A month has gone by since the last earnings report for Carter's (CRI). Shares have lost about 1.2% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Carter's due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Carter's Q4 Earnings & Sales Beat
Carter’s Inc. posted fourth-quarter 2018 results, wherein top and bottom lines beat the Zacks Consensus Estimate. Results were driven by growth in the U.S. Retail and U.S. Wholesale businesses in the final months of 2018, which reflected a strong holiday season.
Carter’s fourth-quarter 2018 earnings per share of $2.84 increased 21.8% year over year. Moreover, the bottom line surpassed the Zacks Consensus Estimate of $2.57. Earnings benefited from operating income growth, lower tax rate and benefits of share repurchases.
Net sales advanced 5.7% to $1.09 billion, beating the Zacks Consensus Estimate of $1.07 billion. Growth was mainly backed by strength in U.S. Retail and U.S. Wholesale segments. However, unfavorable foreign currency impacted the top line by $3.9 million. Sales grew 6.1% on a constant-currency basis.
Sales for the U.S. Retail segment improved 7.1% year over year to $606.3 million, backed by comparable sales (comps) growth of 5.7%. The increase in comps was attributed to solid e-commerce as well as retail sales growth. Further, sales gained from strength in its brands and the less discretionary nature of young children’s clothing.
The U.S. Wholesale segment witnessed sales growth of 6.5% to $351.4 million, backed by rise in shipments of the Carter’s brand, partly negated by loss of sales to Toys “R” Us and Bon-Ton. In fourth-quarter 2017, Toys “R” Us and Bon-Ton contributed $32 million to sales.
The International segment reported a revenue decline of 2.4% to $128.6 million in the fourth quarter due to soft demand in China and unfavorable currency rates. This was partly offset by higher demand in Mexico. Currency-neutral revenues for the segment inched up 0.6%.
Adjusted gross profit increased 1.7% to $469.1 million while adjusted gross margin contracted 170 basis points (bps) to 43.2%.
Adjusted operating income rose 1.5% to $170.5 million. However, adjusted operating margin contracted 60 bps to 15.7%, owing to higher e-commerce shipping costs and promotions, adverse impact of the Toys “R’” Us bankruptcy, and increased mix of lower margin new businesses.
Balance Sheet & Shareholder-Friendly Moves
Carter’s ended 2018 with cash and cash equivalents of $170.1 million, long-term debt of $593.3 million, and shareholders’ equity of $869.4 million. Inventories as of Dec 29, 2018, grew 5% to $574.2 million due to higher product costs as well as increase in hand baby inventory refills.
The company generated $356 million in operating cash flow in 2018. Capital expenditure for the year was $64 million.
Further, the company’s returns to shareholders were impressive in 2018. Through 2018, Carter’s returned nearly $276.7 million to shareholders, including $83.7 million in dividends and $193 million through share buybacks. During the fourth quarter, the company bought back 515,109 shares for $47.5 million, the average price being $92.28 per share. It also paid a dividend of 45 cents per share in the quarter under review.
As of Feb 22, 2019, the company had $368 million remaining under its current share repurchase program. Moreover, the company raised the quarterly dividend by 11% to 50 cents per share on Feb 14. This dividend is payable on Mar 22 to shareholders with record as of Mar 12.
Following the strong close to 2018, the company outlined a soft outlook for the first quarter of 2019 due to difficult comparisons with the prior-year quarter. However, it issued a decent sales and earnings guidance for 2019.
For first-quarter 2019, Carter’s expects difficult top and bottom-line comparisons as a result of negative impacts related to the loss of sales to Toys “R” Us and Bon-Ton stores as well as the shift of Easter holiday to second-quarter 2019 from the first quarter in 2018.
Consequently, net sales are estimated to decline 4-5% compared with the first quarter of 2018. Adjusted earnings per share are anticipated to be 65-70 cents compared with $1.09 reported in the prior-year quarter.
For 2019, the company projects net sales growth of 1-2%, with adjusted earnings per share growth of 4-6% from $6.29 per share reported in 2018.
Further, Carter’s expects operating cash flow of $375-$400 million in 2019, with capital expenditure of nearly $85 million. The capex will be mostly directed toward investments in retail systems, corporate technology infrastructure and distribution network.
How Have Estimates Been Moving Since Then?
Fresh estimates followed a downward path over the past two months. The consensus estimate has shifted -25.53% due to these changes.
At this time, Carter's has a strong Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Carter's has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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