Gap, The Children’s Place, Gymboree, and
Disney. Most retailers, including our customers, have significant
private label product offerings that compete with us. 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 and OshKosh brand names combined
with our breadth of product offerings and operational expertise position us well
against these competitors.
ENVIRONMENTAL
MATTERS
We are subject to various federal,
state, and local laws that govern activities or operations that may have adverse
environmental effects. Noncompliance with these laws and regulations
can result in significant liabilities, penalties, and
costs. Generally, compliance with environmental laws has not had a
material impact on our operations, but there can be no assurance that future
compliance with such laws will not have a material adverse effect on our
operations.
TRADEMARKS,
COPYRIGHTS, AND LICENSES
We own many copyrights and trademarks,
including Carter’s®, Carter’s® Classics, Celebrating Childhood™, Celebrating
Imagination®, Child of Mine®, Just One Year®, OshKosh, OshKosh B’Gosh®, At Play
Since 1895™, OshKosh Est. 1895®, and Genuine Kids®, many of which are registered
in the United States and in more than 120 foreign countries.
We license various Company trademarks,
including Carter’s, Just One
Year, Child of Mine, OshKosh, OshKosh B’Gosh, OshKosh Est. 1895, and Genuine Kids to third
parties to produce and distribute children’s apparel and related products such
as hosiery, outerwear, swimwear, underwear, shoes, boots, slippers, diaper bags,
furniture, room décor, bedding, giftwrap, baby books, party goods, plush toys,
rattles, and dolls.
AVAILABLE
INFORMATION
Our Internet address is www.carters.com. We
are not including the information contained on our website as part of, or
incorporating it by reference into, this Annual Report on Form
10-K. There we make available, free of charge, our Annual Report on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any
amendments to those reports, proxy statements, director and officer reports on
Forms 3, 4, and 5, and 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. The information found on our website is not part of this or
any other report we file with or furnish to the SEC. We also make
available on our website, the Carter’s Code of Business Ethics and
Professional Conduct, 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.
EMPLOYEES
As of December 29, 2007, we had 7,630
employees, 2,750 of whom were employed on a full-time basis and 4,880 of
whom were employed on a part-time basis. None of our employees is
unionized. We have had no labor-related work stoppages and believe
that our labor relations are good.
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 other filings with the Securities and Exchange
Commission in evaluating our business. The risks and uncertainties
described below are not the only 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.
Risks
Relating to Our Business
The
loss of one or more of our major customers could result in a material loss of
revenues.
In fiscal 2007, we derived
approximately 44.1% of our consolidated net sales from our top eight customers,
including mass channel customers. Wal-Mart and Kohl’s each accounted
for approximately 10% of our consolidated net sales in fiscal
2007. We expect that these customers will continue to represent a
significant portion of our sales in the future. However, we do not
enter into long-term sales contracts with our major customers, relying instead
on long-standing relationships with these customers and on our position in the
marketplace. As a result, we face the risk that one or more of our
major customers may significantly decrease its or their business with us or
terminate its or their relationships with us. Any such decrease or
termination of our major customers' business could result in a material decrease
in our sales and operating results.
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 unique and compelling value proposition for
our consumers in the Company’s distribution channels. There can be no
assurance that the demand for our products will not decline, or that we will be
able to successfully evaluate and adapt our product to be aware of consumers’
tastes and preferences and fashion trends. If consumers’ tastes and
preferences are not aligned with our product offerings, promotional pricing may
be required to move seasonal merchandise. Increased use of
promotional pricing would have a material adverse affect on our sales, gross
margin, and results of operations.
The
value of our brand, and our sales, could be diminished if we are associated with
negative publicity.
Although our employees, agents, and
third-party compliance auditors periodically visit and monitor the operations of
our vendors, independent manufacturers, and licensees, we do not control these
vendors, independent manufacturers, licensees, or their labor
practices. A violation of our vendor policies, licensee agreements,
labor laws, or other laws by these vendors, independent manufacturers, or
licensees could interrupt or otherwise disrupt our supply chain or damage our
brand image. As a result, negative publicity regarding our Company,
brands, or products, including licensed products, could adversely affect our
reputation and sales.
The
security of the Company’s databases that contain personal information of our
retail customers could be breached, which could subject us to adverse publicity,
litigation, and expenses. In addition, if we are unable to comply
with security standards created by the credit card industry, our operations
could be adversely affected.
Database privacy, network security, and
identity theft are matters of growing public concern. In an attempt
to prevent unauthorized access to our network and databases containing
confidential, third-party information, we have installed privacy protection
systems, devices, and activity monitoring on our
network. Nevertheless, if unauthorized parties gain access to our
networks or databases, they may be able to steal, publish, delete, or modify our
private and sensitive third-party information. In such circumstances,
we could be held liable to our customers or other parties or be subject to
regulatory or other actions for breaching privacy rules. This could
result in costly investigations and litigation, civil or criminal penalties, and
adverse 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 credit card industry,
we may be subject to fines, restrictions, and expulsion from card acceptance
programs, which could adversely affect our retail operations.
The
Company’s royalty income is greatly impacted by the Company’s brand
reputation.
The Company’s brand image, which is
associated with providing a consumer product with outstanding quality and name
recognition, makes it valuable as a royalty source. The Company is
able to license complementary products and obtain royalty income from use of its
Carter’s, Child of Mine, Just
One Year, OshKosh, Genuine Kids from OshKosh,
and related trademarks. The Company also generates foreign royalty
income as our OshKosh
B’Gosh label carries an international reputation for quality and American
style. While the Company takes significant steps to ensure the
reputation of its brand is maintained through its license agreements, there can
be no guarantee that the Company’s brand image will not be negatively impacted
through its association with products outside of the Company’s core apparel
products.
There
are deflationary pressures on the selling price of apparel
products.
In part due to the actions of discount
retailers, and in part due to the worldwide supply of low cost garment sourcing,
the average selling price of children’s apparel continues to
decrease. To the extent these deflationary pressures are offset by
reductions in manufacturing costs, there could be an affect on the gross margin
percentage. However, the inability to leverage certain fixed costs of
the Company’s design, sourcing, distribution, and support costs over its gross
sales base could have an adverse impact on the Company’s operating
results.
Our
business is sensitive to overall levels of consumer spending, particularly in
the apparel segment.
The Company believes that spending on
children’s apparel is somewhat discretionary. While certain apparel
purchases are less discretionary due to size changes as children grow, the
amount of clothing consumers desire to purchase, specifically brand name apparel
products, is impacted by the overall level of consumer
spending. Overall economic conditions that affect discretionary
consumer spending include employment levels, gasoline and utility costs,
business conditions, tax rates, interest rates, and levels of consumer
indebtedness. Reductions in the level of discretionary spending or
shifts in consumer spending to other products may have a material adverse affect
on the Company’s sales and results of operations.
We
source substantially all of our products through foreign production
arrangements. Our dependence on foreign supply sources could result
in disruptions to our operations in the event of political instability,
international events, or new foreign regulations and such disruptions may
increase our cost of goods sold and decrease gross profit.
We source substantially all of our
products through a network of vendors primarily in the Far East, coordinated by
our Far East agents. The following could disrupt our foreign supply
chain, increase our cost of goods sold, decrease our gross profit, or impact our
ability to get products to our customers:
|
|
·
|
political
instability or other international events resulting in the disruption of
trade in foreign countries from which we source our
products;
|
|
|
·
|
the
imposition of new regulations relating to imports, duties, taxes, and
other charges on imports including the China
safeguards;
|
|
|
·
|
the
occurrence of a natural disaster, unusual weather conditions, or an
epidemic, the spread of which may impact our ability to obtain products on
a timely basis;
|
|
|
·
|
changes
in United States customs procedures concerning the importation of apparel
products;
|
|
|
·
|
unforeseen
delays in customs clearance of any
goods;
|
|
|
·
|
disruption
in the global transportation network such as a port strike, world trade
restrictions, or war. The risk of labor-related disruption in
the ports on the West Coast of the United States in 2008 is
considered to be reasonably likely;
|
|
|
·
|
the
application of foreign intellectual property laws;
and
|
|
|
·
|
exchange
rate fluctuations between the United States dollar and the local
currencies of foreign contractors.
|
These and
other events beyond our control could interrupt our supply chain and delay
receipt of our products into the United States.
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 revenues and gross
profit.
The baby and young children's apparel
market is highly competitive. Both branded and private label
manufacturers compete in the baby and young children's apparel
market. Our primary competitors in our wholesale and mass channel
businesses include Disney, Gerber, and private label product
offerings. Our primary competitors in the retail store channel
include Old Navy, The Gap, The Children’s Place, Gymboree, and
Disney. 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 and are less financially leveraged than we are. 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.
|
The
Company’s retail success and future growth is dependent upon identifying
locations and negotiating appropriate lease terms for retail
stores.
The Company’s retail stores are located
in leased retail locations across the country. 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 the Company is unable to identify new retail locations
with consumer traffic sufficient to support a profitable sales level, retail
growth may consequently be limited. Further, if existing outlet and
strip centers do not maintain a sufficient customer base that provides a
reasonable sales volume, there could be a material adverse impact on the
Company’s sales, gross margin, and results of operations.
Our
leverage could adversely affect our financial condition.
On December 29, 2007, we had total debt
of approximately $341.5 million.
Our indebtedness could have negative
consequences. For example, it could:
|
|
·
|
increase
our vulnerability to interest rate
risk;
|
|
|
·
|
limit
our ability to obtain additional financing to fund future working capital,
capital expenditures, and other general corporate requirements, or to
carry out other aspects of our business
plan;
|
|
|
·
|
require
us to dedicate a substantial portion of our cash flow from operations to
pay principal of, and interest on, our indebtedness, thereby reducing the
availability of that cash flow to fund working capital, capital
expenditures, or other general corporate purposes, or to carry out other
aspects of our business plan;
|
|
|
·
|
limit
our flexibility in planning for, or reacting to, changes in our business
and the industry; and
|
|
|
·
|
place
us at a competitive disadvantage compared to our competitors that have
less debt.
|
In addition, our senior credit facility
contains financial and other restrictive covenants that may limit our ability to
engage in activities that may be in our long-term best interests such as selling
assets, strategic acquisitions, paying dividends, and borrowing additional
funds. Our failure to comply with those covenants could result in an
event of default which, if not cured or waived, could result in the acceleration
of all of our debt which could leave us unable to meet some or all of our
obligations.
Profitability
could be negatively impacted 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.
If the Company does not adequately
forecast demand for its products and purchases inventory to support an
inaccurate forecast, the Company could experience increased costs due to the
need to dispose of excess inventory or lower profitability due to insufficient
levels of inventory.
We
may not achieve sales growth plans, cost savings, and other assumptions that
support the carrying value of our intangible assets.
In connection with the 2001 acquisition
of the Company, we recorded cost in excess of fair value of net assets acquired
of $136.6 million and a Carter’s brand tradename
asset of $220.2 million. Additionally, in connection with the
acquisition of OshKosh, we recorded cost in excess of fair value of net assets
acquired of $142.9 million and an OshKosh brand tradename asset
of $102.0 million. The carrying value of these assets is 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. During the second quarter of fiscal 2007, the Company
performed an interim impairment review of the OshKosh intangible assets due to
continued negative trends in sales and profitability of the Company’s OshKosh
wholesale and retail segments. As a result of this review, the
Company wrote off our OshKosh cost in excess of fair value of net assets
acquired asset of $142.9 million and wrote down the OshKosh tradename by $12.0
million.
Estimated future cash flows used in
these impairment reviews could be negatively impacted 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 potential
impairment of the remaining asset value.
The
Company’s success is dependent upon retaining key individuals within the
organization to execute the Company’s strategic plan.
The Company’s ability to attract and
retain qualified executive management, marketing, merchandising, design,
sourcing, operations, and support function staffing is key to the Company’s
success. If the Company were unable to attract and retain qualified
individuals in these areas, an adverse impact on the Company’s growth and
results of operations may result.
