form10_k.htm

 


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-K
 
x        ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2011

OR
 
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
      FROM ______ TO ______
    

 
Commission file number:
001-31829

CARTER’S, INC.
 (Exact name of Registrant as specified in its charter)

Delaware
13-3912933
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)

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:

TITLE OF EACH CLASS
 
NAME OF EACH EXCHANGE ON WHICH REGISTERED:
Carter’s, Inc.’s common stock
 
New York Stock Exchange
par value $0.01 per share
 
 

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 whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).  Yes x  No 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.  x
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (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 July 1, 2011 (the last business day of our most recently completed second quarter) was $1,776,721,299.

There were 58,884,166 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 29, 2012.
 
 
 
 


 


DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A relating to the Annual Meeting of Shareholders of Carter’s, Inc., to be held on May 17, 2012, will be incorporated by reference in Part III of this Form 10-K.  Carter’s, Inc. intends to file such proxy statement with the Securities and Exchange Commission not later than 120 days after its fiscal year ended December 31, 2011.
 
 
 
 
 
 
 
 
 

 


 
CARTER’S, INC.

 
INDEX TO ANNUAL REPORT ON FORM 10-K
     
 
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2011
     
         
PART I
   
Page
 
Item 1:
Business
    1  
Item 1A:
Risk Factors
    7  
Item 1B:
Unresolved Staff Comments
    12  
Item 2:
Properties
    12  
Item 3:
Legal Proceedings
    12  
Item 4:
Mine Safety Disclosures
    13  
PART II
         
Item 5:
Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
    14  
Item 6:
Selected Financial Data
    16  
Item 7:
Management’s Discussion and Analysis of Financial Condition and Results of Operations
    19  
Item 7A:
Quantitative and Qualitative Disclosures about Market Risk
    35  
Item 8:
Financial Statements and Supplementary Data
    36  
Item 9:
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    72  
Item 9A:
Controls and Procedures
    72  
Item 9B:
Other Information
    72  
PART III
         
Item 10:
Directors and Executive Officers of the Registrant
    73  
Item 11:
Executive Compensation
    73  
Item 12:
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    73  
Item 13:
Certain Relationships and Related Transactions
    73  
Item 14:
Principal Accountant Fees and Services
    73  
PART IV
         
Item 15:
Exhibits and Financial Statement Schedules
    74  
SIGNATURES
    76  
CERTIFICATIONS
       

 
 

 

PART I

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 are expressed as a percentage of total retail sales of a market.  The baby and young children’s apparel market includes apparel products for ages zero to seven.  NPD data is based upon Consumer Panel Track SM (consumer-reported sales) calibrated with selected retailers' point of sale data.  Please note that NPD revised its Fashion Consumer Tracker methodology, effective with the most recent data release for annual 2011 and restated annual 2010 data.  NPD data cited in prior Annual Reports on Form 10-K are based on an alternate methodology no longer employed by NPD and are not comparable to current year presentation.
 
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.
 
ITEM 1. BUSINESS

GENERAL

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.  Established in 1865, our Carter’s brand is recognized and trusted by consumers for high-quality apparel for children sizes newborn to seven.  In fiscal 2005, we acquired OshKosh B’Gosh.  Established in 1895, OshKosh is a well-known brand, trusted by consumers for its line of apparel for children sizes newborn to 12.  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 use a business model that we believe has multiple platforms for growth and is focused on high volume and productivity.  Our Carter’s, OshKosh, and related brands are sold domestically to national department stores, chain and specialty stores, discount retailers, internationally, and online.  As of December 31, 2011, we operated 359 Carter’s and 170 OshKosh outlet and brand retail stores in the United States and 65 retail stores in Canada.  We believe each of our brands has its own unique positioning in the marketplace.  In the U.S., our brands compete in the $22 billion children’s apparel market, for children ages zero to seven, with our Carter’s brand achieving the #1 branded position with a 14.1% market share and our OshKosh brand having a 2.2% 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 across various channels, socio-economic groups, and geographic regions.
 
On June 30, 2011, Northstar Canadian Operations Corp. (“Northstar”), a newly formed Canadian corporation and a wholly owned subsidiary of The William Carter Company (a wholly owned subsidiary of Carter’s, Inc.), purchased all of the outstanding shares of capital stock of the entities comprising Bonnie Togs (the “Acquisition”), a Canadian specialty retailer focused exclusively on the children’s apparel and accessories marketplace.  Prior to the Acquisition, Bonnie Togs was Carter’s principal licensee in Canada since 2007 and was a significant international licensee of the Company.  The operating results for the Canadian business have been consolidated in the Company’s operating results commencing on July 1, 2011.
 
In light of the Acquisition, the Company reevaluated and realigned certain of its reportable segments.  As a result, the Company’s reportable segments include a new international segment reflecting our new Canadian operations, our existing international wholesale business, and royalty income from our international licensees.  In addition, the Company combined its historical mass channel segments with its wholesale segments.  The Company believes these changes in segment reporting better reflect how its five business segments, Carter’s wholesale, Carter’s retail, OshKosh retail, OshKosh wholesale, and international, are managed and how each segment’s performance is evaluated.  Effective October 1, 2011, the Company changed its segment presentation to reflect this new structure, and recast all prior periods presented to conform to the new presentation.
 
The Company is a Delaware corporation.  The Company and its predecessors have been doing business since 1865.  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.


 
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OUR BRANDS, PRODUCTS, AND DISTRIBUTION CHANNELS

CARTER’S BRANDS – U.S.

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, through our Carter’s retail stores, and online at www.carters.com.  Additionally, we sell our Just One You and Precious Firsts brands at Target and our Child of Mine brands at Walmart.  In fiscal 2011, we sold over 278 million units of Carter’s, Child of Mine, Just One You, and Precious Firsts products in the United States, an increase of approximately 11% from fiscal 2010, through our Carter’s retail stores, to our wholesale customers, and online.  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 approximately 65% of our baby and sleepwear net sales in fiscal 2011 in the United States.  We believe our core apparel products are essential consumer staples, less dependent on changes in fashion trends, and generally supported by a favorable birth rate and other demographic trends.
 
We have cross-functional product teams focused on the development of our Carter’s baby, sleepwear, and playclothes 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 comprehensive collection of lifestyle products, including bedding, hosiery, shoes, room décor, furniture, gear, 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 our exposure to fashion risk and supports efficient operations.  We conduct consumer research as part of our product development process and engage in product testing in our own stores.  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 – U.S.

Our strategy is to drive our brand image as the leader in baby and young children’s apparel and to consistently provide high-quality products at a great value to consumers.  We employ a disciplined merchandising strategy that 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 fixturing and branding packages and advertising with our wholesale customers.  We have invested in display units for our major wholesale customers that more clearly present our core products on their floors to enhance brand and product presentation.  We also strive to provide our wholesale customers with a consistent, high-level of service, including delivering and replenishing products on time to fulfill customer needs.
 
CARTER’S PRODUCTS – U.S.

Baby

Carter’s brand baby products include bodysuits, pants, undershirts, towels, washcloths, receiving blankets, layette gowns, bibs, caps, and booties.  In fiscal 2011, we generated $678.3 million in net sales of these products, representing 32.2% of our consolidated net sales in the United States.
 
Our Carter’s brand is the leading brand in the baby category in the United States.  In fiscal 2011, in the department stores, national chains, outlet, specialty stores, and off-price sales channels, our aggregate Carter’s brand market share in the United States was approximately 23.8% for baby ages zero to two, which represents greater than five 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 Little Layette product line, the largest component of our baby business, provides parents with essential core products and accessories, including value-focused multi-packs.  Our Little Collections product line consists of coordinated baby programs designed for first-time mothers and gift-givers.

 
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Playclothes

Carter’s brand playclothes products include knit and woven cotton apparel for everyday use in sizes three months to seven.  In fiscal 2011, we generated $529.0 million in net sales of these products in the United States, or 25.1%, of our consolidated net sales.  We continue to focus on building our Carter’s brand in the playclothes market by developing a base of essential, high-volume, core products that utilize original print designs and innovative artistic applications.  Our aggregate 2011 Carter’s brand playclothes market share in the United States was approximately 13.1% in the $16 billion department store, national chain, outlet, specialty store, and off-price sales channels.
 
Sleepwear

Carter’s brand sleepwear products include pajamas and blanket sleepers in sizes 12 months to seven.  In fiscal 2011, we generated $310.4 million in net sales of these products in the United States, or 14.7%, 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 2011, in these channels, our Carter’s brand market share was approximately 29.0%, which represents nearly three times the market share of the next largest brand.  As in our baby product line, we differentiate our sleepwear products by offering high-volume, high quality core products with distinctive print designs and artistic applications.

Other Products

Our other product offerings include bedding, outerwear, swimwear, shoes, socks, diaper bags, gift sets, toys, and hair accessories.  In fiscal 2011, we generated $93.0 million in net sales of these other products in our Carter’s retail stores and online, or 4.4%, of our consolidated net sales.
 
Royalty Income
 
       We currently extend our Carter’s, Child of Mine, and Just One You product offerings by licensing these brands to 15 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 lifestyle 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 provide for 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 brand vision of high-quality, core products at attractive values to the consumer.  In addition, we work closely with our wholesale customers and our licensees to gain dedicated floor space for licensed product categories.  In fiscal 2011, our Carter’s brand earned $18.5 million in domestic royalty income.

OSHKOSH BRANDS – U.S.

Under our OshKosh brand, we design, source, and market a broad array of young children’s apparel, primarily for children in sizes newborn to 12.  Our OshKosh brand is currently sold in our OshKosh retail stores, department stores, national chains, specialty stores, through off-price sales channels, and online at www.oshkoshbgosh.com.  In fiscal 2011, we sold approximately 50 million units of OshKosh products in the United States through our retail stores, to our wholesale customers, and online, an increase of approximately 3% over fiscal 2010.  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 represents a significant long-term growth opportunity for us, especially in the $16 billion young children’s playclothes market in the United States.  We continue to focus on our core product development and marketing disciplines, improving the productivity of our OshKosh retail stores, investing in new employees and talent development, leveraging our relationships with major wholesale accounts, and leveraging our infrastructure and supply chain.

OSHKOSH BRAND POSITIONING – U.S.

We believe our OshKosh brand stands for high-quality, authentic playclothes products for children sizes newborn to 12.  Our core OshKosh brand products include denim, overalls, t-shirts, fleece, and other playclothes for children.  Our OshKosh brand is generally positioned towards an older segment (sizes two to seven) and at slightly higher average prices than our Carter’s brand.  We believe our OshKosh brand has significant brand name recognition, which consumers associate with rugged, durable, and active playclothes for young children.

 
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OSHKOSH PRODUCTS – U.S.

Playclothes

Our OshKosh brand is best known for its playclothes products.  In fiscal 2011, we generated $303.9 million in net sales of OshKosh brand playclothes products in the United States, which accounted for approximately 14.4% of our consolidated net sales.  OshKosh brand playclothes products include denim apparel products with multiple wash treatments and coordinating garments, overalls, woven bottoms, knit tops, and playclothes products for everyday use in sizes newborn to 12.  We plan to grow this business by strengthening our product offerings, improving product value, reducing product complexity, and leveraging our strong customer relationships and global supply chain expertise.  We believe our OshKosh brand represents a significant opportunity for us to increase our share in the playclothes category as the $16 billion young children’s playclothes market in the United States is highly fragmented.  In fiscal 2011, this market was more than five times the size of the baby and sleepwear markets combined.

Other Products

The remainder of our OshKosh brand product offerings include baby, sleepwear, outerwear, shoes, hosiery, and accessories.  In fiscal 2011, we generated $58.9 million in net sales of these other products in our OshKosh retail stores and online, which accounted for 2.8% of our consolidated net sales.
 
Royalty Income

We partner with a number of domestic licensees to extend the reach of our OshKosh brand.  We currently have six domestic licensees selling apparel and accessories.  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, and accessories.  In fiscal 2011, we earned approximately $10.3 million in domestic royalty income from our OshKosh brands.

INTERNATIONAL

Our international segment includes our new Canadian retail and wholesale operations, our existing international wholesale sales, and royalty income from our international licensees.  Collectively, our international segment operates in approximately 50 countries.  Our international sales of $136.2 million, or 6.5% of consolidated net sales, more than tripled in fiscal 2011 due to six months of incremental sales from the June 30, 2011 acquisition of Bonnie Togs and higher international wholesale sales.  As of December 31, 2011, we operated 65 retail stores in Canada.
 
