Carter's (CRI) Q2 Earnings Surpass Estimate, Sales Meet
Carter's, Inc. CRI reported second-quarter 2023 results, wherein the bottom line beat the Zacks Consensus Estimate, while the top line came in line. However, both metrics fell year over year. Results were hurt by the impacts of inflation, which led to reduced spending. On the flip side, it continued to witness higher-than-planned demand in its wholesale business for the third consecutive quarter, driven by the strength of product offerings and lower inventory.
Q2 in Detail
Carter’s reported second-quarter 2023 adjusted earnings of 64 cents per share, beating the Zacks Consensus Estimate of 51 cents. However, the figure fell 51% from the $1.30 posted in the prior-year quarter.
The company reported net sales of $600 million, which met the Zacks Consensus Estimate. However, the metric declined 14% from the $700.7 million posted in the year-ago period. The downside can be attributed to inflation, rising interest rates, higher consumer debt levels and risk of recession, which affected the demand from consumers and wholesale customers. Unfavorable foreign currency translations hurt sales of $1.2 million or 0.2%.
CRI also witnessed better store performance than e-commerce, as people are returning to stores post the COVID-19 pandemic.
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Segmental Sales
Sales in the U.S. Retail segment decreased 15% to $323.5 million year over year and lagged our estimate of $327.5 million. Comparable retail sales fell 15.9% in the second quarter due to unseasonably cool weather weighed on consumer demand in the earlier months of the quarter. However, it witnessed improvement in the retail sales trend since the Memorial Day weekend and has continued into July.
The U.S. Wholesale segment’s sales dipped 17% year over year from $186.9 million but beat our estimate of $179.6 million. Inflation, higher interest rates and rising consumer debt affected the wholesale customer demand.
The International segment witnessed an 8% year over year drop in revenues from $89.9 million to $92.2 million in the second quarter due to cooler weather in Canada. The metric lagged our estimate of $93.3 million.
Margins
Gross profit declined 12% year over year to $291.9 million but marginally beat our estimate of $290.7 million. Meanwhile, the gross margin expanded 140 basis points to 48.6%.
Further, adjusted operating income declined 50% year over year to $37.9 million in the reported quarter but came ahead of our estimate of $34.9 million. The adjusted operating margin declined 450 basis points to 6.3% in the quarter under review.
Balance Sheet & Shareholder-Friendly Moves
This Zacks Rank #3 (Hold) player ended the quarter with cash and cash equivalents of $175 million, long-term debt of $497 million, and shareholders’ equity of $775 million.
The company’s total liquidity at the end of the second quarter of fiscal 2023 was $1 billion, with $846 million in unused borrowing capacity out of an $850-million secured revolving credit facility.
In the second quarter of fiscal 2023, the company returned $58.5 million to shareholders through share repurchases and cash dividends. In the quarter under review, it repurchased 0.4 million shares of its common stock for $30.3 million. As of Jul 27, 2023, CRI had a $701-million remaining capacity under its previously announced repurchase authorization.
Also, it paid out a dividend of 75 cents per common share in the said quarter.
Carter's, Inc. Price, Consensus and EPS Surprise
Carter's, Inc. price-consensus-eps-surprise-chart | Carter's, Inc. Quote
Outlook
For the third quarter of 2023, net sales are expected to be $770-$790 million. Adjusted earnings are likely to be $1.45-$1.55, suggesting a decline from the $1.68 reported in the prior-year quarter. Adjusted operating income is expected to be $80-$85 million, implying a dip from the $91.6 million recorded in the year-ago quarter.
The third-quarter guidance indicates continued inflationary pressure on consumer demand. The company also expects comparable interest expenses, and a higher effective tax rate and SG&A rate deleverage. Nevertheless, it expects improved gross margins, suggesting reduced inventory-related costs, improved price realization and lower transportation. The company expects a lower average number of shares outstanding for the third quarter of 2023.
For 2023, Carter’s expects net sales of $2.95-$3 billion compared with the earlier mentioned $3 billion. Notably, it reported net sales of $3.2 billion in the previous year. Adjusted earnings per share (EPS) are likely to be $5.95-$6.15 compared with the prior stated $6.15. Notably, it reported an EPS of $6.90 in 2022. Adjusted operating income is forecast to be $325-$340 million, down from the previously communicated $350 million. The estimate indicates a decline from the $388.2 million reported in the year-ago period. The company expects an operating cash flow of more than $300 million and a capital expenditure of $75 million.
Management envisions an improved demand trend for the second half of 2023, as it expects inflation to moderate. Carter’s also forecasts a significant improvement in the operating cash flow this year, enabling the company to continue investing in its growth strategies and returning excess capital to shareholders through dividends and share repurchases.
CRI is making efforts to reduce inventory levels to improve product sell-throughs, price realization and the gross profit margin. It also expects significant improvement in sales and earnings in the second half this year, driven by stronger product offering, improved on-time shipping performance, and lower ocean freight rates and product costs.
Shares of Carter’s have gained 11.2% in the past three months against the industry’s 12.5% decline.
Stocks to Consider
Some better-ranked companies are Bluegreen Vacations BVH, Royal Caribbean RCL and lululemon athletica LULU.
Bluegreen Vacations sports a Zacks Rank #1 (Strong Buy) at present. BVH has a trailing four-quarter earnings surprise of 24.7%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for BVH’s 2023 sales and EPS indicates increases of 3.6% and 17.6%, respectively, from the year-ago reported levels.
Royal Caribbean sports a Zacks Rank #1 at present. RCL has a trailing four-quarter earnings surprise of 26.4%, on average.
The Zacks Consensus Estimate for RCL’s 2023 sales and EPS indicates increases of 47.9% and 158.3%, respectively, from the year-ago period’s reported levels.
lululemon athletica is a yoga-inspired athletic apparel company. LULU carries a Zacks Rank of 2 (Buy) at present.
The Zacks Consensus Estimate for lululemon athletica’s current financial-year sales and EPS suggests growth of 16.7% and 18%, respectively, from the year-ago reported figures. LULU has a trailing four-quarter earnings surprise of 9.9%, on average.
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