None
|
|
|
Approximate
floor space in square feet
|
|
|
|
|
|
|
|
|
Stockbridge,
Georgia
|
|
|
505,000 |
|
Distribution/warehousing
|
|
April
2010
|
|
13
years
|
|
|
Hogansville,
Georgia
|
|
|
258,000 |
|
Distribution/warehousing
|
|
Owned
|
|
|
-- |
|
|
Barnesville,
Georgia
|
|
|
149,000 |
|
Distribution/warehousing
|
|
Owned
|
|
|
-- |
|
|
White
House, Tennessee
|
|
|
284,000 |
|
Distribution/warehousing
*
|
|
Owned
|
|
|
-- |
|
| Chino,
California |
|
|
118,000
|
|
Distribution/warehousing
|
|
March
2011 |
|
|
2
years |
|
|
Griffin,
Georgia
|
|
|
219,000 |
|
Finance/information
technology/benefits administration/rework
|
|
Owned
|
|
|
-- |
|
|
Griffin,
Georgia
|
|
|
12,500 |
|
Carter’s
customer service
|
|
Owned
|
|
|
-- |
|
|
Griffin,
Georgia
|
|
|
11,000 |
|
Information
technology
|
|
December
2008
|
|
|
-- |
|
|
Atlanta,
Georgia
|
|
|
102,000 |
|
Executive
offices/Carter’s design and merchandising
|
|
June
2015
|
|
5
years
|
|
|
Oshkosh,
Wisconsin
|
|
|
99,000 |
|
OshKosh’s
operating offices
|
|
Owned
|
|
|
-- |
|
|
Shelton,
Connecticut
|
|
|
42,000 |
|
Finance
and retail store administration
|
|
December
2008
|
|
|
--
|
|
|
Shelton,
Connecticut
|
|
|
51,000 |
|
New
finance and retail store administration office
|
|
October
2018
|
|
10
years
|
|
|
New
York, New York
|
|
|
16,000 |
|
Carter’s
and OshKosh sales offices/showroom
|
|
January
2015
|
|
|
-- |
|
|
New
York, New York
|
|
|
21,000 |
|
OshKosh’s
design center
|
|
August
2008
|
|
|
-- |
|
|
|
|
*
As of December 29, 2007, this property is classified as an asset held for
sale on the accompanying audited consolidated balance
sheet.
|
As of December 29, 2007, we operate 391
leased retail stores located primarily in outlet and strip centers across the
United States, having an average size of approximately 4,800 square
feet. Generally, leases have an average term of approximately five
years with additional five-year renewal options.
Aggregate lease commitments as of
December 29, 2007 for the above leased properties are as
follows: fiscal 2008—$46.3 million; fiscal 2009—$41.3 million;
fiscal 2010—$35.1 million; fiscal 2011—$26.3 million; fiscal 2012—$17.9
million, and $41.7 million for the balance of these commitments beyond
fiscal 2012.
Not applicable
Not applicable
Our common stock trades on the New York
Stock Exchange under the symbol CRI. The last reported sale price per
share of our common stock on February 19, 2008 was $20.99. On that
date there were approximately 43,573 holders of record of our common
stock.
On June 6, 2006, the Company effected a
two-for-one stock split (the “stock split”) through a stock dividend to
stockholders of record as of May 23, 2006 of one share of our common stock for
each share of common stock outstanding.
The following table sets forth for the
periods indicated the high and low sales prices per share of common stock as
reported by the New York Stock Exchange (all periods prior to June 6, 2006 have
been adjusted for the stock split):
|
|
|
|
|
|
|
|
|
First
quarter
|
|
$ |
26.90 |
|
|
$ |
20.53 |
|
|
Second
quarter
|
|
$ |
29.00 |
|
|
$ |
24.62 |
|
|
Third
quarter
|
|
$ |
26.93 |
|
|
$ |
18.92 |
|
|
Fourth
quarter
|
|
$ |
23.13 |
|
|
$ |
18.35 |
|
|
|
|
|
|
|
|
|
|
First
quarter
|
|
$ |
35.24 |
|
|
$ |
29.27 |
|
|
Second
quarter
|
|
$ |
34.93 |
|
|
$ |
24.10 |
|
|
Third
quarter
|
|
$ |
27.76 |
|
|
$ |
21.08 |
|
|
Fourth
quarter
|
|
$ |
30.18 |
|
|
$ |
25.36 |
|
PURCHASES
OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
The following table provides
information about purchases by the Company during the fourth quarter of fiscal
2007 of equity securities that are registered by the Company pursuant to Section
12 of the Exchange Act:
|
|
|
Total
number of shares purchased
|
|
|
Average
price paid
per
share
|
|
|
Total
number of shares purchased as part of publicly announced plans or
programs
|
|
|
Approximate
dollar value of shares that may yet be purchased under the plans or
programs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2007 through October 27, 2007
|
|
|
-- |
|
|
$ |
-- |
|
|
|
-- |
|
|
$ |
52,594,393 |
|
|
October
28, 2007 through November 24, 2007
|
|
|
438,900 |
(2) |
|
$ |
20.67 |
|
|
|
438,900 |
|
|
$ |
43,523,891 |
|
|
November
25, 2007 through December 29, 2007
|
|
|
48,800 |
(2) |
|
$ |
20.31 |
|
|
|
48,800 |
|
|
$ |
42,532,888 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
487,700 |
|
|
$ |
20.63 |
|
|
|
487,700 |
|
|
$ |
42,532,888 |
|
|
(1)
|
On
February 16, 2007, our Board of Directors approved a stock repurchase
program, pursuant to which the Company is authorized to purchase up to
$100 million of its outstanding common shares. Such repurchases may
occur from time to time in the open market, in negotiated transactions, or
otherwise. This program has no time limit. The timing and
amount of any repurchases will be determined by the Company’s management,
based on its evaluation of market conditions, share price, and other
factors. This program was announced in the Company’s report on
Form 8-K, which was filed on February 21, 2007. The total
remaining authorization under the repurchase program was $42,532,888 as of
December 29, 2007.
|
|
(2)
|
Represents
repurchased shares which were
retired.
|
DIVIDENDS
Provisions in our senior credit
facility currently restrict the ability of our operating subsidiary, The William
Carter Company (“TWCC”), from paying cash dividends to our parent company,
Carter’s, Inc., in excess of $15.0 million, which materially restricts Carter’s,
Inc. from paying cash dividends on our common stock. We do not
anticipate paying cash dividends on our common stock in the foreseeable future
but intend to retain future earnings, if any, for reinvestment in the future
operation and expansion of our business and related development
activities. Any future decision to pay cash dividends will be at the
discretion of our Board of Directors and will depend upon our financial
condition, results of operations, terms of financing arrangements, capital
requirements, and any other factors as our Board of Directors deems
relevant.
RECENT
SALES OF UNREGISTERED SECURITIES
Not applicable
The following table sets forth selected
financial and other data as of and for the five fiscal years ended December 29,
2007 (fiscal 2007).
On October 29, 2003, we completed an
initial public offering of our common stock including the sale of 10,781,250
shares by us and 3,593,750 shares by the selling stockholders (adjusted for the
June 6, 2006 stock split). Net proceeds to us from the offering
totaled $93.9 million. On November 28, 2003, we used approximately
$68.7 million of the proceeds to redeem approximately $61.3 million in
outstanding 10.875% Senior Subordinated Notes (the “Notes”) and pay a redemption
premium of approximately $6.7 million and related accrued interest charges of
$0.7 million. We used approximately $2.6 million of the net proceeds
to terminate a management agreement with Berkshire Partners LLC and used
approximately $11.3 million to prepay amounts outstanding under the Company’s
former senior credit facility. The remaining proceeds were used for
working capital and other general corporate purposes.
On July 14, 2005, Carter’s, Inc.,
through TWCC, acquired all of the outstanding common stock of OshKosh for a
purchase price of $312.1 million, which included payment for vested stock
options (the “Acquisition”). As part of financing the Acquisition,
the Company refinanced its existing debt (the “Refinancing”), comprised of its
former senior credit facility and its Notes due 2011 (together with the
Acquisition, the “Transaction”).
Financing for the Transaction was
provided by a new $500 million Term Loan (the “Term Loan”) and a $125 million
revolving credit facility (including a sub-limit for letters of credit of $80
million, the “Revolver”) entered into by TWCC with Bank of America, N.A., as
administrative agent, Credit Suisse, and certain other financial institutions
(the “Senior Credit Facility”).
The proceeds from the Refinancing were
used to purchase the outstanding common stock and vested stock options of
OshKosh ($312.1 million), pay Transaction expenses ($6.2 million), refinance the
Company’s former senior credit facility ($36.2 million), repurchase the
Company’s Notes ($113.8 million), pay a redemption premium on the Company’s
Notes ($14.0 million), along with accrued and unpaid interest ($5.1 million),
and pay debt issuance costs ($10.6 million). Other Transaction
expenses paid prior and subsequent to the closing of the Transaction totaled
$1.4 million, including $0.2 million in debt issuance costs.
On June 6, 2006, the Company effected a
two-for-one stock split through a stock dividend to stockholders of record as of
May 23, 2006 of one share of our common stock for each share of common stock
outstanding. Earnings per share for all prior periods presented have
been adjusted to reflect the stock split.
The selected financial data for the
five fiscal years ended December 29, 2007 were derived from our audited
consolidated financial statements. Our fiscal year ends on the
Saturday, in December or January, nearest the last day of
December. Consistent with this policy, fiscal 2007 ended on December
29, 2007, fiscal 2006 ended on December 30, 2006, fiscal 2005 ended on December
31, 2005, fiscal 2004 ended on January 1, 2005, and fiscal 2003 ended on January
3, 2004. Fiscal 2007, fiscal 2006, fiscal 2005, and fiscal 2004 each
contained 52 weeks of financial results. Fiscal 2003 contained 53
weeks of financial results.
The following table 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."
