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SECURITIES AND EXCHANGE
COMMISSION
Washington, DC 20549
FORM 10-QA
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 29, 1997 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER - 333-22155
THE WILLIAM CARTER COMPANY
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(Exact name of registrant as specified in charter)
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<S> <C>
MASSACHUSETTS 04-1156680
(STATE OR OTHER JURISDICTION OF INCORPORATION (IRS EMPLOYER IDENTIFICATION
OR ORGANIZATION) NO.)
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1590 ADAMSON PARKWAY, SUITE 400, MORROW, GEORGIA 30260
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(Address of principal executive offices, including zip code)
(770) 961-8722
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(Registrant's telephone number, including area code)
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(Former name, former address and former
fiscal year, if changed since last report)
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 No X
Applicable only to corporate issuers:
As of May 20, 1997, there were 1,000 shares of Common Stock outstanding.
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FORM 10-QA
THE WILLIAM CARTER COMPANY
PAGE
PART I.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 3
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements which involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in these forward-looking statements. The Company
undertakes no obligation to release publically any revisions to these
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of anticipated or unanticipated events.
RESULTS OF OPERATIONS
Three Months Ended March 29, 1997 Compared to Three Months Ended
March 30, 1996.
In the first quarter of 1997, consolidated net sales increased $4.9
million (7.0%) to $75.2 million from $70.3 million in the first quarter of
1996. The Company's wholesale sales increased $0.7
million (1.5%) to approximately $46.2 million in the first quarter of 1997
from $45.4 million in the first quarter of 1996. Regular priced wholesale
sales were $41.3 million or $0.1 million lower than the first quarter of 1996
due to a higher level of demand for early Spring shipments in the fourth
quarter of 1996. The increase in wholesale sales in the first quarter of 1997
was attributed to off-price sales (sales at 25% or more off regular wholesale
sales prices) which were $4.9 million, or $0.8 million higher than off-price
sales in the first quarter of 1996. Off-price sales for fiscal year 1997 are
expected to be lower than fiscal year 1996.
The Company's retail store sales were approximately $27.1 million for the
first quarter of 1997, which represented an increase of $2.3 million (9.1%)
compared to the first quarter of 1996. Comparable store sales decreased 1.6%
in the first quarter of 1997 compared to the first quarter of 1996. This
decrease was due primarily to a less aggressive markdown plan in the first
quarter of 1997, and the reduction of certain higher-priced, but lower margin,
product lines including outerwear and certain playwear categories. During the
first quarter of 1997, the Company opened one retail outlet store which brought
the total number of outlet stores operating as of March 29, 1997 to 136 as
compared to 120 as of March 30, 1996.
Management is addressing the comparable store sales decline by improving
product mix; emphasizing core layette and sleepwear products; improving store
layouts; assessing location, demographics and stores sizes; and upgrading
management and retailing skills at corporate, regional and store levels.
Although management believes that such improvements have slowed the rate of
decline in comparable store results, comparable store sales for the fiscal
year 1997 are expected to be lower than fiscal year 1996.
The Company's gross profit increased $4.8 million (21.1%) to $27.4
million in the first quarter of 1997 from $22.6 million in the first quarter
of 1996. Gross profit as a percentage of net sales in the first quarter of
1997 increased to 36.4% from 32.2% in the first quarter of 1996. This
increase resulted primarily from pricing improvements in the Company's
wholesale and retail business; improvement in margins from off-price sales;
the maturing effect of the Company's three off-shore sewing plants; higher
utilization of internal manufacturing capacity, particularly in the Company's
textile operations; and the change in the retail store product mix toward
higher margin sleepwear and layette products.
Selling, general and administrative expenses for the first quarter of
1997 increased 16.3% to $26.4 million from $22.7 million in the first quarter
of 1996. Selling, general and administrative expenses as a percentage of net
sales increased to 35.1% in the first quarter of 1997 from 32.3% in the first
quarter of 1996. This increase in selling, general and administrative
expenses as a percentage of net sales was attributable to the costs of
amortization of intangible assets and prepaid management fees recorded in
connection with the Acquisition; comparable store sales declines experienced
by the Company's retail outlet stores; higher retail store expenses
associated with 16 additional stores opened since the end of the first
quarter of 1996; and additional expenses associated with establishing a new
retail management team.
Operating income for the first quarter of 1997 was $1.0 million compared
to a loss of $0.1 million in the first quarter of 1996. This increase
reflects the net result from improvements in gross margin and increases in
selling, general and administrative expenses described above.
3
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Interest expense in the first quarter of 1997 increased to $4.0 million
from $2.2 million in the first quarter of 1996. This increase reflects higher
interest expense on additional indebtedness resulting from the Acquisition.
Average revolver borrowings during the first quarter of 1997 were $2.8
million compared to $5.3 million in the first quarter of 1996. At March 29,
1997, outstanding debt aggregated $147.0 million.
