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Carter's (CRI) Gains on Solid Online Show Despite Cost Woes

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Carter’s, Inc. CRI has been gaining from the advancement of its e-commerce capabilities along with increased demand for products online. Notably, improved and expanded products, ease of checkout, site navigation, faster delivery and search capabilities contributed to growth in the e-commerce business. Notably, it witnessed e-commerce growth of 38% in the first quarter of 2021. Moreover, 29% of the company’s stores fulfilled online orders, which reflects an improvement from 16% in the prior-year quarter. Driven by such upsides, management had earlier anticipated e-commerce penetration to surge to 42% by 2024.

Further, strength in its same-day pickup service, easy access to a broad array of online products when shopping in stores, easy access to its new credit card program as well as the buy online and pickup at store facility acted as major growth drivers. As a result, omnichannel sales surged more than 100% year over year during the first quarter. Going ahead, omnichannel is likely to contribute roughly 40% of online sales by 2025.

Some other companies treading the same path include Skechers SKX, Steve Madden SHOO and Nike NKE. Skechers’ domestic e-commerce sales skyrocketed nearly 143% year over year during the first quarter of 2021. For Steve Madden, e-commerce momentum continued in the first quarter of 2021 with revenue growth of 112% year over year for its digital business. Also, digital sales of the NIKE Brand rose 59% on a reported basis and 54% on a currency-neutral basis in third-quarter fiscal 2021.

Coming back to Carter’s, improved demand for its products, particularly in March, on the back of its spring offerings aided the first-quarter 2021 results. Notably, the company’s top and bottom lines beat the Zacks Consensus Estimate and advanced year over year. Also, better promotions, productivity and enhanced pricing contributed to quarterly growth. Further, it witnessed growth across all segments along with improved store traffic following the passing of the $1.9-trillion pandemic relief bill on Mar 11.

Encouraged by solid first-quarter 2021 results, management raised its 2021 guidance. The company now anticipates sales to grow roughly 10%, up from the earlier guided view of almost a 5% increase. Also, the bottom line is now envisioned to rise nearly 40% year over year compared to the prior view of 10% growth for 2021.

Moreover, it issued an upbeat second-quarter view, with sales expected to rise nearly 35% and the bottom line to grow roughly 25% year over year. Adjusted operating income is likely to increase almost 35% year over year. Moreover, it forecasts robust sales growth across all segments in the second quarter.

Cost Headwinds to Overcome

Despite such upsides, Carter’s has been grappling with elevated costs related to compensation benefits, promotional activities and increased investments in marketing, digital media and omnichannel capabilities. Also, rising transportation costs, supply-chain disruptions, uncertainties in store traffic, promotions, international demand and product-cost inflation remain concerns. Further, the company expects SG&A expenses to remain high in the second quarter due to store-related expenses and higher compensation expenses. Elevated freight costs in order to meet growing demand are likely to hurt the gross margin in the second quarter.

Additionally, the company has been witnessing direct costs, including health and safety-related expenses stemming from the COVID-19 crisis. In fact, management anticipates incurring costs related to additional protective equipment and cleaning supplies of $7 million in 2021 and $2 million in the second quarter. Moreover, it projects adverse COVID-19 impacts including store closures, elevated compensation benefits, higher taxes and a delay in the timing of wholesale shipments to hurt the second half of 2021.

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