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars
in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
sales
|
|
$ |
568,905 |
|
|
$ |
560,987 |
|
|
$ |
486,750 |
|
|
$ |
385,810 |
|
|
$ |
356,888 |
|
|
Retail
sales
|
|
|
600,072 |
|
|
|
562,153 |
|
|
|
456,581 |
|
|
|
291,362 |
|
|
|
263,206 |
|
|
Mass
channel
sales
|
|
|
243,269 |
|
|
|
220,327 |
|
|
|
178,027 |
|
|
|
145,949 |
|
|
|
83,732 |
|
|
Total net
sales
|
|
|
1,412,246 |
|
|
|
1,343,467 |
|
|
|
1,121,358 |
|
|
|
823,121 |
|
|
|
703,826 |
|
|
Cost
of goods
sold
|
|
|
928,996 |
|
|
|
854,970 |
|
|
|
725,086 |
|
|
|
525,082 |
|
|
|
448,540 |
|
|
Gross
profit
|
|
|
483,250 |
|
|
|
488,497 |
|
|
|
396,272 |
|
|
|
298,039 |
|
|
|
255,286 |
|
|
Selling,
general, and administrative expenses
|
|
|
359,826 |
|
|
|
352,459 |
|
|
|
288,624 |
|
|
|
208,756 |
|
|
|
188,028 |
|
|
Intangible
asset impairment
(a)
|
|
|
154,886 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
Closure
costs
(b)
|
|
|
5,285 |
|
|
|
91 |
|
|
|
6,828 |
|
|
|
620 |
|
|
|
1,041 |
|
|
Management
fee termination
(c)
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
2,602 |
|
|
Royalty
income
|
|
|
(30,738 |
) |
|
|
(29,164 |
) |
|
|
(20,426 |
) |
|
|
(12,362 |
) |
|
|
(11,025 |
) |
|
Operating
(loss)
income
|
|
|
(6,009 |
) |
|
|
165,111 |
|
|
|
121,246 |
|
|
|
101,025 |
|
|
|
74,640 |
|
|
Interest
income
|
|
|
(1,386 |
) |
|
|
(1,914 |
) |
|
|
(1,322 |
) |
|
|
(335 |
) |
|
|
(387 |
) |
|
Loss
on extinguishment of debt
(d)
|
|
|
-- |
|
|
|
-- |
|
|
|
20,137 |
|
|
|
-- |
|
|
|
9,455 |
|
|
Interest
expense
|
|
|
24,465 |
|
|
|
28,837 |
|
|
|
24,564 |
|
|
|
18,852 |
|
|
|
26,646 |
|
|
(Loss)
income before income taxes
|
|
|
(29,088 |
) |
|
|
138,188 |
|
|
|
77,867 |
|
|
|
82,508 |
|
|
|
38,926 |
|
|
Provision
for income
taxes
|
|
|
41,530 |
|
|
|
50,968 |
|
|
|
30,665 |
|
|
|
32,850 |
|
|
|
15,648 |
|
|
Net
(loss)
income
|
|
$ |
(70,618 |
) |
|
$ |
87,220 |
|
|
$ |
47,202 |
|
|
$ |
49,658 |
|
|
$ |
23,278 |
|
|
PER
COMMON SHARE DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net (loss)
income
|
|
$ |
(1.22 |
) |
|
$ |
1.50 |
|
|
$ |
0.82 |
|
|
$ |
0.88 |
|
|
$ |
0.49 |
|
|
Diluted
net (loss)
income
|
|
$ |
(1.22 |
) |
|
$ |
1.42 |
|
|
$ |
0.78 |
|
|
$ |
0.83 |
|
|
$ |
0.46 |
|
|
Dividends
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
$ |
0.55 |
|
|
Basic
weighted-average
shares
|
|
|
57,871,235 |
|
|
|
57,996,241 |
|
|
|
57,280,504 |
|
|
|
56,251,168 |
|
|
|
47,222,744 |
|
|
Diluted
weighted-average
shares
|
|
|
57,871,235 |
|
|
|
61,247,122 |
|
|
|
60,753,384 |
|
|
|
59,855,914 |
|
|
|
50,374,984 |
|
|
BALANCE
SHEET DATA (end of period):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working
capital
(e)
|
|
$ |
326,891 |
|
|
$ |
265,904 |
|
|
$ |
242,442 |
|
|
$ |
185,968 |
|
|
$ |
150,632 |
|
|
Total
assets
|
|
|
974,668 |
|
|
|
1,123,191 |
|
|
|
1,116,727 |
|
|
|
672,965 |
|
|
|
646,102 |
|
|
Total
debt, including current maturities
|
|
|
341,529 |
|
|
|
345,032 |
|
|
|
430,032 |
|
|
|
184,502 |
|
|
|
212,713 |
|
|
Stockholders’
equity
|
|
|
382,129 |
|
|
|
495,491 |
|
|
|
386,644 |
|
|
|
327,933 |
|
|
|
272,536 |
|
|
CASH
FLOW DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
$ |
51,987 |
|
|
$ |
88,224 |
|
|
$ |
137,267 |
|
|
$ |
42,676 |
|
|
$ |
40,506 |
|
|
Net
cash used in investing activities
|
|
|
(21,819 |
) |
|
|
(30,500 |
) |
|
|
(308,403 |
) |
|
|
(18,577 |
) |
|
|
(16,472 |
) |
|
Net
cash (used in) provided by financing activities
|
|
|
(49,701 |
) |
|
|
(73,455 |
) |
|
|
222,147 |
|
|
|
(26,895 |
) |
|
|
(23,535 |
) |
|
OTHER
DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
34.2 |
% |
|
|
36.4 |
% |
|
|
35.3 |
% |
|
|
36.2 |
% |
|
|
36.3 |
% |
|
Depreciation
and
amortization
|
|
$ |
29,919 |
|
|
$ |
26,489 |
|
|
$ |
21,912 |
|
|
$ |
19,536 |
|
|
$ |
22,216 |
|
|
Capital
expenditures
|
|
|
21,876 |
|
|
|
30,848 |
|
|
|
22,588 |
|
|
|
20,481 |
|
|
|
17,347 |
|
See Notes
to Selected Financial Data.
NOTES
TO SELECTED FINANCIAL DATA
(a) Intangible asset impairment charges
of $154.9 million in fiscal 2007 reflect the impairment of the OshKosh cost in
excess of fair value of net assets acquired asset (OshKosh wholesale segment of
$36.0 million and OshKosh retail segment of $106.9 million) and the impairment
of the value ascribed to the OshKosh tradename of $12.0
million.
(b) The $1.0 million in closure costs
in fiscal 2003 relate to the closure of our two sewing facilities located in
Costa Rica. The $0.6 million in closure costs in fiscal 2004 relate
to costs associated with the closure of our Costa Rican facilities and our
distribution facility in Leola, Pennsylvania. The $6.8 million and
$0.1 million in closure costs in fiscal 2005 and fiscal 2006 relate to the
closure of our Mexican sewing facilities. The $5.3 million in closure
costs in fiscal 2007 relate to the closure of our White House, Tennessee
distribution facility.
(c) The $2.6 million in fiscal 2003
reflects the payment to terminate the Berkshire Partners LLC management
agreement upon completion of our initial public offering of our common stock on
October 29, 2003.
(d) Debt extinguishment charges in
fiscal 2003 reflect the write-off of $2.4 million of debt issuance costs
resulting from the redemption of $61.3 million of our Notes and the prepayment
of $11.3 million on our former senior credit facility, a debt redemption premium
of approximately $6.7 million, and a $0.4 million write-off of the related Note
discount. Debt extinguishment charges in fiscal 2005 reflect the
payment of a $14.0 million redemption premium on our Notes, the write-off of
$4.5 million in unamortized debt issuance costs related to the former senior
credit facility and Notes, and $0.5 million of the related Note
discount. Additionally, we expensed approximately $1.1 million of
debt issuance costs associated with our Senior Credit Facility in accordance
with Emerging Issues Task Force (“EITF”) No. 96-19, “Debtor’s Accounting for a
Modification or Exchange of Debt Instruments” (“EITF 96-19”).
(e) Represents total current assets
less total current liabilities.
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.
OVERVIEW
For more than 140 years, Carter’s has become one of
the most highly recognized and most trusted brand names in the children’s
apparel industry and with the Acquisition of OshKosh on July 14, 2005, we now
own the highly recognized and trusted OshKosh
brand. Results of operations for fiscal 2007 and 2006 include the
operations of OshKosh for the entire period. Results of operations
for fiscal 2005 include the operations of OshKosh for the period from July 14,
2005 through December 31, 2005.
We sell our products under our Carter’s and OshKosh brands in the
wholesale channel, which includes nearly 450 department store, national chain,
and specialty store accounts. Additionally, as of December 29, 2007,
we operated 228 Carter’s and 163 OshKosh retail stores located
primarily in outlet and strip centers throughout the United States and sold our
products in the mass channel under our Child of Mine brand to
approximately 3,500 Wal-Mart stores nationwide and under our Just One Year brand to
approximately 1,600 Target stores. We also extend our brand reach by
licensing our Carter’s, Child
of Mine, Just One Year, OshKosh, and related brand
names through domestic licensing arrangements, including licensing of our Genuine Kids from OshKosh
brand to Target stores nationwide. Our OshKosh B’Gosh brand name is
also licensed through international licensing arrangements. During
fiscal 2007, we earned approximately $30.7 million in royalty income from these
arrangements, including $15.4 million from our OshKosh and Genuine Kids from OshKosh
brands.
While we have made significant progress
integrating the OshKosh business, our plans to grow the OshKosh brand in the
wholesale and retail store channels have not met our expectations to
date. We continue to focus on our core product development and
marketing disciplines, leveraging our relationships with major wholesale
accounts, leveraging our infrastructure and supply chain, and improving the
productivity of our OshKosh retail stores.
Since the Acquisition, we have reduced
the number of OshKosh
sub-brands and have simplified the number of product offerings under our OshKosh
brand. This has allowed us to reduce product complexity, focus
our efforts on essential, core products, and streamline operations.
In connection with the Acquisition of
OshKosh, we recorded cost in excess of fair value of net assets acquired of
$142.9 million and an OshKosh brand tradename asset
of $102.0 million. During the second quarter of fiscal 2007, as a
result of the continued negative trends in sales and profitability of the
Company’s OshKosh B’Gosh wholesale and retail segments and re-forecasted
projections for such segments for the balance of fiscal 2007, the Company
conducted an interim impairment assessment on the value of the intangible assets
that the Company recorded in connection with the Acquisition. Based
on this assessment, charges of approximately $36.0 million for the OshKosh
wholesale segment and $106.9 million for the OshKosh retail segment were
recorded for the impairment of the cost in excess of fair value of net assets
acquired asset. In addition, an impairment charge of $12.0 million
was recorded to reflect the impairment of the value ascribed to the OshKosh
tradename. The carrying value of the OshKosh tradename asset is
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 such impairment
reviews could be negatively impacted 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 potential impairment of such
assets.
We have also acquired certain
definite-lived intangible assets in connection with the Acquisition of OshKosh
comprised of licensing agreements and leasehold interests which resulted in
annual amortization expense of $4.7 million in fiscal 2006 and $4.5 million in
fiscal 2007. Amortization expense related to these intangible assets
will be $4.1 million in fiscal 2008, $3.7 million in fiscal 2009, and $1.8
million in fiscal 2010.
During fiscal 2007, the Board of
Directors approved a stock repurchase program, pursuant to which the Company is
authorized to purchase up to $100 million of its outstanding common
shares. Such repurchases may occur from time to time in the open
market, in negotiated transactions, or otherwise. This program has no
time limit. The timing and amount of any repurchases will be
determined by management, based on its evaluation of market conditions, share
price, and other factors. During fiscal 2007, the Company repurchased
and retired 2,473,219 shares, or approximately $57.5 million, of its common
stock at an average price of $23.24 per share.
Our fiscal year ends on the Saturday,
in December or January, nearest the last day of December. Consistent
with this policy, fiscal 2007 ended on December 29, 2007, fiscal 2006 ended on
December 30, 2006, and fiscal 2005 ended on December 31, 2005. Each
of these periods contained 52 weeks of financial results.
RESULTS
OF OPERATIONS
The following table sets forth, for the
periods indicated (i) selected statement of operations data expressed as a
percentage of net sales and (ii) the number of retail stores open at the end of
each period:
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
sales:
|
|
|
|
|
|
|
|
|
|
|
Carter’s
|
|
|
34.2 |
% |
|
|
34.6 |
% |
|
|
38.1 |
% |
|
OshKosh
|
|
|
6.1 |
|
|
|
7.2 |
|
|
|
5.3 |
|
|
Total
wholesale sales
|
|
|
40.3 |
|
|
|
41.8 |
|
|
|
43.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
store sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carter’s
|
|
|
25.9 |
|
|
|
24.8 |
|
|
|
28.2 |
|
|
OshKosh
|
|
|
16.6 |
|
|
|
17.0 |
|
|
|
12.5 |
|
|
Total
retail store sales
|
|
|
42.5 |
|
|
|
41.8 |
|
|
|
40.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mass
channel sales
|
|
|
17.2 |
|
|
|
16.4 |
|
|
|
15.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
net sales
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
Cost
of goods sold
|
|
|
65.8 |
|
|
|
63.6 |
|
|
|
64.7 |
|
|
Gross
profit
|
|
|
34.2 |
|
|
|
36.4 |
|
|
|
35.3 |
|
|
Selling,
general, and administrative expenses
|
|
|
25.5 |
|
|
|
26.2 |
|
|
|
25.7 |
|
|
Intangible
asset impairment
|
|
|
11.0 |
|
|
|
-- |
|
|
|
-- |
|
|
Closure
costs
|
|
|
0.3 |
|
|
|
-- |
|
|
|
0.6 |
|
|
Royalty
income
|
|
|
(2.2 |
) |
|
|
(2.1 |
) |
|
|
(1.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
(loss) income
|
|
|
(0.4 |
) |
|
|
12.3 |
|
|
|
10.8 |
|
|
Loss
on extinguishment of debt
|
|
|
-- |
|
|
|
-- |
|
|
|
1.8 |
|
|
Interest
expense, net
|
|
|
1.7 |
|
|
|
2.0 |
|
|
|
2.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income before income taxes
|
|
|
(2.1 |
) |
|
|
10.3 |
|
|
|
6.9 |
|
|
Provision
for income taxes
|
|
|
2.9 |
|
|
|
3.8 |
|
|
|
2.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
|
(5.0 |
)% |
|
|
6.5 |
% |
|
|
4.2 |
% |
|
Number
of retail stores at end of period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carter’s
|
|
|
228 |
|
|
|
219 |
|
|
|
193 |
|
|
OshKosh
|
|
|
163 |
|
|
|
157 |
|
|
|
142 |
|
|
Total
|
|
|
391 |
|
|
|
376 |
|
|
|
335 |
|
FISCAL
YEAR ENDED DECEMBER 29, 2007 COMPARED WITH FISCAL YEAR ENDED DECEMBER 30,
2006
CONSOLIDATED
NET SALES
Consolidated net sales for fiscal 2007
were $1.4 billion, an increase of $68.8 million, or 5.1%, compared to $1.3
billion in fiscal 2006. This increase reflects growth in all three of
our Carter’s brand
distribution channels and our OshKosh brand retail store
segment.
