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Carter's, Inc. CRI reported third-quarter 2021 results, wherein the bottom line beat the Zacks Consensus Estimate, while the top line missed the same due to supply-chain headwinds. Nonetheless, price realization, productivity improvements, and cost management helped mitigate higher transportation expenses and enhance profit margins.
The company continued to witness a healthy demand from a few of its largest customers like Target TGT, Amazon AMZN and Walmart WMT.
Driven by brand strength and robust marketing strategies, management lifted the 2021 view. Shares of the Zacks Rank #2 (Buy) company have gained 5.5% year to date compared with the industry’s growth of 19.7%. However, shares of Carter’s fell more than 2% on Oct 29, which might be attributable to supply-chain issues, which, in turn, hurt the top line. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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Q3 in Detail
Carter’s reported third-quarter 2021 adjusted earnings of $1.93 per share, surpassing the Zacks Consensus Estimate of $1.65. However, the figure fell 1.5% from $1.96 reported in the prior-year quarter.
Net sales increased 2.9% year over year to $890.6 million but missed the Zacks Consensus Estimate of $964 million. The uptick can be attributable to growth across retail and international segments. Favorable currency movements of $5.6 million aided top-line growth.
Sales at the U.S. Retail segment rose 4% year over year to $465.7 million, driven by the recovery in the back-to-school demand, and growth in its big kid sizes and playwear product categories.
The U.S. Wholesale segment’s sales fell 3% to $294.2 million. Despite strength in its flagship Carter's brand, supply-chain delays hurt the quarterly results.
The International segment witnessed 15% growth in revenues to $130.7 million in the third quarter, driven by improved performance across Canada and Mexico.
The gross profit advanced 6.5% year over year to $408.9 million, while the gross margin expanded 150 basis points (bps) to 45.9%. This marked the sixth consecutive quarter of a gross-margin expansion. The uptick can be attributable to a sturdy demand and fewer promotions, which led to improved price realization. However, higher freight charges, particularly air freight, acted as a deterrent.
Adjusted SG&A expenses rose 7% to $293.2 million in the quarter due to higher spending on compensation provisions, brand marketing and technology initiatives. As a percentage of sales, SG&A expenses expanded 60 bps to 32.9%.
The company’s adjusted operating income grew 3.7% year over year to $123.9 million in the reported quarter. The adjusted operating margin expanded 10 bps to 13.9% in the quarter under review, driven by solid demand and improved price realization, which offset higher transportation costs, a rise in compensation, and increased investments in marketing and omnichannel capabilities.
Balance Sheet & Shareholder-Friendly Moves
Carter’s ended the third quarter with cash and cash equivalents of $943 million, net long-term debt of $990.9 million and shareholders’ equity of $1,054.9 million. In the nine months ending Oct 2, the company provided a cash flow of $7,319 million for operating activities.
It has $746 million remaining under its revolving credit facility. It boasts liquidity of $1.69 billion at the end of the reported quarter.
In the third quarter, Carter’s board resumed share repurchase activities and bought back 1.1 million shares worth $110.3 million. As of Oct 28, 2021, it has $457 million remaining under its existing share repurchase plan. Management also approved a quarterly dividend of 40 cents per share.
Carter's, Inc. Price, Consensus and EPS Surprise
Carter's, Inc. price-consensus-eps-surprise-chart | Carter's, Inc. Quote
Management raised the 2021 guidance. The updated view suggests gain from the shift of wholesale customer shipments from the third quarter to the fourth quarter along with solid international demand, and improved price realization.
Carter’s anticipates yearly sales of $3.45 billion and expects the metric to be 98% of the pre-pandemic level. Adjusted earnings are now envisioned to be $7.57, up from the last year’s reported figure of $4.16 million. Adjusted operating income is likely to be $490 million, up from the prior year’s reported figure of $279.8 million. This guidance excludes $3.7 million of costs related to additional protective equipment and cleaning supplies, and $2.5 million of restructuring costs. It also anticipates e-commerce penetration of 40%, suggesting a rise from less than 32% reported in 2019. This might be attributable to same-day pickup facilities and easy online access to all its product offerings.
The company also issued an upbeat fourth-quarter view, wherein it expects sales of $1,025 million. Adjusted earnings are envisioned to be $2 per share, with an adjusted operating income of $127 million. The view excludes $0.2 million of pandemic-related costs. The company also noted that the fourth quarter has started on a solid note.
However, Carter’s foresees lingering effects of the pandemic, including supply-chain disruption and inflation as well as higher production and transportation delays. Transportation costs are likely to rise further in 2022.
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