We partner with 24 licensees to sell the Carter’s and OshKosh brands internationally in approximately 35 countries.   In fiscal 2011, our OshKosh international licensees generated retail sales of approximately $124.0 million, on which we earned approximately $7.1 million in royalty income.  In fiscal 2011, our international licensees generated Carter’s brand retail sales of $26.3 million on which we earned $1.3 million in royalty income.

DISTRIBUTION CHANNELS

Business segment financial information for our five business segments:  Carter’s wholesale, Carter’s retail, OshKosh retail, OshKosh wholesale, and international, is contained in Item 8 – “Financial Statements and Supplementary Data,” Note 15 – “Segment Information” to the accompanying audited consolidated financial statements.
 
As described above, we sell our products through the wholesale channel, through our retail stores in the U.S. and Canada, and online.
 
Our Carter’s brand wholesale customers include major retailers, such as Costco, JCPenney, Kohl’s, Macy’s, Sam’s Club, Target, Toys “R” Us, and Walmart.  Our sales professionals work with these customers 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 replenishment reorder plan for core basics.  This allows us to plan our sourcing requirements and benefits both us and our wholesale customers by maximizing our customers’ in-stock positions, thereby improving sales and profitability.  We intend to drive continued growth with our wholesale customers through our focus on managing our key accounts’ business through product mix, fixturing, brand presentation, advertising, and frequent meetings with the senior management of our major wholesale customers.

 
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Our OshKosh brand wholesale customers include major retailers, such as Belk, Bon-Ton, Fred Meyer, JCPenney, Kohl’s, and Sears.  We continue to work with our customers 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.
 
In Canada we sell our products in our Bonnie Togs retail stores, our co-branded Carter's / OshKosh stores, and through the wholesale channel.
 
As of December 31, 2011, we operated 359 Carter’s retail stores in the United States, of which 180 were brand stores and 179 were outlet stores.  These stores carry a complete assortment of first-quality baby and young children’s apparel, accessories, and gift items.  Our stores average approximately 4,500 square feet per location and are distinguished by an easy, consumer-friendly shopping environment.  Our brand stores are generally located in high-traffic, strip centers located in or near major cities.  We believe our brand strength and our assortment of core products have 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.
 
As of December 31, 2011, we operated 170 OshKosh retail stores in the United States, of which 151 were outlet stores and 19 were brand stores.  These stores carry a wide assortment of young children’s apparel, accessories, and gift items and average approximately 4,700 square feet per location.
 
As of December 31, 2011, we operated 65 retail stores in Canada, selling products under the Carter's and OshKosh brands as well as other private label and national brands.  These stores average approximately 5,500 square feet per location, slightly larger than our U.S. based stores, and offer a similar product assortment, localized for climate differences.

Store Expansion

We use 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 brand store locations to our real estate portfolio.
 
GLOBAL SOURCING NETWORK AND PRODUCT COSTS       
 
       We have significant experience in sourcing products internationally, primarily from Asia, with expertise that includes the ability to evaluate vendors, familiarity with foreign supply sources, and experience with sourcing logistics particular to Asia.  We also have relationships with both leading and certain specialized sourcing agents in Asia.  One sourcing agent currently manages approximately 83% of our inventory purchases.  Our product costs can vary depending on the underlying cost of raw materials, such as cotton and polyester, and the level of labor and transportation costs.  The availability of raw materials impacts the cost of our products.  Our sourcing network consists of over 90 vendors located in over 15 countries.  We believe that our sourcing arrangements are sufficient to meet our current operating requirements and provide capacity for growth.
 
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 channel include Disney, Gerber, and private label product offerings.  Our primary competitors in the retail store channel include Disney, Gymboree, Old Navy, The Children’s Place, and The Gap.  Most retailers, including our customers, have significant private label product offerings that compete with our products.  Because of the highly-fragmented nature of the industry, we also compete with many small manufacturers and retailers.  We believe that the strength of our Carter’s, OshKosh, and related brand names combined with our breadth of product offerings 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.

 
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TRADEMARKS, COPYRIGHTS, AND LICENSES

We own many copyrights and trademarks, including Carter’s®, OshKosh®, OshKosh B’gosh®, Child of Mine®, Just One You®, Precious Firsts™, Little Collections™, and Little Layette®, 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 You, Precious Firsts, 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, shoes, boots, slippers, diaper bags, furniture, room décor, bedding, giftwrap, baby books, party goods, and toys.
 
EMPLOYEES

As of December 31, 2011, we had 8,684 employees, 2,619 of whom were employed on a full-time basis and 6,065 of whom were employed on a part-time basis.  We have no unionized employees.  We have had no labor-related work stoppages and believe that our labor relations are good.

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.  On our website, we make available, free of charge, our Annual Reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, director and officer reports on Forms 3, 4, and 5, and any amendments to these reports, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (“SEC”).  Our SEC reports can be accessed through the investor relations section of our website.  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.


 
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ITEM 1A. RISK FACTORS:

You should carefully consider each of the following risk factors as well as the other information contained in this Annual Report on Form 10-K and other filings with the SEC 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 2011, we derived approximately 26% of our consolidated net sales from our top four customers.  No one customer represented 10% or more of our consolidated net sales in fiscal 2011.  We do not enter into long-term sales contracts with our major customers, relying instead on long-standing relationships 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 their business with us or terminate 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 and timely evaluate and adapt our products to changes in consumers’ tastes and preferences or 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 effect on our 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.
 
In addition, 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 generate royalty income from the sale of licensed products that bear its Carter’s, Just One You, Precious Firsts, Child of Mine, OshKosh, OshKosh Est. 1895, Genuine Kids, and related trademarks.  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.
 
We may incur substantial costs as a result of litigation, investigations or other proceedings, including those related to our previously filed restatements.

We are currently involved in litigation matters and investigations and may be subject to additional actions in the future.  As disclosed in the Company’s amended and restated Annual Report on Form 10-K for fiscal 2008, we announced on November 10, 2009, that our Audit Committee, with the assistance of outside counsel, had commenced a review of customer margin support provided by the Company and an investigation into undisclosed margin support commitments and related matters.  The Company self-reported information concerning this investigation to the SEC in the fourth quarter of fiscal 2009 and has also been informed that the United States Attorney’s Office is conducting an investigation into this matter.  In December 2010, the Company and the SEC entered into a non-prosecution agreement pursuant to which the SEC agreed not to charge the Company with any violations of the federal securities laws, commence any enforcement action against the Company, or require the Company to pay any financial penalties in connection with the SEC’s investigation of customer margin support provided by the Company, conditioned upon the Company’s continued cooperation with the SEC’s investigation and with any related enforcement proceedings.  The Company has incurred, and expects to continue to incur, substantial expenses for legal and accounting services due to the SEC and United States Attorney’s Office investigations and any resulting litigation.  These matters have diverted in the past, and may continue to divert in the future, management’s time and attention away from operations and cause the Company to continue to incur substantial costs.  The Company also may bear additional costs to the extent it is required, under the terms of organizational documents or under Delaware law, to indemnify former officers of the Company in respect of costs they incur in connection with any proceedings related to these matters.

 
7

 

At this point, the Company is unable to predict the duration, costs, scope or result of these matters.
 
As described in more detail in Part II - Item 1 of this filing, the Company is also currently subject to two class action lawsuits, as well as various other claims and pending or threatened lawsuits in the normal course of our business.  We have only limited amounts of insurance, which may not provide coverage to offset a negative judgment or a settlement payment, which could be substantial.  We may be unable to obtain additional insurance in the future, or we may be unable to do so on favorable terms.  Our insurers may also dispute our claims for coverage.  Further, these lawsuits may result in diversion of management's time and attention, the expenditure of large amounts of cash on legal fees and other expenses, and injury to our reputation, all of which may adversely affect our operations and financial condition.  As further described in more detail in Part II - Item 1 of this filing, on December 21, 2011, the Company reached an agreement to settle the class action lawsuits, and on January 19, 2012 the Court granted preliminary approval of the settlement and ordered that notice be provided to the proposed settlement class.  The Court has scheduled a hearing for May 31, 2012 to determine whether the settlement will receive final approval.

The Company’s databases containing 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 banks and payment 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 payment card industry, we may be subject to fines, restrictions, and expulsion from card acceptance programs, which could adversely affect our retail operations.

Increased production costs and deflationary pressures on our selling prices may adversely affect our results.
 
The Company’s product costs, driven by inflation in significant component costs such as cotton, polyester, labor, fuel, and transportation, have increased and may remain at elevated levels or increase further.  Our product costs have also been adversely impacted by the devaluation of the U.S. dollar relative to foreign currencies.  These inflationary and currency risk factors have resulted in higher costs of goods sold and inventory values.  Although we have raised our selling prices on many of our products, we do not expect in the near term to be able to fully absorb these cost increases, and we expect our profitability to continue to be adversely impacted.  In recent years, the Company has also experienced deflationary pressure on its selling prices, in part driven by intense price competition in the young children’s apparel industry.
 
Our business is sensitive to overall levels of consumer spending, particularly in the young children’s apparel segment.

Consumers’ demand for young children’s apparel, specifically brand name apparel products, is impacted by the overall level of consumer spending.  Discretionary consumer spending is impacted by employment levels, gasoline and utility costs, business conditions, availability of consumer credit, tax rates, interest rates, levels of consumer indebtedness, and overall levels of consumer confidence.  Recent and further reductions in the level of discretionary spending may have a material adverse effect 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, unfavorable economic conditions, 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 Asia, coordinated by our sourcing 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:

 
8

 


·financial instability of one or more of our major vendors;
 
·political instability or other international events resulting in the disruption of trade in foreign countries from which we source our products;
 
·increases in transportation costs as a result of increased fuel prices or significant changes in the relationship between carrier capacity and shipper demand;
 
·interruptions in the supply, or increases in the cost of raw materials, including cotton, fabric, and trim items;
 
·significant changes in the cost of labor in our sourcing locations;
 
·the imposition of new regulations relating to imports, duties, taxes, and other charges on imports;
 
·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 the 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, capacity withholding, world trade restrictions, or war;
 
·the application of foreign intellectual property laws;
 
·the ability of our vendors to secure sufficient credit to finance the manufacturing process including the acquisition of raw materials; and
 
·exchange rate fluctuations between the Company’s and/or its subsidiaries’ functional currency and the currencies paid to 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 source all of our products through a network of vendors.  We have limited control over these vendors and we may experience delays, product recalls or loss of revenues if our products do not meet our quality standards or regulatory requirements.
 
Our vendors, independent manufacturers, and licensees may not continue to provide products that are consistent with our standards.  We have occasionally received, and may in the future continue to receive, shipments of product that fail to conform to our quality control standards.  A failure in our quality control program may result in diminished product quality, which may result in increased order cancellations and returns, decreased consumer demand for our products, or product recalls, any of which may have a material adverse effect on our results of operations and financial condition.  In addition, notwithstanding our strict quality control procedures, because we do not control our vendors, products that fail to meet our standards, or other unauthorized products, could end up in the marketplace without our knowledge.  This could materially harm our brand and our reputation in the marketplace.
 
Our products are subject to regulation of and regulatory standards set by various governmental authorities including the Consumer Product Safety Commission, with respect to quality and safety.  Regulations and standards in this area are currently in place.  These regulations and standards may change from time to time.  Our inability, or that of our vendors, to comply on a timely basis with regulatory requirements could result in significant fines or penalties, which could adversely affect our reputation and sales.  Issues with the quality and safety of merchandise we sell in our stores, regardless of our culpability, or customer concerns about such issues, could result in damage to our reputation, lost sales, uninsured product liability claims or losses, merchandise recalls, and increased costs.

 
9

 

Any significant disruption to our eCommerce business, including order acceptance and processing, order fulfillment, web-hosting, warehousing, and call center operations, could harm our brand and our reputation in the marketplace.

The operation of our eCommerce business depends on the ability to maintain the efficient and uninterrupted operation of online order-taking and fulfillment operations.  We currently rely on a third party to host our eCommerce website, process and manage web orders, warehouse inventory sold through our eCommerce website, fulfill our eCommerce sales to our customers, and operate a call center supporting our eCommerce business, and we intend to transition fulfillment services in-house in the near future.  Any significant disruption in the operations of our eCommerce business, could harm our brand and our reputation in the marketplace.
 