|
|
|
For
the fiscal years ended
|
|
|
(dollars
in thousands)
|
|
December
29,
|
|
|
%
of
|
|
|
December
30,
|
|
|
%
of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale-Carter’s
|
|
$ |
482,350 |
|
|
|
34.2 |
% |
|
$ |
464,636 |
|
|
|
34.6 |
% |
|
Wholesale-OshKosh
|
|
|
86,555 |
|
|
|
6.1 |
% |
|
|
96,351 |
|
|
|
7.2 |
% |
|
Retail-Carter’s
|
|
|
366,296 |
|
|
|
25.9 |
% |
|
|
333,050 |
|
|
|
24.8 |
% |
|
Retail-OshKosh
|
|
|
233,776 |
|
|
|
16.6 |
% |
|
|
229,103 |
|
|
|
17.0 |
% |
|
Mass
Channel-Carter’s
|
|
|
243,269 |
|
|
|
17.2 |
% |
|
|
220,327 |
|
|
|
16.4 |
% |
|
Total
net
sales
|
|
$ |
1,412,246 |
|
|
|
100.0 |
% |
|
$ |
1,343,467 |
|
|
|
100.0 |
% |
CARTER’S
WHOLESALE SALES
Carter’s brand wholesale
sales increased $17.7 million, or 3.8%, in fiscal 2007, to $482.4
million. The increase in Carter’s brand wholesale
sales was driven by a 4% increase in units shipped. Average price per
unit, was comparable to fiscal 2006.
The growth in units shipped was driven
primarily by our baby and playwear product categories, which accounted for
approximately 47% and 33% of total Carter’s brand wholesale
sales, respectively, partially offset by a decrease in sleepwear units
shipped. The growth in baby and playwear units shipped was driven by
increased demand.
OSHKOSH
WHOLESALE SALES
OshKosh brand wholesale sales
decreased $9.8 million, or 10.2%, in fiscal 2007 to $86.6
million. The decrease in OshKosh brand wholesale
sales, was impacted by a 19% decrease in average price per unit, partially
offset by an 11% increase in units shipped as compared to fiscal
2006. The decrease in average prices reflects changes in product mix
and higher levels of customer accommodations as compared to the prior
year.
CARTER’S RETAIL STORES
Carter’s retail stores sales increased
$33.2 million, or 10.0%, in fiscal 2007 to $366.3 million. The
increase was driven by incremental sales of $22.8 million generated by new store
openings and a comparable store sales increase of $13.3 million, or 4.1%, based
on 206 locations, partially offset by the impact of store closures of $2.8
million. During fiscal 2007, units per transaction increased 5.3% and
average prices decreased 3.0% as compared to fiscal 2006. Average
prices decreased due to increased promotional pricing on spring sleepwear and
fall playclothes products. We believe increased promotional pricing
drove the increase in unit volume. Average inventory levels, on a
comparable store basis, were up 10.9% as compared to fiscal 2006.
We
believe these higher average inventory levels helped drive our comparable store
sales increases.
The Company's comparable store sales
calculations include sales for all stores that were open during the comparable
fiscal period, including remodeled stores and certain relocated
stores. If a store relocates within the same center with no business
interruption or material change in square footage, the sales for such store will
continue to be included in the comparable store calculation. 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 period are included in the comparable store sales calculation up to
the date of closing.
There were a total of 228 Carter’s
retail stores as of December 29, 2007. During fiscal 2007, we opened
ten stores and closed one store. We plan to open 25 and close five
Carter’s retail stores during fiscal 2008.
OSHKOSH
RETAIL STORES
OshKosh retail store sales increased
$4.7 million, or 2.0%, in fiscal 2007 to $233.8 million. The increase
was due to incremental sales of $15.2 million generated by new store openings,
partially offset by a comparable store sales decrease of $9.8 million, or 4.3%,
based on 146 locations, and the impact of store closings of $0.8
million. Average prices decreased 6.0% and units per transaction
increased 4.4%. Average prices decreased due to increased promotional
activity across all major product categories. Average inventory
levels, on a comparable store basis, were up 22.5% as compared to fiscal
2006.
There were a total of 163 OshKosh
retail stores as of December 29, 2007. During fiscal 2007, we opened
nine stores and closed three stores. We plan to open five and close
three OshKosh retail stores during fiscal 2008.
MASS
CHANNEL SALES
Mass channel sales increased $22.9
million, or 10.4%, in fiscal 2007 to $243.3 million. The increase was
driven by increased sales of $11.9 million, or 8.8%, of our Child of Mine brand to
Wal-Mart and increased sales of $11.0 million, or 12.9%, of our Just One Year brand to
Target. The growth in sales of our Child of Mine brand was
driven by gaining additional floor space for fall sleepwear and fall playwear
products. Growth in sales of our Just One Year brand was
driven by new door growth and better product performance.
GROSS
PROFIT
Our gross profit decreased $5.2
million, or 1.1%, to $483.3 million in fiscal 2007. Gross profit as a
percentage of net sales was 34.2% in fiscal 2007 as compared to 36.4% in fiscal
2006.
The decrease in gross profit as a
percentage of net sales reflects:
|
(i)
|
a
decrease in gross profit in our consolidated retail segments, primarily
OshKosh, due to increased promotional pricing (consolidated retail gross
margin decreased from 51.1% in fiscal 2006 to 47.8% in fiscal 2007 despite
an increase in consolidated retail net sales of 6.7% in fiscal
2007);
|
|
(ii)
|
the
impact of OshKosh
brand wholesale product performance, which led to higher levels of
customer accommodations in fiscal 2007;
and
|
|
(iii)
|
the
impact of $4.9 million in higher losses associated with excess
inventory.
|
The Company includes distribution costs
in its selling, general, and administrative expenses. Accordingly,
the Company’s gross profit may not be comparable to other companies that include
such distribution costs in their cost of goods sold.
SELLING,
GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative
expenses in fiscal 2007 increased $7.4 million, or 2.1%, to $359.8
million. As a percentage of net sales, selling, general, and
administrative expenses in fiscal 2007 were 25.5% as compared to 26.2% in fiscal
2006.
The decrease in selling, general, and
administrative expenses as a percentage of net sales reflects:
|
(i)
|
a
reduction in incentive compensation expense of $10.2 million as compared
to fiscal 2006;
|
|
(ii)
|
controlling
growth in spending to a rate lower than the growth in net sales for fiscal
2007; and
|
|
(iii)
|
the
reversal in fiscal 2007 of approximately $1.5 million of previously
recorded stock-based compensation expense and the reduction in fiscal 2007
of $1.2 million of stock-based compensation expense on performance-based
stock awards (see Note 6).
|
Partially offsetting these decreases
were:
|
(i)
|
accelerated
depreciation charges of $2.1 million in fiscal 2007 related to the closure
of our White House, Tennessee distribution facility;
and
|
|
(ii)
|
increased
severance, recruiting, and relocation expenses of $1.9 million as compared
to fiscal 2006. The increase was driven primarily by
restructuring our retail store management
team.
|
INTANGIBLE
ASSET IMPAIRMENT
During
the second quarter of fiscal 2007, as a result of negative trends in sales and
profitability of the OshKosh wholesale and retail segments and revised
projections for such segments, the Company conducted an interim impairment
assessment on the value of the intangible assets that the Company recorded in
connection with the Acquisition of OshKosh. This assessment was
performed in accordance with Statement of Financial Accounting Standards
(“SFAS”) No. 142, “Goodwill and Intangible Assets.” Based on this
assessment, charges of approximately $36.0 million and $106.9 million were
recorded for the impairment of the cost in excess of fair value of net assets
acquired for the wholesale and retail segments, respectively. In
addition, an impairment charge of $12.0 million was recorded to reflect the
impairment of the value ascribed to the OshKosh
tradename.
CLOSURE
COSTS
On February 15, 2007, the Board of
Directors approved management’s plan to close the Company’s White House,
Tennessee distribution facility, which was utilized to distribute the Company’s
OshKosh brand
products. In connection with this closure we recorded costs of $7.4
million, consisting of asset impairment charges of $2.4 million related to a
write-down of the related land, building, and equipment, $2.0 million of
severance charges, $2.1 million of accelerated depreciation (included in
selling, general, and administrative expenses), and $0.9 million in other
closure costs during fiscal 2007.
In May 2005, we decided to exit two
Carter’s brand sewing
facilities in Mexico. During fiscal 2006, in connection with these
closures, we recorded costs of $91,000, including $74,000 of severance and
$17,000 of other exit costs.
ROYALTY
INCOME
Our royalty income increased $1.6
million, or 5.4%, to $30.7 million in fiscal 2007.
We license the use of our Carter’s, Just One Year, and
Child of Mine
brands. Royalty income from these brands was approximately
$15.3 million, an increase of 2.1%, or $0.3 million, as compared to fiscal 2006
due to increased sales by our Carter’s brand and Child of Mine brand
licensees.
We license the use of our OshKosh and Genuine Kids from OshKosh
brand names. Royalty income from these brands increased approximately
$1.3 million, or 8.9%, to $15.4 million in fiscal 2007 and includes $6.5 million
of international royalty. This increase was driven primarily by
increased sales by our OshKosh
brand domestic licensees.
OPERATING
(LOSS) INCOME
Our operating loss was $6.0 million in
fiscal 2007 as compared to operating income of $165.1 million in fiscal
2006. The decrease in operating results was due to the factors
described above including the charges incurred in fiscal 2007 related to the
impairment of OshKosh’s intangible assets and the closure of our White House,
Tennessee distribution facility, partially offset by the reversal of stock-based
compensation expense associated with performance stock awards.
INTEREST
EXPENSE, NET
Interest expense in fiscal 2007
decreased $3.8 million, or 14.3%, to $23.1 million. This decrease is
attributable to accelerated debt reduction in fiscal 2006 and a lower effective
interest rate. In fiscal 2007, weighted-average borrowings were
$349.2 million at an effective interest rate of 7.01% as compared to
weighted-average borrowings of $397.9 million at an effective interest rate of
7.25% in fiscal 2006. In fiscal 2007 and 2006, our interest rate swap
agreement reduced our interest expense under the Term Loan by approximately $1.6
million and $1.3 million, respectively.
INCOME
TAXES
Our effective tax rate was
approximately (142.8%) in fiscal 2007 as compared to approximately 36.9% in
fiscal 2006. This change in our effective tax rate is a result of the
impairment of our OshKosh cost in excess of fair value of net assets acquired
asset, which is not deductible for income tax purposes. See Note 8 to
the accompanying audited consolidated financial statements for a reconciliation
of the statutory rate to our effective tax rate.
NET
(LOSS) INCOME
As a result of the factors above, we
recorded a net loss for fiscal 2007 of $70.6 million as compared to net income
of $87.2 million in fiscal 2006.
