Carter's touts opportunistic bond deal, sets returning shareholder cash, investment as priorities

By Paul Deckelman

New York, Sept. 11 - Carter's Inc. generates cash at a strong pace, its chief financial officer said on Wednesday - and has as its top priorities investing much of that cash back into its business while also returning a sizable chunk of it to its shareholders, either via share repurchases or dividend payments.

So key is the latter goal, said Richard F. Westenberger, who also serves as executive vice president and treasurer of the Atlanta-based manufacturer and retailer of branded children's apparel, that Carter's recently went out and greatly increased its leverage, in the form of a $400 million junk bond deal, mostly to benefit the shareholders.

He told participants at the Goldman Sachs Twelfth Annual Global Retailing Conference in New York that "we looked at the state of the debt market [and] we looked at the level of debt that we were carrying on our balance sheet." The company had $186 million of long-term debt as of the end of the 2013 fiscal second quarter on June 29, unchanged from what it had been a year earlier.

"It just seemed appropriate to take advantage of the financing market, and so we raised $400 million."

The company's wholly owned William Carter Co. subsidiary priced the Rule 144A senior notes at par to yield 5¼% on Aug. 7, slating the deal's proceeds for share repurchases, dividends and other general corporate purposes.

Westenberger called the deal "good, long-term eight-year money at a very low cost."

He said that "we didn't have a need for that cash to run the business - so we turned it into an accelerated share-repurchase transaction, to deploy those proceeds toward share repurchase."

Shareholders get cash back

On Aug. 22, just days after the bond deal settled, Carter's announced that its board of directors had approved a new $400 million share repurchase authorization, bringing the company's total repurchase authorization to $700 million, with some $670 million of total remaining capacity under the authorizations as of that date.

Then, just a week later, it announced that it had entered into agreements with JPMorgan Chase Bank, NA, to repurchase $400 million of its common shares under an accelerated share repurchase program, funded with the bond-deal proceeds.

"We think that's been a good step in the right direction to improve the overall efficiency of our capital structure," Westenberger told the conference attendees, who also heard a formal presentation about Carter's overall operations from the company's chairman and chief executive officer, Michael D. Casey.

Besides the latest share repurchase moves, the company on Aug. 22 also declared a quarterly dividend of 16 cents per share that will be payable this coming Friday to shareholders of record as of the close of business on Sept. 3. The CFO said that this was "something we would like to do going forward on a quarterly basis."

Increased capex - for now

He said that "we've been fortunate that we have a business model that is very cash-rich. We have a lot of operating cash flow."

He declared that "first and foremost, our priorities are to invest in the business." Westenberger said that this has been "an unusual year of capex spending for us," with the company investing around $200 million - roughly double what it generally spends - on such initiatives as a new distribution center, "which we think meaningfully improves both the growth profile of the business and the operating-cost profile of the fulfillment function that serves all of the different businesses."

Carter's has also been spending money on its headquarters operation in Atlanta, moving into a new headquarters facility there and consolidating some operations and relocating a couple hundred employees to its corporate center from Connecticut.

He said that these were "one-off projects that will not repeat next year," projecting that capex should revert back to its usual levels around 2% to 3% of net sales.

Extra liquidity proves useful

Before that capex binge, Westernberger said that over the past few years, the company had saved its money and probably "maintained more cash than strict corporate finance theory would find efficient." But he said that the extra liquidity came in handy, allowing the company to ride out the recession and after that, a sharp rise in the price of cotton, a key apparel industry commodity.

"It felt good to have a lot of liquidity, and that was a good place to be," he said. "When cotton costs really spiked, we saw the investment in inventory and working capital go up enormously, so we needed our liquidity."

However, by 2012-2013, "we started to build a cash balance which seemed well in excess of what we could see spending efficiently near-term," prompting the board to opt for instituting a dividend and giving the company extra authority to buy back shares.

"It's our desire to be shareholder-friendly in that regard, to have an efficient capital structure." Capital structure, he said, "is something that we talk about all the time - we have an ongoing discussion among ourselves on the management team and with the board."

Westenberger opined that "my guess is we'll continue to have some amount of excess cash flow," generated by the strong market positions that the venerable Carter's brand and its OshKosh B'gosh brand hold as well-known leading manufacturers of clothing for, respectively, babies, toddlers and small children on the one hand, and somewhat older kids, from about ages 5 or 6 up to the "tween-age" years, on the other.

As to what to do with that cash, the CFO told the conference participants that going forward, "we'd like to target around 50% of our ongoing free cash flow for distribution to shareholders, whether it's through dividends or share repurchase. So it's our intent to both fully invest in the business and to the extent that we have excess cash beyond that, it's our intent to distribute it."

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