The loss of a sourcing agent could negatively impact our ability to timely deliver our inventory supply and disrupt our business, which may adversely affect our operating results.

One sourcing agent currently manages approximately 83% of our inventory purchases.  Although we believe that other buying agents could be retained, or we could procure some of the inventory directly, the loss of this buying agent could delay our ability to timely receive inventory supply and disrupt our business, which could result in a material adverse effect on our operating results.

We operate in a highly competitive market and the size and resources of some of our competitors may allow them to compete more effectively than we can, resulting in a loss of market share and, as a result, a decrease in revenue and gross profit.

The baby and young children's apparel market is highly competitive.  Both branded and private label manufacturers compete in the baby and young children's apparel market.  Our primary competitors in our wholesale businesses include private label product offerings, Disney, and Gerber.  Our primary competitors in the retail store channel include Disney, Gymboree, Old Navy, The Children’s Place, and The Gap.  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 United States and Canada.  Successful operation of a retail store depends, in part, on the overall ability of the retail location to attract a consumer base sufficient to make store sales volume profitable.  If 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 brand stores do not maintain a sufficient customer base that provides a reasonable sales volume or the Company is unable to negotiate appropriate lease terms for the retail stores, there could be a material adverse impact on the Company’s sales, gross margin, and results of operations.

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.

 
10

 

We face various risks arising from our recent acquisition of Bonnie Togs, a Canadian children’s apparel retailer. We may fail to realize growth opportunities and other benefits from the acquisition of Bonnie Togs, and we may fail to successfully integrate the Bonnie Togs business with our existing business, either of which could adversely affect our financial condition and results of operations.

We may fail to realize growth opportunities and other benefits from the acquisition of Bonnie Togs.  We have no prior experience operating a retail business in Canada, and we may not be as successful in operating and growing this business in Canada as we have been in the United States.  We may be unable to continue existing, or to develop new, vendor and customer relationships, and enhance our position in Canada.  Further, our operations in Canada are subject to the various risks and uncertainties to which our United States retail operations are subject.  Our ability to successfully integrate Bonnie Togs is subject to risks, including delays or difficulties in completing integration and higher than expected costs.  In connection with the integration efforts, our management’s attention and our resources could be diverted from other business concerns.  If integration difficulties arise, the diversion of attention and resources may be increased.  Any of these may adversely affect our financial condition and results of operations.
 
We may not achieve sales growth plans, cost savings, and other assumptions that support the carrying value of our intangible assets.

As of December 31, 2011, the Company had Carter’s goodwill of $136.6 million, a $220.2 million Carter’s brand tradename asset, an $85.5 million OshKosh brand tradename asset, Bonnie Togs goodwill of $52.1 million, and a $0.4 million Bonnie Togs tradename asset on its consolidated balance sheet.  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.

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.























 
11

 


ITEM 1B. UNRESOLVED STAFF COMMENTS

None

ITEM 2. PROPERTIES

 
Location
 
Approximate floor space in square feet
 
Principal use
Lease expiration date
 
Renewal options
 
Stockbridge, Georgia
    505,000  
Distribution/warehousing
April 2015
 
10 years
 
Hogansville, Georgia
    258,000  
Distribution/warehousing
Owned
    --  
Chino, California
    413,000  
Distribution/warehousing
July 2014
 
2 years
 
Griffin, Georgia
    219,000  
Finance/information technology/benefits administration/rework
Owned
    --  
Fayetteville, Georgia
    30,000  
Wholesale customer service/information technology
September 2020
 
15 years
 
Atlanta, Georgia
    131,000  
Executive offices/Carter’s design and merchandising/marketing
June 2015
 
5 years
 
OshKosh, Wisconsin
    6,400  
Finance/consumer affairs
December 2019
 
5 years
 
Shelton, Connecticut
    64,000  
Finance/retail store administration
February 2019
 
10 years
 
New York, New York
    16,000  
Sales office/showroom
January 2015
    --  
New York, New York
    22,000  
OshKosh design center
January 2022
 
10 years
 
Atlanta, Georgia
    9,842  
OshKosh showroom
December 2012
 
1 year
 
Cambridge, Ontario
    36,500  
Bonnie Togs executive offices/distribution/warehousing
June 2021
 
10 years
 
Cambridge, Ontario
    46,332  
Bonnie Togs distribution/warehousing
May 2014
    --  

        As of December 31, 2011, we operated 529 leased retail stores located primarily in outlet and strip centers across the United States, having an average size of approximately 4,600 square feet.  In addition, we operated 65 leased retail stores in Canada, having an average size of approximately 5,500 square feet.  Generally, the majority of our leases have an average term of ten years.
 
Aggregate lease commitments as of December 31, 2011 for the above leased properties are as follows:  fiscal 2012—$82.0 million; fiscal 2013—$77.9 million; fiscal 2014—$69.9 million; fiscal 2015—$58.0 million; fiscal 2016—$49.7 million, and $163.6 million for the balance of these commitments beyond fiscal 2016.
 
ITEM 3.  LEGAL PROCEEDINGS:

A shareholder class action lawsuit was filed on September 19, 2008 in the United States District Court for the Northern District of Georgia entitled Plymouth County Retirement System v. Carter’s, Inc., No. 1:08-CV-02940-JOF (the “Plymouth Action”).  The Amended Complaint filed on May 12, 2009 in the Plymouth Action asserted claims under Sections 10(b), 20(a), and 20A of the 1934 Securities Exchange Act, and alleged that between February 1, 2006 and July 24, 2007, the Company and certain current and former executives made material misrepresentations to investors regarding the successful integration of OshKosh into the Company’s business, and that the share price of the Company’s stock later fell when the market learned that the integration had not been as successful as represented.  Defendants in the Plymouth Action filed a motion to dismiss the Amended Complaint for failure to state a claim under the federal securities laws on July 17, 2009, and briefing of that motion was complete on October 22, 2009.
 
A separate shareholder class action lawsuit was filed on November 17, 2009 in the United States District Court for the Northern District of Georgia entitled Mylroie v. Carter’s, Inc., No. 1:09-CV-3196-JOF (the “Mylroie Action”).  The initial Complaint in the Mylroie Action asserted claims under Sections 10(b) and 20(a) of the 1934 Securities Exchange Act, and alleged that between April 27, 2004 and November 10, 2009, the Company and certain current and former executives made material misstatements to investors regarding the Company’s accounting for discounts offered to some wholesale customers.  The Court consolidated the Plymouth Action and the Mylroie Action on November 24, 2009 (the “Consolidated Action”).  On March 15, 2010, the plaintiffs in the Consolidated Action filed their amended and consolidated complaint.  The Company filed a motion to dismiss on April 30, 2010, and briefing of the motion was complete on July 23, 2010.
 

 
12

 

On March 16, 2011, the United States District Court for the Northern District of Georgia granted without prejudice the Company’s motion to dismiss all of the claims in the amended and consolidated complaint in the Consolidated Action for failure to state a claim under the federal securities laws.  The plaintiffs filed a second amended and consolidated complaint on July 20, 2011.  On December 21, 2011, the Company reached an agreement to settle the Consolidated Action for an amount which has been paid by the Company’s insurance providers.  The settlement agreement includes no admission of liability or wrongdoing by the Company or by any other defendants and provides for a full and complete release of all related claims that were or could have been brought against the Company, its subsidiaries, and any and all current and former directors, officers, and employees of the Company and its subsidiaries.  On January 19, 2012, the Court granted preliminary approval of the settlement and ordered that notice be provided to the proposed settlement class (as defined in the settlement agreement).  The Court has scheduled a hearing for May 31, 2012 to determine whether the settlement will receive final approval.
 
A shareholder derivative lawsuit was filed on May 25, 2010 in the Superior Court of Fulton County, Georgia, entitled Alvarado v. Bloom, No. 2010-cv-186118 (the “Alvarado Action”).  The Complaint in the Alvarado Action alleged, among other things, that certain current and former directors and executives of the Company breached their fiduciary duties to the Company in connection with the Company’s accounting for discounts offered to some wholesale customers.  The Company was named solely as a nominal defendant against whom the plaintiff sought no recovery.  Pursuant to an agreement among the parties, on February 22, 2012 the parties filed a joint stipulation to dismiss the Alvarado Action without prejudice, which the Court granted later that same day.
 
The Company is subject to various other claims and pending or threatened lawsuits in the normal course of our business. The Company is not currently party to any other legal proceedings that it believes would have a material adverse effect on its financial position, results of operations or cash flows.
 

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable



 
13

 

PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

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 21, 2011 was $42.70.  On that date there were approximately 26,154 holders of record of our common stock.
 
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:

2011
 
High
   
Low
 
First quarter                                                               
  $ 30.26     $ 26.50  
Second quarter                                                               
  $ 32.88     $ 27.72  
Third quarter                                                               
  $ 34.50     $ 27.44  
Fourth quarter                                                               
  $ 41.70     $ 29.92  

2010
 
High
   
Low
 
First quarter                                                               
  $ 31.24     $ 25.42  
Second quarter                                                               
  $ 34.24     $ 25.39  
Third quarter                                                               
  $ 27.17     $ 22.19  
Fourth quarter                                                               
  $ 32.69     $ 23.53  

Share Repurchases

The following table provides information about shares acquired from employees during the fourth quarter of fiscal 2011 to satisfy the required withholding of taxes in connection with the vesting of restricted stock:

Period
 
Total number
of shares
purchased
(1)
   
Average price paid per share
   
Total number of shares purchased as part of publicly announced plans or programs
 
Approximate
dollar value of shares that may
yet be
purchased
under the plans
or programs
                     
October 2, 2011 through October 29, 2011
    --     $ --       --  
Not applicable
                           
October 30, 2011 through November 26, 2011
    355     $ 36.73       --  
Not applicable
                           
November 27, 2011 through December 31, 2011
    13,410     $ 39.78       --  
Not applicable
                           
Total                                                                   
    13,765     $ 39.70       --  
Not applicable

(1)  
All of the shares were surrendered by our employees to satisfy required tax withholding upon the vesting of restricted stock awards.



 
14

 

Share Repurchase Program

During fiscal 2007, the Company’s Board of Directors approved a share repurchase authorization, pursuant to which the Company was authorized to purchase up to $100 million of its outstanding common shares.  During fiscal 2010, the Company’s Board of Directors approved a share repurchase authorization, pursuant to which the Company is authorized to purchase up to an additional $100 million of its outstanding common shares.  As of August 13, 2010, the Company had repurchased outstanding shares in the amount totaling the entire $100 million authorized by the Board of Directors on February 16, 2007.  The timing and amount of any future share repurchases will be determined by the Company’s management, based upon its evaluation of market conditions, share price, other investment priorities, and other factors.
 
The Company did not repurchase any shares of its common stock during fiscal 2011 pursuant to any share repurchase authorization other than the shares of common stock from the Company’s employees to satisfy tax withholding obligations upon vesting of restricted stock to such employees.  During fiscal 2010, the Company repurchased and retired 2,058,830 shares, or approximately $50.0 million, of its common stock at an average price of $24.29 per share.  Since inception of the repurchase program and through fiscal 2011, the Company repurchased and retired 6,658,410 shares, or approximately $141.1 million, of its common stock at an average price of $21.19 per share.  The total remaining capacity under this authorization was approximately $58.9 million as of December 31, 2011.  This authorization has no expiration date. 

DIVIDENDS

Provisions in our revolving 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 unless TWCC and its consolidated subsidiaries meet certain leverage ratio and minimum availability requirements under the credit facility, 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

 
15

 

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth selected financial and other data as of and for the five fiscal years ended December 31, 2011 (fiscal 2011).
 
On June 30, 2011, Northstar Canadian Operations Corp. (“Northstar”), a newly formed Canadian corporation and a wholly owned subsidiary of The William Carter Company (a wholly owned subsidiary of Carter’s, Inc.), purchased all of the outstanding shares of capital stock of the entities comprising Bonnie Togs (the “Acquisition”), a Canadian specialty retailer focused exclusively on the children’s apparel and accessories marketplace.  Prior to the acquisition, Bonnie Togs was Carter’s principal licensee in Canada since 2007 and was a significant international licensee of the Company.  As of December 31, 2011, we operated 65 retail stores in Canada and sold products under the Carter’s and OshKosh brands, as well as other private label and other brands.
 