FISCAL
YEAR ENDED DECEMBER 30, 2006 COMPARED WITH FISCAL YEAR ENDED DECEMBER 31,
2005
CONSOLIDATED
NET SALES
Consolidated net sales for fiscal 2006
were $1.3 billion, an increase of $222.1 million, or 19.8%, compared to $1.1
billion in fiscal 2005. This increase reflects growth in all channels
of distribution and includes $325.5 million in net sales from our OshKosh brand in fiscal 2006
and $199.8 million in net sales from our OshKosh brand during the
period from July 14, 2005 through December 31, 2005.
|
|
|
For
the fiscal years ended
|
|
|
(dollars
in thousands)
|
|
December
30,
|
|
|
%
of
|
|
|
December
31,
|
|
|
%
of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale-Carter’s
|
|
$ |
464,636 |
|
|
|
34.6 |
% |
|
$ |
427,043 |
|
|
|
38.1 |
% |
|
Wholesale-OshKosh
|
|
|
96,351 |
|
|
|
7.2 |
% |
|
|
59,707 |
|
|
|
5.3 |
% |
|
Retail-Carter’s
|
|
|
333,050 |
|
|
|
24.8 |
% |
|
|
316,477 |
|
|
|
28.2 |
% |
|
Retail-OshKosh
|
|
|
229,103 |
|
|
|
17.0 |
% |
|
|
140,104 |
|
|
|
12.5 |
% |
|
Mass
Channel-Carter’s
|
|
|
220,327 |
|
|
|
16.4 |
% |
|
|
178,027 |
|
|
|
15.9 |
% |
|
Total
net
sales
|
|
$ |
1,343,467 |
|
|
|
100.0 |
% |
|
$ |
1,121,358 |
|
|
|
100.0 |
% |
CARTER’S
WHOLESALE SALES
Carter’s brand wholesale
sales increased $37.6 million in fiscal 2006, or 8.8%, to $464.6
million. The increase in Carter’s brand wholesale
sales was driven by a 10% increase in units shipped, offset by a 1% decrease in
average price per unit as compared to fiscal 2005.
The growth in units shipped was driven
primarily by our baby product category, which accounted for approximately 56% of
total Carter’s brand
wholesale units shipped in fiscal 2006. The growth in baby units
shipped was driven by our focus on high-volume, essential core
products.
The decrease in average price per unit
as compared to fiscal 2005 was due primarily to our playclothes product category
which accounted for 27% of our Carter’s brand wholesale
units shipped. Playclothes average prices were down 4% as compared to
fiscal 2005 due to product mix. Favorable product mix in our
sleepwear category, with average prices up 2% and which accounted for 17% of our
Carter’s brand
wholesale units shipped in fiscal 2006, partially offset the decline in average
price per unit in playclothes. Average price per unit in our baby
product category increased 2% as compared to fiscal 2005.
OSHKOSH
WHOLESALE SALES
Results for fiscal 2006 include OshKosh brand wholesale sales
for the entire year and are not comparable to results for fiscal 2005 which
include OshKosh brand
wholesale sales from the Acquisition date of July 14, 2005 through December 31,
2005.
OshKosh brand wholesale sales
were $96.4 million in fiscal 2006, including $7.5 million in off-price sales,
and $59.7 million for the period from July 14, 2005 through December 31, 2005,
including $10.5 million in off-price sales. Since the Acquisition, we
have reduced the number of OshKosh wholesale brands from
three brands to one brand (OshKosh)
and significantly reduced the number of styles in order to improve
productivity.
CARTER’S RETAIL STORES
Carter’s retail stores sales increased
$16.6 million in fiscal 2006, or 5.2%, to $333.1 million. Such growth
was driven by incremental sales of $23.1 million generated by new store openings
offset by the impact of store closures of $6.3 million and a comparable store
sales decrease of $0.2 million, or (0.1%), based on 180 locations. On
a comparable store basis, transactions and units per transaction were flat and
average prices decreased 0.4% as compared to fiscal 2005. Average
prices decreased due to increased promotional pricing on spring and fall
playclothes. In fiscal 2006, the Company significantly changed the
mix of and reduced the levels of inventory in its retail stores, which
negatively impacted retail store performance. Average inventory
levels, on a comparable store basis, were down 10.1% as compared to fiscal
2005. The Company believes it is taking the steps necessary to
improve the level and mix of inventory in its retail stores.
The Company's comparable store sales
calculations include sales for all stores that were open during the comparable
fiscal period, including remodeled stores and certain relocated
stores. If a store relocates within the same center with no business
interruption or material change in square footage, the sales for such store will
continue to be included in the comparable store calculation. 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
are included in the comparable store sales calculation up to the date of
closing.
There were a total of 219 Carter’s
retail stores as of December 30, 2006. During fiscal 2006, we opened
31 stores and closed five stores.
OSHKOSH
RETAIL STORES
Results for fiscal 2006 include OshKosh
retail store sales for the entire year and are not comparable to results for
fiscal 2005 which include OshKosh retail store sales from the Acquisition date
of July 14, 2005 through December 31, 2005.
OshKosh retail store sales contributed
$229.1 million in fiscal 2006 and $140.1 million in net sales for the period
from July 14, 2005 through December 31, 2005. During fiscal 2006 we
opened 17 stores and closed two stores. During the period from July
14, 2005 through December 31, 2005, we closed 29 OshKosh retail stores,
including 15 OshKosh lifestyle stores.
There were a total of 157 OshKosh
retail stores as of December 30, 2006.
MASS
CHANNEL SALES
Mass channel sales increased $42.3
million in fiscal 2006, or 23.8%, to $220.3 million. The increase was
driven by increased sales of $23.6 million, or 21.2%, of our Child of Mine brand to
Wal-Mart and increased sales of $18.7 million, or 28.1%, of our Just One Year brand to
Target. The growth in sales resulted from increased productivity,
additional floor space in existing stores, and new door growth.
GROSS
PROFIT
Our gross profit increased $92.2
million, or 23.3%, to $488.5 million in fiscal 2006. Gross profit as
a percentage of net sales was 36.4% in fiscal 2006 as compared to 35.3% in
fiscal 2005.
The increase in gross profit as a
percentage of net sales reflects:
|
|
(i)
|
an
amortization charge in fiscal 2005 of $13.9 million related to a fair
value step-up of inventory acquired from OshKosh and sold during the
period; and
|
|
|
(ii)
|
$1.6
million of accelerated depreciation recorded in fiscal 2005 in connection
with the closure of two Carter's brand sewing
facilities in Mexico.
|
Partially offsetting this increase
was:
|
|
(i)
|
growth
in our lower margin mass channel business, sales from which increased
23.8% in fiscal 2006;
|
|
|
(ii)
|
a
reduction in our consolidated retail store gross margin due to increased
promotional activity (consolidated retail gross margin decreased from
52.0% of consolidated retail store sales in fiscal 2005 to 51.1% of
consolidated retail store sales in fiscal 2006);
and
|
|
|
(iii)
|
a
greater mix of OshKosh brand wholesale
sales which generally have lower margins relative to Carter’s brand
wholesale sales.
|
The Company includes distribution costs
in its selling, general, and administrative expenses. Accordingly,
the Company’s gross margin may not be comparable to other companies that include
such distribution costs in their cost of goods sold.
SELLING,
GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative
expenses in fiscal 2006 increased $63.8 million, or 22.1%, to $352.5
million. As a percentage of net sales, selling, general, and
administrative expenses in fiscal 2006 increased to 26.2% as compared to 25.7%
in fiscal 2005.
The increase in selling, general, and
administrative expenses as a percentage of net sales was led primarily
by:
|
|
(i)
|
retail
store sales increasing to 41.8% of our consolidated sales mix from 40.7%
last year due to the Acquisition of OshKosh. Our retail stores
have a higher selling, general, and administrative cost structure than
other components of our business and our OshKosh retail stores generally
have a higher cost structure than our Carter’s retail
stores. Additionally, in fiscal 2006, we opened 29 brand stores
which have a higher cost structure and lower sales volume than our outlet
stores. As a result, our retail store selling, general, and
administrative expenses increased to 26.7% of consolidated retail store
sales compared to 23.5% last year;
|
|
|
(ii)
|
growth
in our retail store administration expenses from 3.4% of retail store
sales in fiscal 2005 to 4.1% in fiscal 2006 due to expansion of the retail
management team;
|
|
|
(iii)
|
incremental
stock-based compensation expense of $3.9 million resulting from the
adoption of SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS
123R”) as further discussed in Note 6 to the accompanying audited
consolidated financial statements;
and
|
|
|
(iv)
|
incremental
amortization of OshKosh intangible assets related to OshKosh licensing
agreements and leasehold interests capitalized in connection with the
Acquisition, ($4.7 million in fiscal 2006 as compared to $2.2 million in
fiscal 2005).
|
Partially offsetting these increases
were:
|
|
(i)
|
a
reduction in incentive compensation of $3.0 million as compared to fiscal
2005; and
|
|
|
(ii)
|
a
decline in distribution and freight costs as a percentage of sales from
5.6% in fiscal 2005 to 5.3% in fiscal
2006.
|
CLOSURE
COSTS
In May 2005, we decided to exit two
Carter’s brand sewing
facilities in Mexico. We have developed alternative capabilities to
source comparable products in the Far East at lower costs. As a
result of these closures, we recorded total costs of $8.4 million, including
$4.6 million of severance charges, $1.3 million of lease termination costs, $1.6
million of accelerated depreciation (included in cost of goods sold), $0.1
million of asset impairment charges, and $0.8 million of other exit costs during
fiscal 2005.
During fiscal 2006, we recorded $91,000
in closure costs which included $74,000 in severance charges and $17,000 in
other exit costs related to the closures.
ROYALTY
INCOME
Our royalty income increased $8.7
million, or 42.8%, to $29.2 million in fiscal 2006.
We license the use of our Carter’s, Just One Year, and
Child of Mine
brands. Royalty income from these brands was approximately $15.1
million in fiscal 2006, an increase of 8.9% or $1.3 million as compared to
fiscal 2005 due to increased sales by our Carter’s and Child of Mine brand
licensees.
We
license the use of our OshKosh and Genuine Kids from OshKosh
brand names. Results for fiscal 2006 include a full year of royalty
income from these brands and are not comparable to results for fiscal 2005 which
include licensee sales from the Acquisition date of July 14, 2005 through
December 31, 2005. Royalty income from these brands was approximately
$14.1 million in fiscal 2006, including $6.8 million in international royalty
income, and $6.6 million for the period from July 14, 2005 through December 31,
2005, including $2.6 million in international royalty income.
OPERATING
INCOME
Operating income increased $43.9
million, or 36.2%, to $165.1 million in fiscal 2006. The increase in
operating income was due to the factors described above.
LOSS
ON EXTINGUISHMENT OF DEBT
As a result of the Refinancing in
fiscal 2005, we incurred a $14.0 million redemption premium in connection with
the repurchase of our Notes, expensed $4.5 million in debt issuance costs
associated with our former senior credit facility and Notes, expensed $0.5
million related to the debt discount on the Notes, and wrote off $1.1 million in
debt issuance costs associated with our new Senior Credit Facility in accordance
with EITF 96-19.
INTEREST
EXPENSE, NET
Interest expense in fiscal 2006
increased $3.7 million, or 15.8%, to $26.9 million. This increase is
attributable to the impact of additional borrowings associated with the
Transaction. In fiscal 2006, weighted-average borrowings were $397.9
million at an effective interest rate of 7.25% as compared to weighted-average
borrowings of $320.6 million at an effective interest rate of 7.66% in fiscal
2005. In fiscal 2006, we reclassified approximately $1.3 million
related to our interest rate swap agreement into earnings, which effectively
reduced our interest expense under the Term Loan.
INCOME
TAXES
Our effective tax rate was
approximately 36.9% in fiscal 2006 as compared to approximately 39.4% in fiscal
2005. Our effective tax rate decreased in fiscal 2006 due primarily
to lower state taxable income. See Note 8 to the accompanying audited
consolidated financial statements for a reconciliation of the statutory rate to
our effective tax rate.
NET
INCOME
Our fiscal 2006 net income increased
$40.0 million to $87.2 million as compared to $47.2 million in fiscal 2005 as a
result of the factors described above.
LIQUIDITY
AND CAPITAL RESOURCES
Our primary cash needs are working
capital and capital expenditures. Our primary source of liquidity
will continue to be cash flow from operations and borrowings under our Revolver,
and we expect that these sources will fund our ongoing requirements for working
capital and capital expenditures. These sources of liquidity may be
impacted by continued demand for our products and our ability to meet debt
covenants under our Senior Credit Facility, described below.
