Key opportunity: Glenview Capital raises its stake in Carter's (Part 4 of 6)
Glenview Capital and Carter’s
Larry Robbins’ Glenview Capital filed a Schedule 13G with the SEC last week. The fund disclosed that it increased its stake in Carter’s Inc. (CRI) to 6.84%. Carter’s is a branded marketer of apparel exclusively for babies and young children.
Carter’s forecast 2Q 2014 net sales to increase approximately 8% to 10% over the second quarter of fiscal 2013 and adjusted diluted earnings per share to be around $0.46. This number is the same as the company’s earnings in 2Q 2013.
However, the earnings forecast excludes expenses and other items. For fiscal 2014, the company expects an approximate 8% to 10% increase in net sales over fiscal 2013 and adjusted diluted earnings per share to increase around 12% to 15% compared to $3.37 in fiscal 2013.
Key risks to the forecast include macroeconomic factors and foreign currency movements—especially for the Canadian dollar. Carter’s also said an aggressive promotional activity across the industry that began at the end of last year and continued earlier this year could “impact consumer reaction to its planned pricing and promotional strategies.”
Management said Carter’s expects to improve operating margins as well as “price realizations through selective price increases, better supply chain performance, and inventory allocation.” The company is expanding its direct sourcing capabilities and expects to complete full automation of its multi-channel distribution center in Georgia in the second half of this year.
Carter’s management further noted on its earnings call that inventories for the end of 2Q 2014 are expected to increase around 25% year-over-year. This increase should be driven “in part by planned earlier receipts and anticipation of a potential West Coast port strike.” A report in Forbes cited data from the National Retail Federation and Hackett Associates and noted that June container volumes have surged on concerns of a strike or lockout at the West Coast ports. The article added that “retailers have been bringing holiday merchandise in early” to deal with any potential disruptions.
New store openings and opportunities in emerging markets could be future growth drivers
During the quarter, the company opened 16 Carter’s retail stores and six OshKosh retail stores in the United States. It opened two retail stores in Canada. As of the end of 1Q 2014, Carter’s operated 491 Carter’s and 186 OshKosh outlet, brand, and specialty stores in the U.S. It also had 103 company-operated stores in Canada in addition to international wholesale, licensing, and online channels.
Management said on the earnings call that it is “on track to open 60 Carter stores this year.” It also added that the Canadian market remains “attractive” for Carter’s, and it plans to open 22 new stores and also launch a co-branded website. Carter’s anticipates “international sales to grow from 10% to 15% of our total sales by 2018.” The company’s exploring new market opportunities in China, Mexico, and Brazil.
A report by Euromonitor said that Carter’s remained the leader in children’s wear in 2013. The company’s 12% value share reached $3.5 billion. The release further said that the company has made direct-to-consumer sales a priority by opening new U.S. outlets and driving increased traffic to its e-commerce operations. These initiatives will be a positive growth catalyst for the company.
Euromonitor added that The Gap Inc. (GPS) was second in this market, with a 7% share of sales in 2013. A recovery in the U.S. birth rate and economic conditions will spell good news for retailers of apparel for babies and young children like The Gap, Gymboree, Children’s Place Retail Stores (PLCE), and Disney (DIS) as well as Internet retailers like Amazon (AMZN) and Zulily (ZU).
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