In light of the Acquisition, the Company reevaluated and realigned certain of its reportable segments.  As a result, the Company’s reportable segments include a new international segment reflecting our new Canadian operations, our existing international wholesale business, and royalty income from our international licensees.  In addition, the Company combined its historical mass channel segments with its wholesale segments.  The Company believes these changes in segment reporting better reflect how its five business segments, Carter’s wholesale, Carter’s retail, OshKosh retail, OshKosh wholesale, and international, are managed and how each segment’s performance is evaluated.  Effective October 1, 2011, the Company changed its segment presentation to reflect this new structure, and recast all prior periods presented to conform to the new presentation.
 
On October 15, 2010, the Company entered into a $375 million ($130 million sub-limit for letters of credit and a swing line sub-limit of $40 million) revolving credit facility with Bank of America as sole lead arranger and administrative agent, JP Morgan Chase Bank as syndication agent, and other financial institutions.  This revolving credit facility was immediately drawn upon to pay off the Company’s former term loan of $232.2 million and pay transaction fees and expenses of $3.8 million, leaving approximately $130 million available under the revolver for future borrowings (net of letters of credit of approximately $8.6 million).  In connection with the repayment of the Company’s former term loan, in the fourth quarter of fiscal 2010 the Company wrote off approximately $1.2 million in unamortized debt issuance costs.  In addition, in connection with the revolving credit facility, the Company recorded $3.5 million of debt issuance costs to be amortized over the term of the revolving credit facility (five years).  On December 22, 2011, the Company and lenders amended and restated the revolving credit facility to, among other things, provide a U.S. dollar revolving facility of $340 million ($130 million sub-limit for letters of credit and a swing line sub-limit of $40 million) and a $35 million multicurrency revolving facility ($15 million sub-limit for letters of credit and a swing line sub-limit of $5 million), which is available for borrowings by either TWCC or our Canadian subsidiary, in U.S. dollars or Canadian dollars. The term of the revolving credit facility expires October 15, 2015.
 
The selected financial data for the five fiscal years ended December 31, 2011 was 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 2011 ended on December 31, 2011, fiscal 2010 ended on January 1, 2011, fiscal 2009 ended on January 2, 2010, fiscal 2008 ended on January 3, 2009, and fiscal 2007 ended on December 29, 2007.  Fiscal 2011, fiscal 2010, fiscal 2009, and fiscal 2007 each contained 52 weeks of financial results.  Fiscal 2008 contained 53 weeks of financial results.
 


 
16

 

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."

   
Fiscal Years
 
                               
(dollars in thousands, except per share data)
 
2011
   
2010
   
2009
   
2008
   
2007
 
                               
OPERATING DATA:
                             
Wholesale sales – Carter’s                                                           
  $ 939,115     $ 827,815     $ 742,224     $ 730,043     $ 707,212  
Retail sales – Carter’s                                                           
    671,590       546,233       489,740       422,436       366,296  
Retail sales – OshKosh                                                           
    280,900       264,887       257,289       249,130       233,776  
Wholesale sales – OshKosh                                                           
    81,888       75,484       72,448       73,014       84,172  
International                                                           
    136,241       34,837       27,976       19,897       12,570  
Total net sales                                                       
    2,109,734       1,749,256       1,589,677       1,494,520       1,404,026  
Cost of goods sold                                                           
    1,418,582       1,075,384       985,323       975,999       928,996  
Gross profit                                                           
    691,152 (a)     673,872       604,354       518,521       475,030  
Selling, general, and administrative expenses
    540,960 (a)     468,192       428,674       404,274       359,826  
Investigation expenses (b)                                                           
    --       --       5,717       --       --  
Intangible asset impairment (c)                                                           
    --       --       --       --       154,886  
Executive retirement charges (d)                                                           
    --       --       --       5,325       --  
Workforce reduction, facility write-down, and closure costs (e)
    --       --       10,771       2,609       5,285  
Royalty income                                                           
    (37,274 )     (37,576 )     (36,421 )     (33,685 )     (30,738 )
Operating income (loss)                                                           
    187,466       243,256       195,613       139,998       (14,229 )
Interest income                                                           
    (386 )     (575 )     (219 )     (1,491 )     (1,386 )
Interest expense                                                           
    7,534       10,445       12,004       19,578       24,465  
Foreign exchange gain                                                           
    (570 )     --       --       --       --  
Income (loss) before income taxes
    180,888       233,386       183,828       121,911       (37,308 )
Provision for income taxes                                                           
    66,872       86,914       68,188       44,007       38,488  
Net income (loss)                                                           
  $ 114,016     $ 146,472     $ 115,640     $ 77,904     $ (75,796 )
PER COMMON SHARE DATA:
                                       
Basic net income (loss)                                                           
  $ 1.96     $ 2.50     $ 2.03     $ 1.37     $ (1.30 )
Diluted net income (loss)                                                           
  $ 1.94     $ 2.46     $ 1.97     $ 1.33     $ (1.30 )
                                         
BALANCE SHEET DATA (end of period):
                                       
Working capital (f)                                                           
  $ 629,394     $ 532,891     $ 505,051     $ 359,919     $ 311,000  
Total assets                                                           
    1,402,709       1,257,182       1,208,599       1,038,012       958,777  
Total debt, including current maturities
    236,000       236,000       334,523       338,026       341,529  
Stockholders’ equity                                                           
    805,709       679,936       556,024       413,551       366,238  
CASH FLOW DATA:
                                       
Net cash provided by operating activities
  $ 81,074     $ 85,821     $ 188,859     $ 181,041     $ 50,190  
Net cash used in investing activities                                                           
    (106,692 )     (39,496 )     (29,516 )     (34,947 )     (20,022 )
Net cash provided by (used in) financing
activities                                                        
    11,505       (133,984 )     13,349       (32,757 )     (49,701 )
OTHER DATA:
                                       
Gross margin                                                           
    32.8 %     38.5 %     38.0 %     34.7 %     33.8 %
Depreciation and amortization                                                           
  $ 32,548     $ 31,727     $ 32,274     $ 30,158     $ 29,919  
Capital expenditures                                                           
    45,495       39,782       33,600       34,947       20,079  






See Notes to Selected Financial Data.

 
17

 

NOTES TO SELECTED FINANCIAL DATA

(a) Gross profit includes $6.7 million in additional expenses related to the amortization of the fair value step-up of inventory acquired as a result of the Acquisition.  SG&A includes $5.5 million related to revaluation of the contingent consideration and acquisition-related charges associated with the Acquisition.
 
(b) Investigation expenses of $5.7 million in fiscal 2009 relate to professional service fees incurred in connection with the Company’s customer margin support investigation (see Note 17 to the accompanying audited consolidated financial statements).
 
(c) Intangible asset impairment charges of $154.9 million in fiscal 2007 reflect the impairment of the OshKosh goodwill (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.
 
(d) Executive retirement charges of $5.3 million in fiscal 2008 consist of $3.1 million related to the present value of severance and benefit obligations and $2.2 million of which related to the accelerated vesting of certain stock options.
 
(e) The $5.3 million in closure costs in fiscal 2007 relate to the closure of our White House, Tennessee distribution facility.  The $2.6 million charge in fiscal 2008 relates to the write-down of the carrying value of our White House, Tennessee distribution facility.  The $10.7 million in fiscal 2009 includes closure costs of $3.3 million associated with the closure of our Barnesville, Georgia distribution facility including severance and other benefits, asset impairment charges, and other closure costs, $1.2 million of asset impairment charges net of a gain on the closure and sale of our Oshkosh, Wisconsin facility, $0.7 million related to the write-down of our White House, Tennessee distribution facility, and $5.5 million of severance and other benefits related to the corporate workforce reduction.
 
(f)  Represents total current assets less total current liabilities.




 
18

 

 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is a discussion of our results of operations and current financial condition.  You should read this discussion in conjunction with our consolidated historical financial statements and notes included elsewhere in this Annual Report on Form10-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 146 years, Carter’s has been one of the most recognized and trusted brand names in the children’s apparel industry.  We also own the OshKosh brand, which over 110 years has earned the position of a highly trusted and well-known brand.
 
On June 30, 2011, we acquired Bonnie Togs, a Canadian children’s apparel retailer and a former international licensee.  Specifically, the Company purchased all of the outstanding shares of capital stock of Bonnie Togs for total consideration of up to CAD $95 million, of which USD $61.2 million was paid in cash at closing.  Such payment is subject to post-closing adjustments, which we expect to be finalized in the first quarter of fiscal 2012.  The sellers may also be paid contingent consideration ranging from zero to CAD $35 million if the Canadian business meets certain earnings targets for the period beginning July 1, 2011 and ending on June 27, 2015.  Sellers may receive a portion of the contingent consideration of up to CAD $25 million if interim earnings targets are met through June 2013 and June 2014, respectively.  Any such payments are not recoverable by the Company in the event of any failure to meet overall targets.
 
As of July 2, 2011, the Company had a discounted contingent consideration liability of approximately $24.3 million based upon the high probability that Bonnie Togs will attain its earnings targets.  The fair value of the discounted contingent consideration liability as of December 31, 2011 was approximately $25.6 million and is included in other long-term liabilities on the accompanying consolidated balance sheet.  The $1.2 million change in the fair value of the liability is reflected as $2.5 million in accretion expense and $1.3 million in other comprehensive income resulting from a favorable foreign currency translation adjustment.  The Company determined the fair value of the contingent consideration based upon a probability-weighted discounted cash flow analysis.  The Company will continue to revalue the contingent consideration at each reporting date.
 
In light of the Acquisition, the Company reevaluated and realigned certain of its reportable segments.  As a result, the Company’s reportable segments include a new international segment reflecting our new Canadian operations, our existing international wholesale business, and royalty income from our international licensees.  In addition, the Company combined its historical mass channel segments with its wholesale segments.  The Company believes these changes in segment reporting better reflect how its five business segments, Carter’s wholesale, Carter’s retail, OshKosh retail, OshKosh wholesale, and international, are managed and how each segment’s performance is evaluated.  Effective October 1, 2011, the Company changed its segment presentation to reflect this new structure, and recast all prior periods presented to conform to the new presentation.
 
We sell our products under our Carter’s, OshKosh, Child of Mine, and Just One You brands in the wholesale channel, which include nearly 17,000 department, national chain, specialty, and discount retailer stores in the United States.  Additionally, as of December 31, 2011, we operated 359 Carter’s and 170 OshKosh retail stores located primarily in outlet and strip centers throughout the United States and 65 retail stores in Canada.  In March 2010, we launched our eCommerce business.  We also extend our brand reach by licensing our Carter’s, Child of Mine, Just One You, OshKosh, and related brand names through domestic licensing arrangements, including licensing of our Genuine Kids from OshKosh brand to Target stores nationwide.  Our OshKosh and Carter’s brand names are also licensed through international licensing arrangements.  During fiscal 2011, we earned approximately $37.3 million in royalty income from these arrangements.
 
We source substantially all of our products through a network of vendors primarily in Asia.  Various sourcing agents coordinate this process, with one sourcing agent currently managing approximately 83% of our inventory purchases.  Our product costs, driven by inflation in significant component costs such as cotton, polyester, labor, fuel, and transportation increased substantially throughout fiscal 2011 and are expected to continue to remain at elevated levels for at least the first half of fiscal 2012.  These cost increases have resulted in higher cost of goods sold and inventory values.  Although we have raised our selling prices on many of our products, we have been unable to fully absorb these cost increases and our profitability was negatively impacted.  We do not expect in the near term to be able to fully absorb these elevated costs and our profitability may continue to be adversely impacted. 

 
19

 

In connection with the Acquisition, we acquired certain definite-lived intangible assets comprised of a Bonnie Togs tradename and non-compete agreements which resulted in amortization expense of $0.2 million in fiscal 2011. In connection with the acquisition of OshKosh, we acquired certain definite-lived intangible assets comprised of licensing agreements and leasehold interests which were fully amortized in fiscal 2010 and had amortization expense of $1.8 million in fiscal 2010 and $3.7 million in fiscal 2009.
 