Net accounts receivable at December 29,
2007 were $119.7 million compared to $110.6 million at December 30,
2006. This increase reflects higher levels of wholesale and mass
channel revenue in the latter part of fiscal 2007 as compared to the latter part
of fiscal 2006.
Net inventories at December 29, 2007
were $225.5 million compared to $193.6 million at December 30,
2006. This increase was driven by higher levels of inventory in our
retail stores to better support demand, an increase in finished goods inventory
to support demand, particularly in baby products, and slightly higher levels of
excess inventory as compared to the prior year.
Net cash provided by operating
activities for fiscal 2007 was $52.0 million compared to $88.2 million in fiscal
2006. This change is primarily attributable to increased inventory
levels as discussed above. Net cash provided by our operating
activities in fiscal 2005 was approximately $137.3 million. Cash flow
in fiscal 2006 is not comparable to fiscal 2005 due to the timing of the
Acquisition on July 14, 2005, a point in the year when OshKosh’s working capital
was at its peak. Additionally, in fiscal 2006, the Company had
significant reductions in current liabilities resulting from the payment of
Acquisition-related liabilities and a change in classification of the income tax
benefit from the exercise of stock options resulting from the adoption of SFAS
123R, as described in Note 6 to the accompanying audited consolidated financial
statements.
We invested $21.9 million in capital
expenditures during fiscal 2007 compared to $30.8 million in fiscal
2006. Major investments include retail store openings and remodelings
and investments in information technology. We plan to invest
approximately $50 million in capital expenditures in fiscal 2008 primarily for
retail store openings and includes a new point of sale system for our retail
stores.
On February 16, 2007, the Board of
Directors approved a stock repurchase program, pursuant to which the Company is
authorized to purchase up to $100 million of its outstanding common
shares. Such repurchases may occur from time to time in the open
market, in negotiated transactions, or otherwise. This program has no
time limit. The timing and amount of any repurchases will be
determined by management, based on its evaluation of market conditions, share
price, and other factors. During fiscal 2007, the company repurchased
and retired 2,473,219 shares, or approximately $57.5 million, of its common
stock at an average price of $23.24 per share.
Weighted-average borrowings for fiscal
2007 were $349.2 million at an effective rate of 7.01% as compared to
weighted-average borrowings of $397.9 million at an effective interest rate of
7.25% in fiscal 2006.
At December 29, 2007, we had
approximately $341.5 million in Term Loan borrowings and no borrowings under our
Revolver, exclusive of $16.3 million of outstanding letters of
credit. At December 30, 2006, we had approximately $345.0 million in
Term Loan borrowings and no borrowings under our Revolver, exclusive of
approximately $14.5 million of outstanding letters of credit.
The term of the Revolver expires July
14, 2011 and the term of the Term Loan expires July 14,
2012. Principal borrowings under the Term Loan are due and payable in
quarterly installments of $0.9 million from March 31, 2008 through June 30, 2012
with the remaining balance of $325.8 million due on July 14, 2012.
In March 2006, we made a $9.0 million
prepayment on our Term Loan; in May 2006, we made a $15.0 million prepayment on
our Term Loan; in June 2006, we made a $10.0 million prepayment on our Term
Loan; in November 2006, we made a $35.0 million prepayment on our Term Loan, and
in December 2006, we made an $11.9 million prepayment on our Term
Loan. In fiscal 2006, we also made scheduled amortization payments of
$4.1 million. In fiscal 2007, we made scheduled amortization payments
of $3.5 million.
On April 28, 2006, the Company entered
into Amendment No. 1 to the Senior Credit Facility. Amendment No. 1
reduced the Company’s interest rate by refinancing the existing Term Loan
(initially priced at LIBOR + 1.75% with a leverage-based pricing grid ranging
from LIBOR + 1.50% to LIBOR + 1.75%) with a new Term Loan having an applicable
rate of LIBOR + 1.50% with no leverage-based pricing grid. Interest
is payable at the end of interest rate reset periods, which vary in length, but
in no case exceed 12 months for LIBOR rate loans and quarterly for prime rate
loans. The effective interest rate on variable rate Term Loan
borrowings as of December 29, 2007 and December 30, 2006 was 6.4% and
6.9%. The Senior Credit Facility contains financial covenants,
including a minimum interest coverage ratio, maximum leverage ratio, and fixed
charge coverage ratio. The Senior Credit Facility also sets forth
mandatory and optional prepayment conditions, including an annual excess cash
flow requirement, as defined, that may result in our use of cash to reduce our
debt obligations. There was no excess cash flow payment required for
fiscal 2007 or 2006. Our obligations under the Senior Credit Facility
are collateralized by a first priority lien on substantially all of our assets,
including the assets of our domestic subsidiaries.
Our operating results are subject to
risk from interest rate fluctuations on our Senior Credit Facility, which
carries variable interest rates. As of December 29, 2007, our
outstanding debt aggregated approximately $341.5 million, of which $93.4 million
bore interest at a variable rate. An increase or decrease of 1% in
the applicable rate would increase or decrease our annual interest cost by $0.9
million, exclusive of variable rate debt subject to our swap and collar
agreements (see Note 2), and could have an adverse effect on our net (loss)
income and cash flow.
During fiscal 2007, the Company closed
its White House, Tennessee distribution center, which was utilized to distribute
the Company’s OshKosh
brand products. As a result of this closure, we recorded costs
in fiscal 2007 of $7.4 million, consisting of asset impairment charges of $2.4
million related to a write-down of the related land, building and equipment,
$2.0 million of severance charges, $2.1 million of accelerated depreciation
(included in selling, general, and administrative expenses), and $0.9 million of
other closure costs. The estimated annual savings resulting from the
closure of this facility are approximately $4.0 million. As of
December 29, 2007, there are no significant remaining cash payments to be made
as a result of this closure.
The estimated value of the White House
assets as of December 29, 2007 was $6.1 million. These assets are
classified as assets held for sale on the accompanying audited consolidated
balance sheet.
In connection with the Acquisition,
management developed an integration plan that includes severance, certain
facility and store closures, and contract terminations. The following
liabilities, included in other current liabilities in the accompanying audited
consolidated balance sheets, were established at the closing of the Acquisition,
will be funded by cash flows from operations and borrowings under our Revolver,
and are expected to be paid in fiscal 2008:
|
(dollars
in thousands)
|
|
|
|
|
Other
exit
|
|
|
Lease
termination
|
|
|
Contract
termination
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2005
|
|
$ |
8,209 |
|
|
$ |
1,926 |
|
|
$ |
6,552 |
|
|
$ |
898 |
|
|
$ |
17,585 |
|
|
Payments
|
|
|
(5,294 |
) |
|
|
(1,377 |
) |
|
|
(4,999 |
) |
|
|
(399 |
) |
|
|
(12,069 |
) |
|
Adjustments
to cost in excess of fair value of net assets acquired
|
|
|
(780 |
) |
|
|
170 |
|
|
|
180 |
|
|
|
(299 |
) |
|
|
(729 |
) |
|
Balance
at December 30, 2006
|
|
|
2,135 |
|
|
|
719 |
|
|
|
1,733 |
|
|
|
200 |
|
|
|
4,787 |
|
|
Payments
|
|
|
(1,624 |
) |
|
|
(641 |
) |
|
|
(1,059 |
) |
|
|
-- |
|
|
|
(3,324 |
) |
|
Adjustments
to cost in excess of fair value of net assets acquired
|
|
|
(100 |
) |
|
|
-- |
|
|
|
-- |
|
|
|
(200 |
) |
|
|
(300 |
) |
|
Balance
at December 29, 2007
|
|
$ |
411 |
|
|
$ |
78 |
|
|
$ |
674 |
|
|
$ |
-- |
|
|
$ |
1,163 |
|
The
following table summarizes as of December 29, 2007, the maturity or expiration
dates of mandatory contractual obligations and commitments for the following
fiscal years:
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
$ |
3,503 |
|
|
$ |
3,503 |
|
|
$ |
3,503 |
|
|
$ |
3,503 |
|
|
$ |
327,517 |
|
|
$ |
-- |
|
|
$ |
341,529 |
|
|
Interest
on debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable
rate (a)
|
|
|
21,429 |
|
|
|
21,429 |
|
|
|
21,429 |
|
|
|
21,429 |
|
|
|
10,715 |
|
|
|
-- |
|
|
|
96,431 |
|
|
Operating
leases (see Note 9 to the Consolidated Financial
Statements)
|
|
|
49,029 |
|
|
|
42,130 |
|
|
|
35,202 |
|
|
|
26,279 |
|
|
|
17,852 |
|
|
|
41,683 |
|
|
|
212,175 |
|
|
Total
financial obligations
|
|
|
73,961 |
|
|
|
67,062 |
|
|
|
60,134 |
|
|
|
51,211 |
|
|
|
356,084 |
|
|
|
41,683 |
|
|
|
650,135 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Letters
of
credit
|
|
|
16,268 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
16,268 |
|
|
Purchase
obligations (b)
|
|
|
194,453 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
194,453 |
|
|
Total
financial obligations and commitments
|
|
$ |
284,682 |
|
|
$ |
67,062 |
|
|
$ |
60,134 |
|
|
$ |
51,211 |
|
|
$ |
356,084 |
|
|
$ |
41,683 |
|
|
$ |
860,856 |
|
|
|
(a)
|
Reflects
estimated variable rate interest on obligations outstanding on our Term
Loan as of December 29, 2007 using an interest rate of 6.4% (rate in
effect at December 29, 2007).
|
|
(b)
|
Unconditional
purchase obligations are defined as agreements to purchase goods or
services that are enforceable and legally binding on us and that specify
all significant terms, including fixed or minimum
quantities
to be purchased; fixed, minimum, or variable price provisions; and the
approximate timing of the transaction. The purchase obligations
category above relates to commitments for inventory
purchases.
Amounts
reflected on the accompanying audited consolidated balance sheets in
accounts payable or other current liabilities are excluded from the table
above.
|
In addition to the total contractual
obligations and commitments in the table above, we have post-retirement benefit
obligations and reserves for uncertain tax positions, included in other current
and other long-term liabilities as further described in Note 7 and Note 8,
respectively, to the accompanying audited consolidated financial
statements.
Based on our current level of
operations, we believe that cash generated from operations and available cash,
together with amounts available under our Revolver, will be adequate to meet our
debt service requirements, capital expenditures, and working capital needs for
the foreseeable future, although no assurance can be given in this
regard. We may, however, need to refinance all or a portion of the
principal amount of amounts outstanding under our Revolver on or before July 14,
2011 and amounts outstanding under our Term Loan on or before July 14,
2012.
EFFECTS
OF INFLATION AND DEFLATION
We are affected by inflation and
changing prices primarily through purchasing product from our global suppliers,
increased operating costs and expenses, and fluctuations in interest
rates. The effects of inflation on our net sales and operations have
not been material. In recent years, there has been deflationary
pressure on selling prices. While we have been successful in
offsetting such deflationary pressures through product improvements and lower
costs with the expansion of our global sourcing network, if deflationary price
trends outpace our ability to obtain further price reductions from our global
suppliers, our profitability may be affected.
SEASONALITY
We experience seasonal fluctuations in
our sales and profitability, with generally lower sales and gross profit in the
first and second quarters of our fiscal year. Over the past five
fiscal years, excluding the impact of the Acquisition in fiscal 2005,
approximately 57% of our consolidated net sales were generated in the second
half of our fiscal year. Accordingly, our results of operations for
the first and second quarters of any year are not indicative of the results we
expect for the full year.
As a result of this seasonality, our
inventory levels and other working capital requirements generally begin to
increase during the second quarter and into the third quarter of each fiscal
year. During these peak periods we have historically borrowed under
our Revolver. In fiscal 2007, we had $41.6 million in peak borrowings
under our Revolver.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our
financial condition and results of operations are based upon our consolidated
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues,
expenses, and related disclosure of contingent assets and
liabilities. We base our estimates on historical experience and on
various other assumptions that we believe are reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under
different assumptions or conditions.