The Company recorded an income tax benefit of $1.5 million in the first
quarter of 1997 compared to an income tax benefit of $0.8 million in the
first quarter of 1996. This increase was due to higher pretax losses in the
first quarter of 1997 resulting principally from higher interest costs on
additional indebtedness recorded in connection with the Acquisition. The
Company's effective tax rate was approximately 48.9% during the first quarter
of 1997 compared to 36.4% during the first quarter of 1996. The Company's
first quarter 1997 tax rate was impacted by goodwill, recorded in connection
with the Acquisition, which was not deductible for tax purposes.
As a result of the factors described above, the Company reported a net
loss of $1.5 million in the first quarter of 1997 compared to a net loss of
$1.4 million in the first quarter of 1996.
FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
The Company has financed its working capital, capital expenditures and
debt service requirements primarily through internally generated cash flow,
in addition to funds borrowed under the Company's revolving credit facility.
Net accounts receivable at March 29, 1997 were $21.2 million compared to
$20.0 million at March 30, 1996. This increase reflects the higher levels of
wholesale revenues in the first quarter of 1997. The net increase of $0.7
million in wholesale sales in the first quarter of 1997 includes a $3.1
million increase in March 1997 wholesale sales compared to March 1996
wholesale sales. The Company improved the number of days sales outstanding as
of March 29, 1997 to 37 days from 39 days as of March 30, 1996. Due to the
seasonal nature of the Company's operations, the net accounts receivable
balance at March 29, 1997 is not comparable to the net accounts receivable
balance at December 28, 1996.
Inventories at March 29, 1997 were $82.6 million compared to $99.9
million at March 30, 1996. This decrease reflects management's efforts to
reduce inventories by moderating production plans, the benefits derived from
investments in production planning systems, the aggressive sell-off of excess
finished goods through "off-price" secondary markets and the reduction in
scope of certain lower margin product offerings in the Company's retail
outlet stores. The Company has achieved a net reduction in inventory levels
despite higher levels of inventory required to support increases in its sales
plans. Due to the seasonal nature of the Company's operations, inventories at
March 29, 1997 are not comparable to inventories at December 28, 1996.
Improvements in production planning and reporting have been made possible
with new information systems installed in the first quarter of fiscal 1996,
as well as with the implementation of an automatic replenishment system which
was fully functioning at the retail stores as of August 1996. In addition,
the Company continues to aggressively reduce the scope of its product
offerings and reduce the amount of open-market purchases, which will help
mitigate the Company's exposure to excess finished goods and will allow the
Company to continue moderating inventory levels prospectively.
4
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS(CONTINUED)
The Company invested $1.0 million and $0.6 million in capital
expenditures during the first quarter of 1997 and 1996, respectively. The
Company plans to invest a total of $14.0 million in capital expenditures in
1997.
The Company incurred additional indebtedness in connection with the
Acquisition. At March 29, 1997, the Company had $147.0 million of debt
outstanding, consisting of $100.0 million of 10 3/8% Series A Senior
Subordinated Notes, and $45.0 million in term loan borrowings and $2.0
million in revolver borrowings under the Senior Credit Facility. At March 29,
1997, the Company had approximately $43.8 million of financing available under
the revolving credit portion of the Senior Credit Facility, including
approximately $4.2 million of outstanding letters of credit.
The Company believes that cash generated from operations, together with
availability under the revolving portion of the Senior Credit Facility, will
be adequate to meet its debt service requirements, capital expenditures and
working capital needs for the foreseeable future, although no assurance can
be given in this regard.
On April 23, 1997, the Company's Board of Directors declared a semiannual
dividend of 12% on the $20.0 million of redeemable preferred stock to be paid
on May 1, 1997. The Company intends to pay a similar dividend on November 1,
1997.
EFFECTS OF INFLATION
The Company is affected by inflation primarily through the purchase of
raw material, increased operating costs and expenses, and higher interest
rates. The effects of inflation on the Company's operations have not been
material in recent years.
SEASONALITY
The Company experiences seasonal fluctuations in its sales and
profitability, with generally lower sales and gross profit in the first and
second quarters of its fiscal year. The Company believes that seasonality of
sales and profitability is a factor that affects the baby and children's
apparel industry generally and is primarily due to retailers' emphasis on
Fall and Holiday sales, including back to school promotions, which results in
higher sales and profitability in the third and fourth quarters.
Accordingly, the results of operations for the three month period ended
March 29, 1997 are not indicative of the results to be expected for the full
year.
5
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE WILLIAM CARTER COMPANY
Date: May 21, 1997 /s/ FREDERICK J. ROWAN, II
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Frederick J. Rowan, II
Chairman of the Board, President,
Chief Executive Officer and Director
/s/ JAY A. BERMAN
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Jay A. Berman
Senior Vice President, Treasurer, Chief
Financial Officer and Director
6