On October 15, 2010, the Company entered into a $375 million ($130 million sub-limit for letters of credit and a swing line sub-limit of $40 million) revolving credit facility with Bank of America as sole lead arranger and administrative agent, JP Morgan Chase Bank as syndication agent, and other financial institutions.  This revolving credit facility was immediately drawn upon to pay off the Company’s former term loan of $232.2 million and pay transaction fees and expenses of $3.8 million, leaving approximately $130 million available under the revolver for future borrowings (net of letters of credit of approximately $8.6 million).  In connection with the repayment of the Company’s former term loan, in the fourth quarter of fiscal 2010 the Company wrote off approximately $1.2 million in unamortized debt issuance costs.  In addition, in connection with the revolving credit facility, the Company recorded $3.5 million of debt issuance costs to be amortized over the term of the revolving credit facility (five years).  On December 22, 2011, the Company and lenders amended and restated the revolving credit facility to, among other things, provide a U.S. dollar revolving facility of $340 million ($130 million sub-limit for letters of credit and a swing line sub-limit of $40 million) and a $35 million multicurrency revolving facility ($15 million sub-limit for letters of credit and a swing line sub-limit of $5 million), which is available for borrowings by either TWCC or our Canadian subsidiary, in U.S. dollars or Canadian dollars. The term of the revolving credit facility expires October 15, 2015.
 
During fiscal 2007, the Company’s Board of Directors approved a share repurchase authorization, pursuant to which the Company was authorized to purchase up to $100 million of its outstanding common shares.  During fiscal 2010, the Company’s Board of Directors approved a share repurchase authorization, pursuant to which the Company is authorized to purchase up to an additional $100 million of its outstanding common shares.  As of August 13, 2010, the Company had repurchased outstanding shares in the amount totaling the entire $100 million authorized by the Board of Directors on February 16, 2007.  The timing and amount of any future share repurchases will be determined by the Company’s management, based upon its evaluation of market conditions, share price, other investment priorities, and other factors.
 
The Company did not repurchase any shares of its common stock during fiscal 2011 pursuant to any share repurchase authorization other than the shares of common stock from the Company’s employees to satisfy tax withholding obligations upon vesting of restricted stock to such employees.  During fiscal 2010, the Company repurchased and retired 2,058,830 shares, or approximately $50.0 million, of its common stock at an average price of $24.29 per share.  Since inception of the repurchase program and through fiscal 2011, the Company repurchased and retired 6,658,410 shares, or approximately $141.1 million, of its common stock at an average price of $21.19 per share.  The total remaining capacity under this authorization was approximately $58.9 million as of December 31, 2011.  This authorization has no expiration date. 
 
Our fiscal year ends on the Saturday, in December or January, nearest the last day of December.  Consistent with this policy, fiscal 2011 ended on December 31, 2011, fiscal 2010 ended on January 1, 2011, and fiscal 2009 ended on January 2, 2010.  Fiscal 2011, 2010, and 2009 each contained 52 weeks of financial results.
 
 




















 
20

 

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:

   
Fiscal Years
 
   
2011
   
2010
   
2009
 
                   
Net Sales
                 
                   
Carter’s Wholesale
    44.5 %     47.3 %     46.7 %
Carter’s Retail
    31.8       31.2       30.8  
    Total Carter’s
    76.3       78.5       77.5  
                         
OshKosh Retail
    13.3       15.2       16.2  
OshKosh Wholesale
    3.9       4.3       4.5  
    Total OshKosh
    17.2       19.5       20.7  
                         
International
    6.5       2.0        1.8  
                         
Consolidated net sales
    100.0       100.0       100.0  
Cost of goods sold
    67.2       61.5       62.0  
Gross profit
    32.8       38.5       38.0  
Selling, general, and administrative expenses
    25.6       26.8       27.0  
Investigation expenses
    --       --       0.4  
Workforce reduction, facility write-down, and closure costs
    --       --       0.7  
Royalty income
    (1.7 )     (2.2 )     (2.4 )
                         
Operating income
    8.9       13.9       12.3  
Foreign exchange gain
    --       --       --  
Interest expense, net
    0.3       0.6       0.7  
                         
Income before income taxes
    8.6       13.3       11.6  
Provision for income taxes
    3.2       4.9       4.3  
                         
Net income
    5.4 %     8.4 %     7.3 %
Number of retail stores at end of period:
                       
Carter’s
    359       306       276  
OshKosh
    170       180       170  
International
    65        --        --  
Total
     594        486        446  
                         
                         



 
21

 

FISCAL YEAR ENDED DECEMBER 31, 2011 COMPARED WITH FISCAL YEAR ENDED JANUARY 1, 2011

CONSOLIDATED NET SALES

Consolidated net sales for fiscal 2011 were $2.1 billion, an increase of $360.5 million, or 20.6%, compared to $1.7 billion in fiscal 2010 and reflects growth in all of our segments and the Acquisition.

   
For the fiscal years ended
 
(dollars in thousands)
 
December 31,
2011
   
% of
Total
   
January 1,
2011
   
% of
Total
 
                         
Net sales:
                       
Carter’s Wholesale                                          
  $ 939,115       44.5 %   $ 827,815       47.3 %
Carter’s Retail                                          
    671,590       31.8 %     546,233       31.2 %
     Total Carter’s                                          
    1,610,705       76.3 %     1,374,048       78.5 %
                                 
OshKosh Retail                                          
    280,900       13.3 %     264,887       15.2 %
OshKosh Wholesale
    81,888        3.9 %     75,484        4.3 %
     Total OshKosh                                          
    362,788       17.2 %     340,371       19.5 %
 
International                                          
    136,241       6.5 %     34,837       2.0 %
         Total net sales                                          
  $ 2,109,734       100.0 %   $ 1,749,256       100.0 %
                                 

CARTER’S WHOLESALE SALES

Carter’s wholesale sales in the United States increased $111.3 million, or 13.4%, in fiscal 2011 to $939.1 million.  This growth was driven by an 8% increase in units shipped and a 5% increase in average price per unit, as compared to fiscal 2010.  The increase in units shipped was primarily driven by continued strong demand for our Carter’s and Child of Mine product offerings and an increase in shipments to the off-price channel.  The increase in average price per unit primarily reflects higher average selling prices on our product offerings.

CARTER’S RETAIL SALES

Carter’s retail sales in the United States increased $125.4 million, or 22.9%, in fiscal 2011 to $671.6 million.  The increase was driven by incremental sales of $57.0 million generated by new store openings, $40.8 million generated by eCommerce sales, and a comparable store sales increase of $29.1 million, or 5.6% (based on 296 locations), partially offset by the effect of store closures of $1.5 million.  During fiscal 2011, on a comparable store basis, average prices increased 5.0% on our product offerings, units per transaction increased 1.9%, and transactions decreased 1.3%.  Despite a decline in consumer traffic, we believe comparable store sales were strong.
 
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 of 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 last full fiscal month of operations.
 
There were a total of 359 Carter’s retail stores open as of December 31, 2011.  During fiscal 2011, we opened 56 and closed three Carter’s retail stores.  We plan to open approximately 60 and close four Carter’s retail stores during fiscal 2012.

OSHKOSH RETAIL SALES

OshKosh retail sales in the United States increased $16.0 million, or 6.0%, in fiscal 2011 to $280.9 million.  The increase reflects incremental sales of $12.9 million generated by eCommerce sales and $8.9 million generated by new store openings, partially offset by the effect of store closings of $5.0 million and a comparable store sales decrease of $0.7 million, or 0.3% (based on 163 locations).  On a comparable store basis, units per transaction increased 2.4%, average prices increased 1.0%, and transactions decreased 3.6% on our product offerings.  We believe this decrease was driven by the decline in consumer traffic.
 
There were a total of 170 OshKosh retail stores open as of December 31, 2011.  During fiscal 2011, we opened three and closed 13 OshKosh retail stores.  We plan to open approximately five and close 13 OshKosh retail stores during fiscal 2012.
 

 
22

 

OSHKOSH WHOLESALE SALES

OshKosh brand wholesale sales in the United States increased $6.4 million, or 8.5%, in fiscal 2011 to $81.9 million.  The increase in OshKosh brand wholesale sales was driven by an 8% increase in average price per unit and a 1% increase in units shipped, as compared to fiscal 2010.  The increase in average price per unit primarily reflects higher average selling prices.  The increase in units shipped was primarily driven by an increase in shipments to our off-price customers.

INTERNATIONAL SALES

International sales increased $101.4 million, or 291.1%, in fiscal 2011 to $136.2 million.  The increase reflects six months of sales from our new Canadian operations in the current year and higher international wholesale sales, primarily driven by expansion in our multi-national accounts and growth in the Middle East. We operated a total of 65 retail stores in Canada as of December 31, 2011.  In fiscal 2012, the Company plans to open 18 retail stores in Canada and anticipates no store closures.

GROSS PROFIT

Our gross profit increased $17.3 million, or 2.6%, to $691.2 million in fiscal 2011.  Gross margin decreased 570 basis points from 38.5% in fiscal 2010 to 32.8% in fiscal 2011.
 
The decrease in gross profit as a percentage of net sales reflects:
 
(i) higher product costs of approximately $180 million primarily related to increases in cotton prices and labor rates; and
 
(ii) an amortization charge of approximately $6.7 million related to a fair value step-up of inventory acquired at the Acquisition and sold during fiscal 2011.
 
Partially offsetting these decreases were:
 
(i) approximately $101 million in selective price increases; and
 
(ii) approximately $40 million in incremental volume related to our new Canadian operations in fiscal 2011.
 

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 2011 increased $72.8 million, or 15.5%, to $541.0 million.  As a percentage of net sales, selling, general, and administrative expenses was 25.6% in fiscal 2011 as compared to 26.8% in fiscal 2010.
 
The improvements in selling, general, and administrative expenses as a percentage of net sales reflect:
 
(i) a 70 basis points decrease (from 12.3% to 11.6%) in our U.S. retail store expenses as compared to fiscal 2010;
 
(ii) approximately $11 million in lower provisions for performance-based compensation for fiscal 2011; and
 
(iii) controlling growth in spending to a lower rate than growth in net sales.
 


 
23

 

Partially offsetting these reductions were:
 
(i) $21.4 million in Bonnie Togs selling, general and administrative expenses;
 
(ii) $3.1 million of Bonnie Togs acquisition-related expenses during fiscal 2011; and
 
(iii) $2.5 million of accretion expense associated with the revaluation of the Bonnie Togs contingent consideration.

ROYALTY INCOME

Our royalty income decreased $0.3 million, or 0.8%, to $37.3 million in fiscal 2011.  The decrease was primarily due to the absence of six months of international royalty income in fiscal 2011 from our former licensee, Bonnie Togs.  
 
We license the use of our Carter’s, Just One You, and Child of Mine brands.  Domestic royalty income from these brands was approximately $18.5 million, an increase of 0.9%, or $0.2 million, as compared to fiscal 2010 resulting from higher sales by our Carter’s brand and Just One You brand licensees, partially offset by lower sales from our Child of Mine brand licensees.  The Carter’s brand internationally generated $1.3 million in royalty income in fiscal 2011 as compared to $1.9 million in fiscal 2010.  
 
We also license the use of our OshKosh B’gosh, OshKosh, and Genuine Kids from OshKosh brands.  Domestic royalty income from these brands increased approximately $0.5 million, or 5.1%, to $10.3 million in fiscal 2011.  This increase was driven by increased sales by our Genuine Kids from OshKosh brand sold at Target.  The OshKosh brand internationally generated $7.1 million in royalty income in fiscal 2011 as compared to $7.5 million in fiscal 2010.  
 
OPERATING INCOME

Our operating income decreased $55.8 million, or 22.9%, to $187.5 million in fiscal 2011.  This decrease in operating income is attributable to the factors described above.

INTEREST EXPENSE, NET

Interest expense, net, in fiscal 2011 decreased $2.7 million, or 27.6%, to $7.1 million.  This decrease is attributable to $47.3 million in lower weighted-average borrowings.  In fiscal 2011, weighted-average borrowings were $236 million at an effective interest rate of 3.25%, including amortization of debt issuance costs, as compared to weighted-average borrowings of $283.3 million at an effective interest rate of 3.67%, including amortization of debt issuance costs, in fiscal 2010.  In fiscal 2010, we recorded $1.7 million in interest expense related to our interest rate swap agreements and a $1.7 million write-off of debt issuance costs related to the prepayment of a portion of our term loan debt.