Our significant accounting policies are
described in Note 2 to the accompanying audited consolidated financial
statements. The following discussion addresses our critical
accounting policies and estimates, which are those policies that require
management’s most difficult and subjective judgments, often as a result of the
need to make estimates about the effect of matters that are inherently
uncertain.
Revenue recognition: We
recognize wholesale and mass channel revenue after shipment of products to
customers, when title passes, when all risks and rewards of ownership have
transferred, the sales price is fixed or determinable, and collectibility is
reasonably assured. In certain cases, in which we retain the risk of
loss during shipment, revenue recognition does not occur until the goods have
reached the specified customer. In the normal course of business, we
grant certain accommodations and allowances to our wholesale and mass channel
customers in order to assist these customers with inventory clearance or
promotions. Such amounts are reflected as a reduction of net sales
and are recorded based upon historical trends and annual
forecasts. Retail store revenues are recognized at the point of
sale. We reduce revenue for customer returns and
deductions. We also maintain an allowance for doubtful accounts for
estimated losses resulting from the inability of our customers to make payments
and other actual and estimated deductions. If the financial condition
of our customers were to deteriorate, resulting in an impairment of their
ability to make payments, an additional allowance could be
required. Past due balances over 90 days are reviewed individually
for collectibility. Our credit and collections department reviews all
other balances regularly. Account balances are charged off against
the allowance when we believe it is probable the receivable will not be
recovered.
We
contract with a third-party service to provide us with the fair value of
cooperative advertising arrangements entered into with certain of our major
wholesale and mass channel customers. Such fair value is determined
based upon, among other factors, comparable market analysis for similar
advertisements. In accordance with EITF Issue No. 01-09, “Accounting
for Consideration Given by a Vendor to a Customer/Reseller,” we have included
the fair value of these arrangements of approximately $2.5 million in fiscal
2007, $3.3 million in fiscal 2006, and $4.8 million in fiscal 2005 as a
component of selling, general, and administrative expenses on the accompanying
audited consolidated statement of operations rather than as a reduction of
revenue. Amounts determined to be in excess of the fair value of
these arrangements are recorded as a reduction of net sales.
Inventory: We
provide reserves for slow-moving inventory equal to the difference between the
cost of inventory and the estimated market value based upon assumptions about
future demand and market conditions. If actual market conditions are
less favorable than those we project, additional write-downs may be
required.
Cost in excess of fair value of net
assets acquired and tradename: As of December 29, 2007, we had
approximately $444.8 million in Carter’s cost in excess of fair value of net
assets acquired and Carter’s
and OshKosh
tradename assets. The fair value of the Carter’s tradename was
estimated at the 2001 acquisition to be approximately $220.2 million using a
discounted cash flow analysis, which examined the hypothetical cost savings that
accrue as a result of our ownership of the tradename. The fair value
of the OshKosh
tradename was recently estimated to be approximately $88.0 million, also using a
discounted cash flow analysis. The cash flows, which incorporated
both historical and projected financial performance, were discounted using a
discount rate of 10% for Carter’s and 12% for OshKosh. The tradenames
were determined to have indefinite lives. The carrying value of these
assets is subject to annual impairment reviews as of the last day of each fiscal
year. Factors affecting such impairment reviews include the continued
market acceptance of our offered products and the development of new
products. Impairment reviews may also be triggered by any significant
events or changes in circumstances.
Accrued
expenses: Accrued expenses for workers’ compensation,
incentive compensation, health insurance, and other outstanding obligations are
assessed based on actual commitments, statistical trends, and estimates based on
projections and current expectations, and these estimates are updated
periodically as additional information becomes available.
Accounting for income
taxes: As part of the process of preparing the accompanying
audited consolidated financial statements, we are required to estimate our
actual current tax exposure (state, federal, and foreign). We assess
our income tax positions and record tax benefits for all years subject to
examination based upon management’s evaluation of the facts, circumstances, and
information available at the reporting dates. For those uncertain tax
positions where it is “more likely than not” that a tax benefit will be
sustained, we have recorded the largest amount of tax benefit with a greater
than 50% likelihood of being realized upon ultimate settlement with a taxing
authority that has full knowledge of all relevant information. For
those income tax positions where it is not “more likely than not” that a tax
benefit will be sustained, no tax benefit has been recognized in the financial
statements. Where applicable, associated interest is also
recognized. We also assess permanent and temporary differences
resulting from differing bases and treatment of items for tax and accounting
purposes, such as the carrying value of intangibles, deductibility of expenses,
depreciation of property, plant, and equipment, and valuation of
inventories. Temporary differences result in deferred tax assets and
liabilities, which are included within our consolidated balance
sheets. We must then assess the likelihood that our deferred tax
assets will be recovered from future taxable income. Actual results
could differ from this assessment if sufficient taxable income is not generated
in future periods. To the extent we determine the need to establish a
valuation allowance or increase such allowance in a period, we must include an
expense within the tax provision in the accompanying audited consolidated
statement of operations.
Stock-based compensation
arrangements: The
Company accounts for stock-based compensation in accordance with the fair value
recognition provisions of SFAS 123R. The Company adopted SFAS 123R
using the modified prospective application method of transition. The
Company uses the Black-Scholes option pricing model, which requires the use of
subjective assumptions. These assumptions include the
following:
Volatility – This is a
measure of the amount by which a stock price has fluctuated or is expected to
fluctuate. The Company uses actual monthly historical changes in the
market value of our stock since the Company’s initial public offering on October
29, 2003, supplemented by peer company data for periods prior to our initial
public offering covering the expected life of options being
valued. An increase in the expected volatility will increase
compensation expense.
Risk-free interest rate –
This is the U.S. Treasury rate as of the grant date having a term equal to the
expected term of the option. An increase in the risk-free interest
rate will increase compensation expense.
Expected term – This is the
period of time over which the options granted are expected to remain outstanding
and is based on historical experience and estimated future exercise
behavior. Separate groups of employees that have similar historical
exercise behavior are considered separately for valuation
purposes. An increase in the expected term will increase compensation
expense.
Dividend yield – The Company
does not have plans to pay dividends in the foreseeable future. An
increase in the dividend yield will decrease compensation expense.
Forfeitures – The Company
estimates forfeitures of stock-based awards based on historical experience and
expected future activity.
Changes in the subjective assumptions
can materially affect the estimate of fair value of stock-based compensation and
consequently, the related amount recognized in the accompanying audited
consolidated statement of operations.
The Company accounts for its
performance-based awards in accordance with SFAS 123R and records stock-based
compensation expense over the vesting term of the awards that are expected to
vest based on whether it is probable that the performance criteria will be
achieved. The Company reassesses the probability of vesting at each
reporting period for awards with performance criteria and adjusts stock-based
compensation expense based on its probability assessment.
RECENT
ACCOUNTING PRONOUNCEMENTS
In September 2006, the Financial
Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair Value
Measurements” (“SFAS 157”), which defines fair value, establishes a framework
for measuring fair value, and expands disclosures about fair value
measurements. The provisions of SFAS 157 are effective as of the
beginning of our 2008 fiscal year. In February 2008, the FASB issued
FSP No. FAS 157-2, which delays the effective date of SFAS 157, "Fair Value
Measurements," for nonfinancial assets and nonfinancial liabilities, except for
items that are recognized or disclosed at fair value in the financial statements
on a recurring basis (at least annually). Nonfinancial assets and
nonfinancial liabilities would include all assets and liabilities other than
those meeting the definition of a financial asset or financial liability as
defined in paragraph 6 of SFAS No. 159, "The Fair Value Option for Financial
Assets and Financial Liabilities" (“SFAS 159”). This FASB Staff
Position defers the effective date of Statement 157 to fiscal years beginning
after November 15, 2008, and interim periods within those fiscal years for items
within the scope of FSP No. FAS 157-2. We have evaluated the
impact that SFAS 157 will have on our consolidated financial statements and have
determined that it will not have a significant impact on our consolidated
financial statements.
In February 2007, the FASB issued SFAS
159, which provides entities with an option to report selected financial
assets and liabilities at fair value. SFAS 159 also establishes
presentation and disclosure requirements designed to facilitate comparisons
between entities that choose different measurement attributes for similar types
of assets and liabilities. This statement is effective as of the
beginning of the first fiscal year that begins after November 15,
2007. The Company has evaluated the impact that SFAS 159 will have on
its consolidated financial statements and have determined that it will not have
a significant impact on our consolidated financial statements.
In December 2007, the FASB issued SFAS
No. 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”), which replaces
SFAS No. 141, “Business Combinations” (“SFAS 141”). SFAS 141(R)
retains the underlying concepts of SFAS 141 in that all business combinations
are still required to be accounted for at fair value under the acquisition
method of accounting but SFAS 141(R) changed the method of applying the
acquisition method in a number of significant aspects. Acquisition
costs will generally be expensed as incurred; noncontrolling interests will be
valued at fair value at the acquisition date; in-process research and
development will be recorded at fair value as an indefinite-lived intangible
asset at the acquisition date; restructuring costs associated with a business
combination will generally be expensed subsequent to the acquisition date; and
changes in deferred tax asset valuation allowances and income tax uncertainties
after the acquisition date generally will affect income tax
expense. SFAS 141(R) is effective on a prospective basis for all
business combinations for which the acquisition date is on or after the
beginning of the first annual period subsequent to December 15, 2008, with
the exception of the accounting for valuation allowances on deferred taxes and
acquired tax contingencies. SFAS 141(R) amends SFAS No. 109,
“Accounting for Income Taxes,” such that adjustments made to valuation
allowances on deferred taxes and acquired tax contingencies associated with
acquisitions that closed prior to the effective date of SFAS 141(R) would also
apply the provisions of SFAS 141(R). Early adoption is not
permitted. We are currently evaluating the effects, if any, that SFAS
141(R) may have on our consolidated financial statements.
FORWARD-LOOKING
STATEMENTS
Statements contained herein that relate
to our future performance, including, without limitation, statements with
respect to our anticipated results of operations or level of business for fiscal
2008 or any other future period, are forward-looking statements within the
meaning of the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Such statements are based on current expectations
only and are subject to certain risks, uncertainties, and
assumptions. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those anticipated, estimated, or
projected. These risks are described herein under the heading “Risk
Factors” on page 7. We undertake no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events, or otherwise.
CURRENCY
AND INTEREST RATE RISKS
In the operation of our business, we
have market risk exposures, including those related to foreign currency risk and
interest rates. These risks and our strategies to manage our exposure
to them are discussed below.
We contract for production with third
parties primarily in the Far East and South and Central
America. While these contracts are stated in United States dollars,
there can be no assurance that the cost for the future production of our
products will not be affected by exchange rate fluctuations between the United
States dollar and the local currencies of these contractors. Due to
the number of currencies involved, we cannot quantify the potential impact of
future currency fluctuations on net (loss) income in future years. In
order to manage this risk, we source products from approximately 130 vendors
worldwide, providing us with flexibility in our production should significant
fluctuations occur between the United States dollar and various local
currencies. To date, such exchange fluctuations have not had a
material impact on our financial condition or results of
operations. We do not hedge foreign currency exchange rate
risk.
Our operating results are subject to
risk from interest rate fluctuations on our Senior Credit Facility, which
carries variable interest rates. As of December 29, 2007, our
outstanding debt aggregated approximately $341.5 million, of which $93.4 million
bore interest at a variable rate. An increase or decrease of 1% in
the applicable rate would increase or decrease our annual interest cost by $0.9
million, exclusive of variable rate debt subject to our swap and collar
agreements, and could have an adverse effect on our net (loss) income and cash
flow.
OTHER
RISKS
We enter into various purchase order
commitments with full-package suppliers. We can cancel these
arrangements, although in some instances, we may be subject to a termination
charge reflecting a percentage of work performed prior to
cancellation. As we rely exclusively on our full-package global
sourcing network, we could incur more of these termination charges, which could
increase our cost of goods sold and have a material impact on our
business.
CARTER’S,
INC.
