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Carter's (CRI) Q2 Earnings & Sales Top Estimates, View Intact

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Carter's (CRI) Q2 Earnings & Sales Top Estimates, View Intact

Carter's (CRI) delivers top and bottom-line beat in the second quarter driven by solid performance of the U.S. Retail and International segments. The company reiterates view for 2018.

Carter’s Inc. CRI posted top- and bottom-line beat in second-quarter 2018, which marked its seventh straight earnings beat and ninth sales beat in 11 quarters. Results mostly gained from strength in the Retail and International segments.

While shares of the company showed little movement following the results, this Zacks Rank #4 (Sell) stock has gained 11.9% in the past three months, outperforming the industry’s growth of 8.5%.

Q2 Highlights

Carter’s second-quarter 2018 earnings per share of 79 cents were flat year over year. Moreover, the bottom line surpassed the Zacks Consensus Estimate of 56 cents.

Carter's, Inc. Price, Consensus and EPS Surprise


Carter's, Inc. Price, Consensus and EPS Surprise | Carter's, Inc. Quote

Net sales increased 0.6% to $696.2 million, surpassing the Zacks Consensus Estimate of $684.1 million. The improvement can be attributed to gains from the U.S. Retail and International segments, with significant contributions from the Mexico licensee acquired in 2017. However, lower sales in the U.S. Wholesale segment partly hurt the top line. Sales grew 0.3% on a constant-currency basis. Foreign currency gains aided the top line by $2.6 million or 0.4%.

Segment Revenues

U.S. Retail segment sales improved 2.7% year over year to $402 million, backed by comparable store sales (comps) growth of 0.9%. The increase in comps is mainly attributed to solid e-commerce growth.

U.S. Wholesale segment saw a sales decline of 3.8% to $209.5 million, mainly due to lower shipments resulting from the discontinued sales to Toys “R” Us and Bon-Ton, partially negated by contributions from the Skip Hop acquisition.

The International segment reported revenue gains of 2.6% to $84.7 million in the second quarter. The increase was driven by contributions from Mexico acquisition and strength in Canada, partially neutralized by the decline in wholesale demand across various markets outside the United States. Foreign currency gains contributed 3.1% to the top line growth. Currency-neutral revenues for the segment declined 0.6%.

Costs & Margins

Gross profit improved 2.1% to $310 million and gross margin expanded 60 basis points (bps) to 44.5%. The improvement is attributable to sourcing efficiencies and favorable channel mix.

Adjusted operating income declined 13.1% to $57 million. Adjusted operating margin contracted 130 bps to 8.2% owing to higher retail and marketing investments as well as lower margins in the U.S. Wholesale segment due to customer mix. This was partly compensated by sourcing efficiencies.

Balance Sheet & Shareholder-Friendly Moves

Carter’s ended second-quarter 2018 with cash and cash equivalents of $183.2 million, net long-term debt of $682.8 million and shareholders’ equity of $810.3 million. Inventories as of Jun 30, 2018, grew 8.7% to $663.3 million.

The company generated $103.1 million in operating cash flow in the first half of 2018.

In the second quarter, Carter’s returned nearly $84.9 million to shareholders including $21 million in dividends and $63.9 million in share buyback. During the quarter, the company bought back 599,314 shares at an average price of $106.62 per share. The company also paid a dividend of 45 cents per share. As of Jul 25, 2018, the company had $483.8 million remaining under its current share repurchase program.


For third-quarter 2018, Carter’s expects net sales to be flat with the third quarter of 2017. Adjusted earnings per share are also anticipated to be flat with the prior-year quarter earnings of $1.70. Results for the third quarter assume a partial recovery of los sales that was initially planned for Toys “R” Us and Bon-Ton.

Driven by the strong product offerings, investments in brand marketing and e-commerce capabilities, and gains from the new tax reform, the company reiterated its sales and earnings growth guidance for 2018. The company continues to anticipate growth of 3% for revenues and about 12% for adjusted earnings per share in 2018.

The company expects sales and earnings to be aided by the recapturing of nearly half of the lost volume due to the liquidating of its wholesale customers, Toys “R” Us and Bon-Ton, in the last three quarters of 2018. Other assumptions include lower discretionary spending from planned levels and an effective tax rate of about 22%.

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A better-ranked stock in the same industry is Deckers Outdoor Corporation DECK, carrying a Zacks Rank #2 (Buy). Other stocks worth considering in the broader Consumer Discretionary space are lululemon athletica inc. LULU and G-III Apparel Group, LTD. GIII, both sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Deckers Outdoor has long-term earnings growth rate of 12.2%. Further, the company has gained 27.6% in the past three months.

lululemon, with long-term earnings growth rate of 14.3%, has surged 26% in the past three months.

G-III Apparel has long-term earnings growth rate of 15%. Moreover, the company has rallied 25.7% in the past three months.

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