FOREIGN CURRENCY GAIN

As part of the Acquisition, the Company entered into a forward foreign currency exchange contract to reduce its risk from exchange rate fluctuations on the purchase price of Bonnie Togs.  The contract was settled on June 30, 2011 and a gain of $0.2 million was recognized in earnings during the second quarter of fiscal 2011.  In addition, during fiscal 2011, the Company recorded $0.4 million net gain primarily related to our Canadian subsidiary’s foreign currency exchange contracts and its foreign denominated payables.
 
INCOME TAXES

Our effective tax rate was approximately 37.0% in fiscal 2011 as compared to approximately 37.2% in fiscal 2010.  The effective tax rate in both years was reduced by the reversal of reserves for uncertain tax positions.
 
NET INCOME

As a result of the factors described above, our net income for fiscal 2011 decreased $32.5 million, or 22.2%, to $114.0 million as compared to $146.5 million in fiscal 2010.

 
24

 

FISCAL YEAR ENDED JANUARY 1, 2011 COMPARED WITH FISCAL YEAR ENDED JANUARY 2, 2010

CONSOLIDATED NET SALES

Consolidated net sales for fiscal 2010 were $1.7 billion, an increase of $159.6 million, or 10.0%, compared to $1.6 billion in fiscal 2009 and reflects growth in all of our segments.

   
For the fiscal years ended
 
(dollars in thousands)
 
January 1,
2011
   
% of
Total
   
January 2,
2010
   
% of
Total
 
                         
Net sales:
                       
Carter’s Wholesale                                          
  $ 827,815       47.3 %   $ 742,224       46.7 %
Carter’s Retail                                          
    546,233       31.2 %     489,740       30.8 %
     Total Carter’s                                          
    1,374,048       78.5 %     1,231,964       77.5 %
                                 
OshKosh Retail                                          
    264,887       15.2 %     257,289       16.2 %
OshKosh Wholesale
    75,484        4.3 %     72,448        4.5 %
     Total OshKosh                                          
    340,371       19.5 %     329,737       20.7 %
 
International                                          
    34,837       2.0 %     27,976       1.8 %
         Total net sales                                          
  $ 1,749,256       100.0 %   $ 1,589,677       100.0 %
                                 

CARTER’S WHOLESALE SALES

Carter’s wholesale sales in the United States increased $85.6 million, or 11.5%, in fiscal 2010 to $827.8 million.  The increase in Carter’s brand wholesale sales was driven by a 13% increase in units shipped, partially offset by a 1% decrease in average price per unit, as compared to fiscal 2009.  The increase in units shipped was primarily driven by strong over-the-counter performance at our wholesale customers and the decrease in average price per unit primarily reflects lower average selling prices on our wholesale sales.

CARTER’S RETAIL SALES

Carter’s retail sales in the United States increased $56.5 million, or 11.5%, in fiscal 2010 to $546.2 million.  The increase was driven by incremental sales of $45.3 million generated by new store openings and eCommerce sales, and a comparable store sales increase of $11.9 million, or 2.5% (based on 271 locations), partially offset by the impact of store closures of $0.7 million.  During fiscal 2010, on a comparable store basis, units per transaction increased 2.8%, average transaction value increased 2.2%, and average prices decreased 0.6% as compared to fiscal 2009.  We attribute the increases in units per transaction and average transaction value to strong product performance in our playwear product category, improved in-store product presentation, and increased merchandising and marketing efforts.  The decrease in average prices resulted from increased promotional activity given the competitive environment.
 
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 306 Carter’s retail stores open as of January 1, 2011.  During fiscal 2010, we opened 30 Carter’s retail stores.

OSHKOSH RETAIL SALES

OshKosh retail sales in the United States increased $7.6 million, or 3.0%, in fiscal 2010 to $264.9 million.  The increase was due to incremental sales of $13.7 million generated by new store openings and eCommerce sales, partially offset by the impact of a comparable store sales decline of $4.8 million, or 1.9% (based on 162 locations), and store closures of $1.2 million.  On a comparable store basis, units per transaction increased 2.6%, transactions decreased 1.9%, and average prices decreased 2.6%.  We attribute the increase in units per transaction to strong in-store product presentation and direct-to-consumer marketing efforts, partially offset by a decrease in transactions attributable to reduced traffic at our stores.  The decrease in average prices resulted from increased promotional activity given the competitive environment.

 
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There were a total of 180 OshKosh retail stores open as of January 1, 2011.  During fiscal 2010, we opened 12 OshKosh retail stores and closed two.

OSHKOSH WHOLESALE SALES

OshKosh brand wholesale sales in the United States increased $3.0 million, or 4.2%, in fiscal 2010 to $75.5 million.  The increase in OshKosh brand wholesale sales was driven by a 6% increase in units shipped, partially offset by a 1% decrease in average price per unit, as compared to fiscal 2009.  The increase in units shipped was primarily driven by over-the-counter performance at our wholesale customers.  The decrease in average price per unit primarily reflects lower average selling prices on wholesale sales.

INTERNATIONAL SALES

International sales increased $6.9 million, or 24.5%, in fiscal 2010 to $34.8 million.  The increase reflects higher wholesale sales driven primarily by the expansion of our Carter’s brand internationally.

GROSS PROFIT

Our gross profit increased $69.5 million, or 11.5%, to $673.9 million in fiscal 2010.  Gross margin increased 50 basis points from 38.0% in fiscal 2009 to 38.5% in fiscal 2010.
 
The increase in gross margin as a percentage of net sales reflects:
 
(i) $18.6 million of higher consolidated retail and eCommerce gross margins driven by new store and comp store sales growth; and
 
(ii) $4.2 million related to growth in Carter’s wholesale margins due to increased volume and improved product performance, partially offset by higher product costs, air freight and excess inventory charges.
 
Partially offsetting these increases were:
 
(i) $5.9 million due to higher air freight and excess inventory charges associated with the Child of Mine and Just One You brands, and the absence of a vendor recovery that occurred in fiscal 2009; and
 
(ii) $4.7 million related to the OshKosh wholesale segment, reflecting higher levels of customer support, air freight, and excess inventory charges.
 
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 2010 increased $39.5 million, or 9.2%, to $468.2 million.  As a percentage of net sales, selling, general, and administrative expenses was 26.8% in fiscal 2010 as compared to 27.0% in fiscal 2009.
 
The decrease in selling, general, and administrative expenses as a percentage of net sales reflects:

(i) controlling growth in spending to a lower rate than growth in net sales for fiscal 2010;
 
(ii) $1.9 million reduction in amortization expense; and
 
(iii) $1.0 million in fiscal 2009 of accelerated depreciation related to a facility closure.



 
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Partially offsetting these decreases were:
 
(i) $22.9 million, or 10.2%, increase in consolidated retail expenses primarily due to new store growth; and
 
(ii) $8.7 million of incremental expenses associated with eCommerce.

INVESTIGATION EXPENSES

In connection with the investigation of customer margin support, the Company recorded pre-tax charges in the fourth quarter of fiscal 2009 of approximately $5.7 million related to professional service fees.

WORKFORCE REDUCTION, FACILITY WRITE-DOWN, AND CLOSURE COSTS

During fiscal 2009, as a result of the corporate workforce reduction, the Company recorded charges of $6.7 million consisting of $5.5 million in severance charges and other benefits, and approximately $1.2 million in asset impairment charges net of a gain on the closure and sale of our Oshkosh, Wisconsin office.
 
In conjunction with the plan to close the Barnesville, Georgia distribution facility, the Company recorded closure costs of approximately $4.3 million during fiscal 2009, consisting of severance and other benefits of $1.7 million, asset impairment charges of $1.1 million related to the write-down of the related land, building, and equipment, $1.0 million of accelerated depreciation (included in selling, general, and administrative expenses), and $0.5 million of other closure costs.
 
During fiscal 2009, the Company also wrote down the carrying value of its White House, Tennessee distribution facility by approximately $0.7 million to $2.8 million to reflect the decrease in the fair market value of the facility at that time.  During the third quarter of fiscal 2009, the Company sold this facility for net proceeds of approximately $2.8 million.
 
ROYALTY INCOME

Our royalty income increased $1.2 million, or 3.2%, to $37.6 million in fiscal 2010.
 
We license the use of our Carter’s, Just One You, and Child of Mine brands.  Domestic royalty income from these brands was approximately $18.4 million, a decrease of 0.5%, or $0.1 million, as compared to fiscal 2009 due to increased sales by our Carter’s brand and Just One You brand licensees, partially offset by decreased sales from our Child of Mine brand licensees.  The Carter’s brand internationally generated $1.9 million in royalty income in fiscal 2010 as compared to $0.7 million in fiscal 2009.
 
We also license the use of our OshKosh B’gosh, OshKosh, and Genuine Kids from OshKosh brands.  Royalty income from these brands increased approximately $0.1 million, or 0.6%, to $17.3 million in fiscal 2010.  This increase was driven by increased sales by our OshKosh brand domestic licensees.  The OshKosh brand internationally generated $7.5 million in royalty income in fiscal 2010 as compared to $7.9 million in fiscal 2009.
 
OPERATING INCOME

Our operating income increased $47.6 million, or 24.4%, to $243.3 million in fiscal 2010.  This increase in operating income is attributable to the factors described above.

INTEREST EXPENSE, NET

Interest expense, net, in fiscal 2010 decreased $1.9 million, or 16.2%, to $9.9 million.  This decrease is attributable to $53.4 million in lower weighted-average borrowings.  In fiscal 2010, weighted-average borrowings were $283.3 million at an effective interest rate of 3.67% as compared to weighted-average borrowings of $336.7 million at an effective interest rate of 3.57% in fiscal 2009.  In fiscal 2010, we recorded $1.7 million in interest expense related to our interest rate swap agreements.  In fiscal 2009, we recorded $2.5 million in interest expense related to our interest rate swap agreements and $0.5 million in interest expense related to our interest rate collar agreement.

INCOME TAXES

Our effective tax rate was approximately 37.2% in fiscal 2010 as compared to approximately 37.1% in fiscal 2009.  The effective tax rate in both years was reduced by the reversal of reserves for uncertain tax positions.

 
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NET INCOME

As a result of the factors described above, our net income for fiscal 2010 increased $30.8 million, or 26.7%, to $146.5 million as compared to $115.6 million in fiscal 2009.
 
LIQUIDITY AND CAPITAL RESOURCES

Our primary cash needs are working capital and capital expenditures.  Our primary source of liquidity will continue to be cash and cash equivalents on hand, cash flow from operations, and borrowings under our revolving credit facility, 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 events described in our risk factors, as further discussed in Item 1A of this filing.
 
Net accounts receivable at December 31, 2011 were $157.8 million compared to $121.5 million at January 1, 2011 and reflects higher Carter’s and OshKosh brand wholesale sales in the latter part of fiscal 2011 as compared to fiscal 2010 and incremental receivables associated with Bonnie Togs.
 
Net inventories at December 31, 2011 were $347.2 million compared to $298.5 million at January 1, 2011.  This increase primarily reflects higher product costs, incremental inventory from our new Canadian operations, and growth in our eCommerce and retail businesses.
 
Product costs can vary depending on the underlying cost of raw materials, such as cotton and polyester, and the level of labor and transportation costs.  A substantial portion of the Company’s products utilize cotton based fabrics, the cost of which reached historically high levels in fiscal 2011.  Additionally, labor costs have increased across Asia, particularly in China, where the Company currently sources approximately 50% of its products.  Furthermore, transportation costs to bring product to the United States have risen due to higher fuel costs and limited capacity in the marketplace.  The Company purchases finished goods largely from foreign suppliers and pays its suppliers in U.S. currency.  Consequently, the Company’s product costs have been adversely impacted by the devaluation of the U.S. dollar relative to foreign currencies.  These inflationary and currency risk factors have resulted in higher costs of goods sold and inventory values, and have adversely impacted our profitability and cash flows from operations.  We expect that higher product costs will continue to adversely impact our profitability and cash flow through at least the first half of fiscal 2012.
 
Net cash provided by operating activities for fiscal 2011 was $81.1 million compared to $85.8 million in fiscal 2010.  The decrease in operating cash flow primarily reflects lower earnings, which were partially offset by lower net working capital requirements.  Net cash provided by our operating activities in fiscal 2009 was approximately $188.9 million.
 