To the
Board of Directors and Stockholders of Carter's, Inc.:
In our
opinion, the consolidated financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of Carter's,
Inc. and its subsidiaries at December 29, 2007 and December 30, 2006,
and the results of their operations and
their cash flows
for each of the three years in the period ended December 29, 2007 in
conformity with accounting principles generally accepted in the United States of
America. Also in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 29,
2007, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company's management
is responsible for these financial statements, for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in
Management's Report on Internal Control over Financial Reporting appearing under
Item 9A. Our responsibility is to express opinions on these financial
statements and on the Company's internal control over financial reporting based
on our integrated audits. We conducted our audits in accordance with
the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements are free
of material misstatement and whether effective internal control over financial
reporting was maintained in all material respects. Our audits of the
financial statements included examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. Our audit of
internal control over financial reporting included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audits provide a reasonable
basis for our opinions.
As
discussed in Note 6 to the consolidated financial statements, the Company
changed the manner in which it accounts for stock-based compensation in
2006.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and
(iii) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
/s/
PricewaterhouseCoopers LLP
Stamford,
Connecticut
February
27, 2008
CARTER’S,
INC.
(dollars
in thousands, except for share data)
|
|
|
December
29,
|
|
|
December
30,
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash
equivalents
|
|
$ |
49,012 |
|
|
$ |
68,545 |
|
|
Accounts
receivable, net of reserve for doubtful accounts of $4,743 in fiscal 2007
and $3,316 in fiscal 2006
|
|
|
119,707 |
|
|
|
110,615 |
|
|
Finished
goods inventories,
net
|
|
|
225,494 |
|
|
|
193,588 |
|
|
Prepaid
expenses and other current
assets
|
|
|
9,093 |
|
|
|
7,296 |
|
|
Assets
held for
sale
|
|
|
6,109 |
|
|
|
-- |
|
|
Deferred
income
taxes
|
|
|
24,234 |
|
|
|
22,377 |
|
|
Total
current
assets
|
|
|
433,649 |
|
|
|
402,421 |
|
|
Property,
plant, and equipment,
net
|
|
|
75,053 |
|
|
|
87,940 |
|
|
Tradenames
|
|
|
308,233 |
|
|
|
322,233 |
|
|
Cost
in excess of fair value of net assets
acquired
|
|
|
136,570 |
|
|
|
279,756 |
|
|
Licensing
agreements, net of accumulated amortization of $10,185 in fiscal 2007 and
$6,205 in fiscal 2006
|
|
|
8,915 |
|
|
|
12,895 |
|
|
Deferred
debt issuance costs,
net
|
|
|
4,743 |
|
|
|
5,903 |
|
|
Leasehold
interests, net of accumulated amortization of $1,149 in fiscal 2007 and
$682 in fiscal 2006
|
|
|
684 |
|
|
|
1,151 |
|
|
Other
assets
|
|
|
6,821 |
|
|
|
10,892 |
|
|
Total
assets
|
|
$ |
974,668 |
|
|
$ |
1,123,191 |
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
Current
maturities of long-term
debt
|
|
$ |
3,503 |
|
|
$ |
2,627 |
|
|
Accounts
payable
|
|
|
56,589 |
|
|
|
70,310 |
|
|
Other
current
liabilities
|
|
|
46,666 |
|
|
|
63,580 |
|
|
Total current
liabilities
|
|
|
106,758 |
|
|
|
136,517 |
|
|
Long-term
debt
|
|
|
338,026 |
|
|
|
342,405 |
|
|
Deferred
income
taxes
|
|
|
113,706 |
|
|
|
125,784 |
|
|
Other
long-term
liabilities
|
|
|
34,049 |
|
|
|
22,994 |
|
|
Total
liabilities
|
|
|
592,539 |
|
|
|
627,700 |
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
|
Preferred
stock; par value $.01 per share; 100,000 shares authorized; none issued or
outstanding at December 29, 2007 and December 30, 2006
|
|
|
-- |
|
|
|
-- |
|
|
Common
stock, voting; par value $.01 per share; 150,000,000 shares authorized;
57,663,315 and 58,927,280 shares issued and outstanding at December 29,
2007 and December 30, 2006, respectively
|
|
|
576 |
|
|
|
589 |
|
|
Additional
paid-in
capital
|
|
|
232,356 |
|
|
|
275,045 |
|
|
Accumulated
other comprehensive
income
|
|
|
2,671 |
|
|
|
5,301 |
|
|
Retained
earnings
|
|
|
146,526 |
|
|
|
214,556 |
|
|
Total
stockholders’
equity
|
|
|
382,129 |
|
|
|
495,491 |
|
|
Total
liabilities and stockholders’
equity
|
|
$ |
974,668 |
|
|
$ |
1,123,191 |
|
The
accompanying notes are an integral part of the consolidated financial
statements
CARTER’S,
INC.
(dollars
in thousands, except per share data)
|
|
|
For
the fiscal years ended
|
|
|
|
|
December
29,
|
|
|
December
30,
|
|
|
December
31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
1,412,246 |
|
|
$ |
1,343,467 |
|
|
$ |
1,121,358 |
|
|
Cost
of goods sold
|
|
|
928,996 |
|
|
|
854,970 |
|
|
|
725,086 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
483,250 |
|
|
|
488,497 |
|
|
|
396,272 |
|
|
Selling,
general, and administrative expenses
|
|
|
359,826 |
|
|
|
352,459 |
|
|
|
288,624 |
|
|
Intangible
asset impairment (Note 2)
|
|
|
154,886 |
|
|
|
-- |
|
|
|
-- |
|
|
Closure
costs
|
|
|
5,285 |
|
|
|
91 |
|
|
|
6,828 |
|
|
Royalty
income
|
|
|
(30,738 |
) |
|
|
(29,164 |
) |
|
|
(20,426 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
(loss) income
|
|
|
(6,009 |
) |
|
|
165,111 |
|
|
|
121,246 |
|
|
Interest
income
|
|
|
(1,386 |
) |
|
|
(1,914 |
) |
|
|
(1,322 |
) |
|
Loss
on extinguishment of debt
|
|
|
-- |
|
|
|
-- |
|
|
|
20,137 |
|
|
Interest
expense
|
|
|
24,465 |
|
|
|
28,837 |
|
|
|
24,564 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income before income taxes
|
|
|
(29,088 |
) |
|
|
138,188 |
|
|
|
77,867 |
|
|
Provision
for income taxes
|
|
|
41,530 |
|
|
|
50,968 |
|
|
|
30,665 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$ |
(70,618 |
) |
|
$ |
87,220 |
|
|
$ |
47,202 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net (loss) income per common share
|
|
$ |
(1.22 |
) |
|
$ |
1.50 |
|
|
$ |
0.82 |
|
|
Diluted
net (loss) income per common share
|
|
$ |
(1.22 |
) |
|
$ |
1.42 |
|
|
$ |
0.78 |
|
|
Basic
weighted-average number of shares outstanding
|
|
|
57,871,235 |
|
|
|
57,996,241 |
|
|
|
57,280,504 |
|
|
Diluted
weighted-average number of shares outstanding
|
|
|
57,871,235 |
|
|
|
61,247,122 |
|
|
|
60,753,384 |
|
The
accompanying notes are an integral part of the consolidated financial
statements
CARTER’S,
INC.
(dollars
in thousands)
|
|
|
For
the fiscal years ended
|
|
|
|
|
December
29,
|
|
|
December
30,
|
|
|
December
31,
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$ |
(70,618 |
) |
|
$ |
87,220 |
|
|
$ |
47,202 |
|
|
Adjustments
to reconcile net (loss) income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
|
29,919 |
|
|
|
26,489 |
|
|
|
21,912 |
|
|
Non-cash intangible asset
impairment charges
|
|
|
154,886 |
|
|
|
-- |
|
|
|
-- |
|
|
Loss on extinguishment of
debt
|
|
|
-- |
|
|
|
-- |
|
|
|
20,137 |
|
|
Amortization of debt issuance
costs
|
|
|
1,160 |
|
|
|
2,354 |
|
|
|
2,802 |
|
|
Amortization of inventory
step-up
|
|
|
-- |
|
|
|
-- |
|
|
|
13,900 |
|
|
Accretion of debt
discount
|
|
|
-- |
|
|
|
-- |
|
|
|
40 |
|
|
Non-cash stock-based
compensation expense
|
|
|
3,601 |
|
|
|
5,942 |
|
|
|
1,824 |
|
|
Non-cash closure
costs
|
|
|
2,450 |
|
|
|
-- |
|
|
|
113 |
|
|
Loss (gain) on sale of
property, plant, and equipment
|
|
|
690 |
|
|
|
118 |
|
|
|
(64 |
) |
|
Income tax benefit from
exercised stock options
|
|
|
(8,230 |
) |
|
|
(9,155 |
) |
|
|
6,590 |
|
|
Deferred income
taxes
|
|
|
(9,630 |
) |
|
|
502 |
|
|
|
380 |
|
|
Effect of changes in operating
assets and liabilities (net of assets acquired and liabilities
assumed):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(9,092 |
) |
|
|
(14,471 |
) |
|
|
275 |
|
|
Inventories
|
|
|
(31,906 |
) |
|
|
(5,134 |
) |
|
|
4,639 |
|
|
Prepaid
expenses and other assets
|
|
|
(1,404 |
) |
|
|
(886 |
) |
|
|
543 |
|
|
Accounts
payable
|
|
|
(13,721 |
) |
|
|
7,181 |
|
|
|
18,561 |
|
|
Other
liabilities
|
|
|
3,882 |
|
|
|
(11,936 |
) |
|
|
(1,587 |
) |
|
Net cash provided by operating
activities
|
|
|
51,987 |
|
|
|
88,224 |
|
|
|
137,267 |
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of OshKosh B’Gosh, Inc., net of cash acquired
|
|
|
-- |
|
|
|
-- |
|
|
|
(309,984 |
) |
|
Capital
expenditures
|
|
|
(21,876 |
) |
|
|
(30,848 |
) |
|
|
(22,588 |
) |
|
Proceeds
from sale of property, plant, and equipment
|
|
|
57 |
|
|
|
348 |
|
|
|
2,860 |
|
|
Sale
of investments
|
|
|
-- |
|
|
|
-- |
|
|
|
229,180 |
|
|
Purchase
of investments
|
|
|
-- |
|
|
|
-- |
|
|
|
(210,825 |
) |
|
Collections
on loan
|
|
|
-- |
|
|
|
-- |
|
|
|
2,954 |
|
|
Net cash used in investing
activities
|
|
|
(21,819 |
) |
|
|
(30,500 |
) |
|
|
(308,403 |
) |
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
on term loan
|
|
|
(3,503 |
) |
|
|
(85,000 |
) |
|
|
(69,968 |
) |
|
Proceeds
from term loan
|
|
|
-- |
|
|
|
-- |
|
|
|
500,000 |
|
|
Proceeds
from revolving loan facility
|
|
|
121,400 |
|
|
|
5,000 |
|
|
|
-- |
|
|
Payments
on revolving loan facility
|
|
|
(121,400 |
) |
|
|
(5,000 |
) |
|
|
-- |
|
|
Payments
on former term loan
|
|
|
-- |
|
|
|
-- |
|
|
|
(71,326 |
) |
|
Payment
of 10.875% Senior Subordinated Notes
|
|
|
-- |
|
|
|
-- |
|
|
|
(113,750 |
) |
|
Payment
of debt redemption premium
|
|
|
-- |
|
|
|
-- |
|
|
|
(14,015 |
) |
|
Payments
of debt issuance costs
|
|
|
-- |
|
|
|
-- |
|
|
|
(10,780 |
) |
|
Share
repurchase
|
|
|
(57,467 |
) |
|
|
-- |
|
|
|
-- |
|
|
Income
tax benefit from exercised stock options
|
|
|
8,230 |
|
|
|
9,155 |
|
|
|
-- |
|
|
Proceeds
from exercise of stock options
|
|
|
3,039 |
|
|
|
2,390 |
|
|
|
1,986 |
|
|
Net cash (used in) provided by
financing activities
|
|
|
(49,701 |
) |
|
|
(73,455 |
) |
|
|
222,147 |
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(19,533 |
) |
|
|
(15,731 |
) |
|
|
51,011 |
|
|
Cash
and cash equivalents at beginning of period
|