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Carter's (CRI) Q1 Earnings & Sales Beat Estimates, 2021 View Up

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  • CRI

Carter's, Inc. CRI reported impressive first-quarter 2021 results, wherein the bottom and top lines advanced year over year. Results gained from improved demand for its products in March, led by its spring offerings along with government stimulus and the accelerated vaccine rollout program. Also, better promotions, productivity and pricing efforts along with enhanced pricing contributed to quarterly growth.

Moreover, the company continued to witness healthy demand, particularly for babywear from a few of its largest customers like Target TGT, Amazon AMZN and Walmart WMT.

Driven by such upsides, management lifted the 2021 view. Consequently, shares of the Zacks Rank #3 (Hold) company have gained 17.1% in the past three months against the industry’s decline of 1.6%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Q1 Highlights

Carter’s reported first-quarter 2021 adjusted earnings of $1.98 per share, surpassing the Zacks Consensus Estimate of 27 cents. Moreover, the figure compared favorably with a loss of 81 cents reported in the prior year quarter.

Net sales increased 20% to $787 million and exceeded the Zacks Consensus Estimate of $657 million. The uptick can be attributable to growth across all segments along with solid demand and improved store traffic, following the passing of the $1.9-trillion pandemic relief bill on Mar 11. Also, favorable currency movements of $3.1 million aided top-line growth.

The company’s e-commerce business witnessed growth of 38% in the quarter under review, driven by efforts, including improved and expanded products, ease of checkout, site navigation, faster delivery and search capabilities. Also, the buy online and pick up in store facility acted as a major growth driver.

Segmental Sales

Sales at the U.S. Retail segment rose 27% year over year to $407.1 million, driven by double-digit growth in stores and online.

The U.S. Wholesale segment sales witnessed a rise of 12.4% to $283.4 million owing to exclusive brand strength to the tune of double digits. Also, its flagship Carter's brand and Skip Hop brand performed well with double-digit growth in baby apparel.

The International segment witnessed 18.7% growth in revenues to $96.9 million in the first quarter, driven by improved performance across Canada and Mexico, which more than offset store closures. Also, strength in the Simple Joys brand remained an upside.

Margins

Gross profit surged 71.7% year over year to $392 million, while gross margin expanded 1490 basis points (bps) to 49.8%. The uptick can be attributable to improved pricing efforts, sturdy demand for its products led by strength in spring product offerings, enhanced promotions and better inventory management. Also, reduced product costs aided margins.

Adjusted SG&A expenses rose 3.4% to $270.9 million in the quarter. However, the metric, as a percentage of sales, contracted 560 bps to 34.4%.

The company’s adjusted operating income was $128.5 million against an operating loss of $26.3 million reported in the prior-year quarter. Meanwhile, adjusted operating margin was 16.3% in the quarter under review, driven by strength in the company’s spring product offerings along with better pricing and enhanced inventory.

Balance Sheet & Shareholder-Friendly Moves

The company ended the first quarter with cash and cash equivalents of $1,053.7 million, net long-term debt of $990 million and shareholders’ equity of $1,029.6 million. In the said quarter, the company used a cash flow of $39.5 million for operating activities.

The company has $745 million remaining for borrowings under its revolving credit facility. It boasts liquidity of $1.8 billion at the end of the reported quarter.

During the first quarter, Carter’s board approved a quarterly dividend of 40 cents per share to be paid on May 28 as of shareholders’ record on May 12. Also, it incurred capital expenditures of $11.7 million in the reported quarter.

Store Update

Carter’s shut down 60 stores in the first quarter, with plans to close roughly 115 low-margin stores in 2021. Closure of these low-productivity stores is likely to benefit the bottom line and margins in 2021. Also, it intends to open 10 stores beginning 2022.

Carters, Inc. Price, Consensus and EPS Surprise

Carters, Inc. Price, Consensus and EPS Surprise
Carters, Inc. Price, Consensus and EPS Surprise

Carters, Inc. price-consensus-eps-surprise-chart | Carters, Inc. Quote

Outlook

Encouraged by the solid first-quarter results, management raised its 2021 guidance. The company now anticipates sales to grow roughly 10%, up from the earlier guided view of almost 5%. Also, the bottom line is now envisioned to rise nearly 40% year over year compared to the prior view of 10% for 2021. This guidance includes $7 million of costs related to additional protective equipment and cleaning supplies, and $1 million of restructuring costs.

The company also issued an upbeat second-quarter view, wherein it expects sales to rise nearly 35%, with bottom-line growth of roughly 25% year over year. Moreover, the adjusted operating income is likely to increase almost 35% year over year. This view is inclusive of $2-million of pandemic-related costs. Also, it forecasts robust sales growth across all segments in the second quarter. Further, gross margin is projected to expand year over year but decline sequentially due to elevated freight costs in order to meet the growing demand. Apart from these, SG&A costs are likely to remain high owing to store-related expenses and higher compensation expenses.

It projects adverse impacts of store closures, elevated compensation benefits, higher taxes and delay in the timing of wholesale shipments to hurt the company’s performance in the second half of 2021. Also, rising transportation costs, supply-chain disruptions, uncertainties in store traffic, promotions and international demand as well as product cost inflation remain key concerns.

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