We invested approximately $45.5 million in capital expenditures during fiscal 2011, $39.8 million in fiscal 2010, and $33.6 million in fiscal 2009.  Major investments included U.S. and Canadian retail store openings and remodelings, facility expansion, fixtures for our wholesale customers, and investments in information technology.  We plan to invest approximately $90 - $100 million in capital expenditures in fiscal 2012 primarily for U.S. and international retail store openings and remodelings and expansion of our distribution capacity.
 
During fiscal 2007, the Company’s Board of Directors approved a share repurchase authorization, pursuant to which the Company was authorized to purchase up to $100 million of its outstanding common shares.  During fiscal 2010, the Company’s Board of Directors approved a share repurchase authorization, pursuant to which the Company is authorized to purchase up to an additional $100 million of its outstanding common shares.  As of August 13, 2010, the Company had repurchased outstanding shares in the amount totaling the entire $100 million authorized by the Board of Directors on February 16, 2007.
 
The Company did not repurchase any shares of its common stock during fiscal 2011 pursuant to any repurchase authorization other than the shares of common stock from the Company’s employees to satisfy tax withholding obligations upon vesting of restricted stock to such employees. During fiscal 2010, the Company repurchased and retired 2,058,830 shares, or approximately $50.0 million, of its common stock at an average price of $24.29 per share.  Since inception of the repurchase program and through fiscal 2011, the Company repurchased and retired 6,658,410 shares, or approximately $141.1 million, of its common stock at an average price of $21.19 per share.  We have reduced common stock by the par value of such shares repurchased and have deducted the remaining excess repurchase price over par value from additional paid-in capital.  Future repurchases may occur from time to time in the open market, in negotiated transactions, or otherwise.  The timing and amount of any repurchases will be determined by the Company’s management, based on its evaluation of market conditions, share price, other investment priorities, and other factors.

 
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On October 15, 2010, the Company entered into a $375 million ($130 million sub-limit for letters of credit and a swing line sub-limit of $40 million) revolving credit facility with Bank of America as sole lead arranger and administrative agent, JP Morgan Chase Bank as syndication agent, and other financial institutions.  This revolving credit facility was immediately drawn upon to pay off the Company’s former term loan of $232.2 million and pay transaction fees and expenses of $3.8 million, leaving approximately $130 million available under the revolver for future borrowings (net of letters of credit of approximately $8.6 million).  In connection with the repayment of the Company’s former term loan, in the fourth quarter of fiscal 2010 the Company wrote off approximately $1.2 million in unamortized debt issuance costs.  In addition, in connection with the revolving credit facility, the Company recorded $3.5 million of debt issuance costs to be amortized over the term of the revolving credit facility (five years).  On December 22, 2011, the Company and lenders amended and restated the revolving credit facility to, among other things, provide a U.S. dollar revolving facility of $340 million ($130 million sub-limit for letters of credit and a swing line sub-limit of $40 million) and a $35 million multicurrency revolving facility ($15 million sub-limit for letters of credit and a swing line sub-limit of $5 million), which is available for borrowings by either TWCC or our Canadian subsidiary, in U.S. dollars or Canadian dollars. The term of the revolving credit facility expires October 15, 2015.
 
The revolving credit facility provides for two pricing options for U.S. dollar facility revolving loans: (i) revolving loans on which interest is payable quarterly at a base rate equal to the highest of (x) the Federal Funds Rate plus ½ of 1%, (y) the rate of interest in effect for such day as publicly announced from time to time by Bank of America, N.A. as its prime rate, or (z) the Eurodollar Rate plus 1%, plus, in each case, an applicable margin initially equal to 1.25%, which may be adjusted based upon a leverage-based pricing grid ranging from 1.00% to 1.50% and (ii) revolving loans on which interest accrues for one, two, three, six or if, generally available, nine or twelve month interest periods (but is payable not less frequently than every three months) at a rate of interest per annum equal to an adjusted British Bankers Association LIBOR rate, plus an applicable margin initially equal to 2.25%, which may be adjusted based upon a leverage-based pricing grid ranging from 2.00% to 2.50%.
 
The revolving credit facility provides for two pricing options for multicurrency facility revolving loans denominated in U.S. dollars: (i) revolving loans on which interest is payable quarterly at a base rate equal to the highest of (x) the Federal Funds Rate plus ½ of 1%, (y) the rate of interest in effect for such day as publicly announced from time to time by Bank of America, N.A., Canada Branch in Toronto as its reference rate for loans in U.S. dollars to its Canadian borrowers, or (z) the Eurodollar Rate plus 1%, plus, in each case, an applicable margin initially equal to 1.25%, which may be adjusted based upon a leverage-based pricing grid ranging from 1.00% to 1.50% and (ii) revolving loans on which interest accrues for one, two, three, six or if, generally available, nine or twelve month interest periods (but is payable not less frequently than every three months) at a rate of interest per annum equal to an adjusted British Bankers Association LIBOR rate, plus an applicable margin initially equal to 2.25%, which may be adjusted based upon a leverage-based pricing grid ranging from 2.00% to 2.50%.
 
The revolving credit facility provides for two pricing options for multicurrency facility revolving loans denominated in Canadian dollars: (i) revolving loans on which interest is payable quarterly at a base rate equal to the highest of (x) the rate of interest in effect for such day as publicly announced from time to time by Bank of America, N.A., Canada Branch in Toronto as its prime rate for loans in Canadian Dollars to Canadian Borrowers and (y) the rate of interest in effect for such day for Canadian dollar bankers’ acceptances having a term of one month that appears on the Reuters Screen CDOR Page plus ½ of 1%, plus, in each case, an applicable margin initially equal to 1.25%, which may be adjusted based upon a leverage-based pricing grid ranging from 1.00% to 1.50%, and (iii) revolving loans on which interest accrues for one, two, three, six or if, generally available, nine or twelve month interest periods (but is payable not less frequently than every three months) at a rate of interest per annum equal to an adjusted British Bankers Association LIBOR rate, plus an applicable margin initially equal to 2.25%, which may be adjusted based upon a leverage-based pricing grid ranging from 2.00% to 2.50%.  Amounts outstanding under the revolving credit facility currently accrue interest at a LIBOR rate plus 2.25%.
 
The revolving credit facility contains and defines financial covenants, including a lease adjusted leverage ratio (defined as, with certain adjustments, the ratio of the Company’s consolidated indebtedness plus six times rent expense to consolidated net income before interest, taxes, depreciation, amortization, and rent expense (“EBITDAR”)) to exceed (x) if such period ends on or before December 31, 2014, 3.75:1.00 and (y) if such period ends after December 31, 2014, 3.50:1.00; and consolidated fixed charge coverage ratio (defined as, with certain adjustments, the ratio of consolidated EBITDAR to consolidated fixed charges (defined as interest plus rent expense)), for any such period to be less than 2.75:1.00.  As of December 31, 2011, the Company believes it was in compliance with its financial debt covenants.
 
At December 31, 2011, we had approximately $236 million in revolver borrowings, exclusive of $14.9 million of outstanding letters of credit. At January 1, 2011, we had approximately $236.0 million in revolver borrowings, exclusive of $8.6 million of outstanding letters of credit. Weighted-average borrowings for fiscal 2011 were $236 million at an effective rate of 3.25% as compared to weighted-average borrowings of $283.3 million at an effective rate of 3.67% in fiscal 2010.

 
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Our operating results are subject to risk from interest rate fluctuations on our revolving credit facility, which carries variable interest rates.  As of December 31, 2011, our outstanding variable rate debt aggregated approximately $236 million.  An increase or decrease of 1% in the applicable rate would increase or decrease our annual interest cost by approximately $2.4 million and could have an adverse effect on our earnings and cash flow.
 
On June 30, 2011, Northstar purchased all of the outstanding shares of capital stock of Bonnie Togs for total consideration of up to CAD $95 million, of which USD $61.2 million was paid in cash at closing.  Such payment is subject to post-closing adjustments, which we expect to be finalized in the first quarter of fiscal 2012.  The sellers may also be paid contingent consideration ranging from zero to CAD $35 million if the Canadian business meets certain earnings targets for the period beginning July 1, 2011 and ending on June 27, 2015.  Sellers may receive a portion of the contingent consideration of up to CAD $25 million if interim earnings targets are met through June 2013 and June 2014, respectively.  Any such payments are not recoverable in the event of any failure to meet overall targets.
 
The fair value of the discounted contingent consideration liability was approximately $24.3 million as of July 2, 2011 and approximately $25.6 million as of December 31, 2011.  The $1.2 million change in the fair value of the liability is reflected as $2.5 million in accretion expense and $1.3 million in accumulated other comprehensive income reflecting a favorable foreign currency translation adjustment.  The Company determined the fair value of the contingent consideration based upon a probability-weighted discounted cash flow analysis.  The Company will continue to revalue the contingent consideration at each reporting date.
 
The following table summarizes as of December 31, 2011, the maturity or expiration dates of mandatory contractual obligations and commitments for the following fiscal years:

(dollars in thousands)
 
2012
   
2013
   
2014
   
2015
   
2016
   
Thereafter
   
Total
 
                                           
Long-term debt
  $ --     $ --     $ --     $ 236,000     $ --     $ --     $ 236,000  
Interest on debt:
                                                       
Variable rate (a)
    6,004       6,004       6,004       6,004       --       --       24,016  
Operating leases (see Note 11 to the Consolidated Financial Statements)
    84,171       78,967       70,682       58,249       49,853       163,657       505,579  
Total financial obligations
    90,175       84,971       76,686       300,253       49,853       163,657       765,595  
                                                         
Letters of credit                             
    14,889       --       --       --       --       --       14,889  
Purchase obligations (b)
    509,958       --       --       --       --       --       509,958  
Total financial obligations and commitments
  $ 615,022     $ 84,971     $ 76,686     $ 300,253     $ 49,853     $ 163,657     $ 1,290,442  


 
(a)
Reflects estimated variable rate interest on obligations outstanding on our revolving credit facility as of December 31, 2011 using an interest rate of 2.54% (rate in effect at December 31, 2011).

 
(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 8 and Note 9, respectively, to the accompanying audited consolidated financial statements.
 
Based on our current outlook, we believe that cash generated from operations and available cash, together with amounts available under our revolving credit facility, will be adequate to meet our working capital needs and capital expenditure requirements 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, if any, outstanding under our revolving credit facility on or before October 15, 2015.
 

 
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EFFECTS OF INFLATION AND DEFLATION; OPERATING COSTS

The Company is subject to both inflationary and deflationary risks.  With respect to inflation, the Company is experiencing higher product costs, driven by increases in underlying component costs, such as cotton, polyester, labor rates, fuel, and transportation costs.  The Company expects product costs will remain at elevated levels for at least the first half of fiscal 2012.  The Company’s product costs have also been adversely impacted by the devaluation of the U.S. dollar relative to foreign currencies.  These inflationary and currency risk factors have resulted in higher costs of goods sold and inventory values.  Although we raised our selling prices on many of our products, we were unable to fully absorb these cost increases and our profitability was adversely impacted.  We do not expect in the near term to be able to fully absorb these inflated costs and our profitability may continue to be adversely impacted.
 
In recent years, the Company has also experienced deflationary pressure on its selling prices, in part driven by intense price competition in the young children’s apparel industry.  In this environment there is a risk that customers will not accept our price increases.  If the Company is unable to effectively raise selling prices to help offset higher production costs, the adverse effect on our profitability may be even greater than anticipated.
 
SEASONALITY

We experience seasonal fluctuations in our sales and profitability due to the timing of certain holidays and key retail shopping periods, generally resulting in lower sales and gross profit in the first half of our fiscal year.  More of our consolidated net sales over the past five fiscal years, excluding the effect of the Acquisition, have typically been generated in the second half of our fiscal year (approximately 57%).  Accordingly, our results of operations during the first half of the year may not be indicative of the results we expect for the full year.
 
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 eCommerce 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 collectability 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 customers to assist these customers with inventory clearance or promotions.  Such amounts are reflected as a reduction of net sales and are recorded based upon agreements with customers, historical trends, and annual forecasts.  Retail store revenues are recognized at the point of sale.  We reduce revenue for estimated 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 collectability.  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 customers.  Such fair value is determined based upon, among other factors, comparable market analysis for similar advertisements.  In accordance with accounting guidance on consideration given by a vendor to a customer/reseller, we have included the fair value of these arrangements of approximately $3.6 million in fiscal 2011, $4.0 million in fiscal 2010, and $3.3 million in fiscal 2009 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.

 
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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 we project, additional write-downs may be required.
 
Goodwill and tradename:  As of December 31, 2011, we had approximately $188.7 million in Carter’s and Bonnie Togs goodwill and $306.2 million of aggregate value related to the Carter’s, OshKosh, and Bonnie Togs tradename assets.  The fair value of the Carter’s tradename was estimated using a discounted cash flow analysis at the time of the acquisition of Carter’s, Inc. which was consummated on August 15, 2001.  The particular discounted cash flow approach utilized the hypothetical cost savings that accrue as a result of our ownership of the tradename.  The fair value of the OshKosh tradename was estimated at its acquisition date, July 14, 2005, using an identical discounted cash flow analysis.  The Carter’s and OshKosh tradenames were determined to have indefinite lives.  The Bonnie Togs tradename was also estimated using an identical discounted cash flow analysis at the time of acquisition on June 30, 2011. The Bonnie Togs tradename was determined to have a definite life and is being amortized over two years.
 
The carrying values of the goodwill and indefinite lived tradename assets are subject to annual impairment reviews in accordance with accounting guidance on goodwill and other intangible assets, as of the last day of each fiscal year.  Impairment reviews may also be triggered by any significant events or changes in circumstances affecting our business.  Factors affecting such impairment reviews include the continued market acceptance of our offered products and the development of new products.  We use discounted cash flow models to determine the fair value of these assets, using assumptions we believe hypothetical marketplace participants would use.  For indefinite-lived intangible assets, if the carrying amount exceeds the fair value, an impairment charge is recognized in the amount equal to that excess.
 
We perform impairment tests of our goodwill at our reporting unit level, which is consistent with our operating segments.  The goodwill impairment test consists of a two-step process, if necessary.  The first step is to compare the fair value of a reporting unit to its carrying value, including goodwill.  We use discounted cash flow models to determine the fair value of a reporting unit.  The assumptions used in these models are consistent with those we believe hypothetical marketplace participants would use.  If the fair value of a reporting unit is less than its carrying value, the second step of the impairment test must be performed in order to determine the amount of impairment loss, if any.  The second step compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill.  If the carrying amount of the reporting unit’s goodwill exceeds its implied fair value, an impairment charge is recognized in an amount equal to that excess.  The loss recognized cannot exceed the carrying amount of goodwill.
 
A deterioration of macroeconomic conditions may not only negatively impact the estimated operating cash flows used in our cash flow models, but may also negatively impact other assumptions used in our analyses, including, but not limited to, the estimated cost of capital and/or discount rates.  Additionally, as discussed above, in accordance with accounting guidance, we are required to ensure that assumptions used to determine fair value in our analyses are consistent with the assumptions a hypothetical marketplace participant would use.  As a result, the cost of capital and/or discount rates used in our analyses may increase or decrease based on market conditions and trends, regardless of whether our actual cost of capital has changed.  Therefore, we may recognize an impairment of an intangible asset or assets even though realized actual cash flows are approximately equal to or greater than our previously forecasted amounts.
 
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.
 
Loss contingencies:  We record accruals for various contingencies including legal exposures as they arise in the normal course of business.  In accordance with accounting guidance on contingencies, we determine whether to disclose and accrue for loss contingencies based on an assessment of whether the risk of loss is remote, reasonably possible or probable.  Our assessment is developed in consultation with our internal and external counsel and other advisors and is based on an analysis of possible outcomes under various strategies.  Loss contingency assumptions involve judgments that are inherently subjective and can involve matters that are in litigation, which, by its nature is unpredictable.  We believe that our assessment of the probability of loss contingencies is reasonable, but because of the subjectivity involved and the unpredictable nature of the subject matter at issue, our assessment may prove ultimately to be incorrect, which could materially impact our consolidated financial statements.


 
32

 

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, stock-based compensation expense, 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.
 
Foreign currency:  The functional currency of the Company’s foreign operations is the local currency.  Assets and liabilities are translated into U.S. dollars using the current exchange rates in effect at the balance sheet date, while revenues and expenses are translated at the average exchange rates for the period.  The resulting translation adjustments are recorded as a component of accumulated other comprehensive income within stockholders’ equity.
 
Employee benefit plans:  We sponsor a defined contribution plan, a frozen defined benefit pension plan and other unfunded post-retirement plans.  The defined benefit pension and post-retirement plans require an actuarial valuation to determine plan obligations and related periodic costs.  We use independent actuaries to assist with these calculations.  Plan valuations require economic assumptions, including expected rates of return on plan assets, discount rates to value plan obligations, employee demographic assumptions including mortality rates, and changes in health care costs.  The actuarial assumptions used may differ materially from actual results due to changing market and economic conditions.  Actual results that differ from the actuarial assumptions are reflected as unrecognized gains and losses.  Unrecognized gains and losses that exceed 10% of the greater of the plan’s projected benefit obligations or market value of assets are amortized to earnings over the estimated service life of the remaining plan participants. 
 
Significant assumptions used in valuing the Company’s net obligation under its Oshkosh B’Gosh pension plan under which retirement benefits were frozen as of December 31, 2005 are expected long-term rates of return on plans assets and the discount rate used to determine the plan’s projected benefit obligation.   Expected long-term rates of return on plan assets were estimated to be 7.5% for the fiscal year ended December 31, 2011.  Our strategy with regards to the investments in the pension plan is to earn a rate of return sufficient to fund all pension obligations as they arise.  The long-term rate of return assumption considers current market trends, historical investment performance, and the portfolio mix of investments and has been set at 7.0% for fiscal 2012.  The discount rate used to determine the plan’s projected benefit obligation was 4.5% for the year ended December 31, 2011.  This discount rate was used to calculate the present value of expected future cash flows for benefit payments.  The rate used reflects the comparable long-term rate of return on a pool of high quality fixed income investments.
 
Any future obligations under our plan not funded from investment returns on plan assets will be funded from cash flows from operations.  The assumptions used in computing our net pension expense and projected benefit obligations have a significant impact on the amounts recorded.  A 0.25% change in the assumptions identified below would have had the following effects on the net pension expense and projected benefit obligation as of and for the year ended December 31, 2011.

   
Increase
   
Decrease
 
                         
(dollars in millions)
 
Discount
rate
   
Return on plan assets
   
Discount
rate
   
Return on plan assets
 
                         
Net pension expense
  $ (0.1 )   $ (0.1 )   $ 0.1     $ 0.1  
                                 
Projected benefit obligation
  $ (2.1 )   $ --     $ 2.3     $ --  

The most significant assumption used to determine the Company’s projected benefit obligation under its post-retirement life and medical plan under which retirement benefits were frozen in 1991 is the discount rate used to determine the plan’s projected benefit obligation.  A 0.25% change in the assumed discount rate would result in an increase or decrease, as applicable, in the plan’s projected benefit obligation of approximately $0.2 million.

 
33

 


See Note 8, “Employee Benefits Plans,” to the accompanying audited consolidated financial statements for further details on rates and assumptions.
 
Stock-based compensation arrangements:  The Company accounts for stock-based compensation in accordance with the fair value recognition provisions of accounting guidance on share-based payments.  The Company adopted this guidance 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 covering the expected life of stock 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 stock option.  An increase in the risk-free interest rate will increase compensation expense.
 
Expected term – This is the period of time over which the stock 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 accounting guidance on share-based payments 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.
 
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 2012 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.
 


 
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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 Asia.  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 income (loss) in future years.  In order to manage this risk, we source products from over 90 vendors in over 15 countries, 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.
 
Transactions by our Canadian subsidiary may be denominated in a currency other than the entity’s functional currency, which is the Canadian dollar.  Fluctuations in exchange rates, primarily between the United States dollar and the Canadian dollar, may affect our results of operations, financial position, and cash flows.  Our Canadian subsidiary employs foreign exchange contracts to hedge foreign currency exchange rate risk associated with the procurement of U.S. dollar denominated finished goods destined for the Canadian market.  These foreign exchange contracts are marked to market at the end of each reporting period, which could result in earnings volatility.  
 
Our operating results are subject to risk from interest rate fluctuations on our revolving credit facility, which carries variable interest rates.  As of December 31, 2011, our outstanding variable rate debt aggregated approximately $236.0 million.  An increase or decrease of 1% in the applicable rate would increase or decrease our annual interest cost by $2.4 million and could have an adverse effect on our net income (loss) and cash flow.

OTHER RISKS

We enter into various purchase order commitments with our 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.
 

 
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



 
CARTER’S, INC.
 
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


   
Page
 
       
Report of Independent Registered Public Accounting Firm
 
    37  
Consolidated Balance Sheets at December 31, 2011 and January 1, 2011
 
    38  
Consolidated Statements of Operations for the fiscal years ended December 31, 2011, January 1, 2011, and January 2, 2010
 
    39  
Consolidated Statements of Cash Flows for the fiscal years ended December 31, 2011, January 1, 2011, and January 2, 2010
 
    40  
Consolidated Statements of Changes in Stockholders’ Equity for the fiscal years ended December 31, 2011, January 1, 2011, and January 2, 2010
 
    41  
Notes to Consolidated Financial Statements
 
    42  


 
36

 

 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholder's 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 31, 2011 and January 1, 2011 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2011 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 31, 2011 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.

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, CT
February 29, 2012

 
37

 
CARTER’S, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except for share data)

   
December 31,
2011
   
January 1,
2011
 
ASSETS
           
             
Current assets:
           
  Cash and cash equivalents                                                                                                        
  $ 233,494     $ 247,382  
  Accounts receivable, net of reserve for doubtful accounts of $5,020 in fiscal 2011 and $3,251 in fiscal 2010
    157,754       121,453  
  Finished goods inventories, net                                                                                                        
    347,215       298,509  
  Prepaid expenses and other current assets                                                                                                        
    18,519       17,372  
  Deferred income taxes                                                                                                        
    25,165        31,547  
Total current assets                                                                                                  
    782,147       716,263  
Property, plant, and equipment, net                                                                                                        
    122,346       94,968  
Tradenames                                                                                                        
    306,176       305,733  
Goodwill                                                                                                        
    188,679       136,570  
Deferred debt issuance costs, net                                                                                                        
    2,624       3,332  
Other intangible assets, net                                                                                                        
    258       --  
Other assets                                                                                                        
    479       316  
Total assets                                                                                             
  $ 1,402,709     $ 1,257,182  
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
Current liabilities:
               
  Current maturities of long-term debt                                                                                                        
  $ --     $ --  
  Accounts payable                                                                                                        
    102,804       116,481  
  Other current liabilities                                                                                                        
    49,949        66,891  
        Total current liabilities                                                                                                        
    152,753       183,372  
Long-term debt                                                                                                        
    236,000       236,000  
Deferred income taxes                                                                                                        
    114,421       113,817  
Other long-term liabilities                                                                                                        
    93,826       44,057  
        Total liabilities                                                                                                        
    597,000       577,246  
Commitments and contingencies
               
Stockholders’ equity:
               
Preferred stock; par value $.01 per share; 100,000 shares authorized; none issued or outstanding at December 31, 2011 and January 1, 2011
    --       --  
Common stock, voting; par value $.01 per share; 150,000,000 shares authorized; 58,595,421 and 57,493,567 shares issued and outstanding at December 31, 2011 and January 1, 2011, respectively
    586       575  
  Additional paid-in capital                                                                                                         
    231,738       210,600  
  Accumulated other comprehensive loss                                                                                                         
    (11,282 )     (1,890 )
  Retained earnings                                                                                                         
    584,667       470,651  
        Total stockholders’ equity                                                                                                         
    805,709       679,936  
Total liabilities and stockholders’ equity                                                                                              
  $ 1,402,709     $ 1,257,182  
                 

The accompanying notes are an integral part of the consolidated financial statements
 
 
38

 
CARTER’S, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)

   
For the fiscal years ended
 
   
December 31,
2011
   
January 1,
2011
   
January 2,
2010
 
                   
Net sales
  $ 2,109,734     $ 1,749,256     $ 1,589,677  
Cost of goods sold