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Carter's (CRI) Q4 Earnings & Sales Miss, 2021 View Upbeat

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Carter's, Inc. CRI reported fourth-quarter 2020 results, wherein the bottom and top lines not only missed the Zacks Consensus Estimate but also declined year over year. Results were hurt by COVID-19 impacts, including soft store traffic and muted demand from international customers.

However, robust e-commerce sales along with improved margins stemming from enhanced inventory management as well as better promotions and prices remained positives. Moreover, this Zacks Rank #3 (Hold) company continued to witness healthy demand from a few of its largest customers, like Target TGT, Amazon AMZN and Walmart WMT. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Going ahead, management expects sales growth and improved profitability this year. It also noted that 2021 started on a positive note, driven by spring product offerings and gains from government stimulus payments to families with young children. Apart from these, the company is well positioned to recover from the pandemic woes as vaccines are being distributed across the United States.

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

Q4 Highlights

Carter’s reported fourth-quarter 2020 adjusted earnings of $2.46 per share, missing the Zacks Consensus Estimate of $2.92. Moreover, the figure declined 12% year over year from $2.81 in the prior-year quarter.

Net sales decreased 10% to $990 million and missed the Zacks Consensus Estimate of $1,044 million. The year-over-year decline was due to COVID-related disruptions, which led to lower wholesale sales and soft store traffic, which were somewhat offset by strong e-commerce sales. However, an additional week in 2020 contributed to the top line to the tune of nearly $32 million.

Its e-commerce business is performing well, backed by new capabilities such as curbside pickup and the direct shipment of e-commerce orders from stores. The company also gained more than 2 million new customers. Moreover, online sales surpassed the $1-billion mark in 2020.

Going forward, the company anticipates omnichannel to grow roughly 40% of online sales by 2025.

Segmental Sales

Sales at the U.S. Retail segment fell 5.5% year over year to $585.8 million due to soft store sales. During the quarter, retail comparable sales declined 9% with solid e-commerce growth and weak store sales.

The U.S. Wholesale segment sales witnessed a decrease of 16.9% to $290.1 million due to sluggishness in the Carter's brand and the off-price channel. On the flip side, strength in online demand and Little Baby Basics acted as key growth drivers.

The International segment witnessed a 13.4% decline in revenues to $113.8 million in the fourth quarter due to market disruptions related to the ongoing COVID-19 situation, particularly in Canada and Mexico, as many stores remained shut in these markets.

Margins

Gross profit decreased 0.3% year over year to $466 million, while gross margin expanded 460 basis points (bps) to 47.1%. The uptick can be attributable to improved pricing efforts, sturdy demand for its products, enhanced promotions and better inventory management.

The company’s adjusted operating income was $145 million, down10.5% year over year from $162 million reported in the prior-year quarter. Meanwhile, adjusted operating margin of 14.7% expanded 540 bps in the quarter under review. Apart from these, adjusted SG&A expenses rose 5% to $327 million in the quarter.

Balance Sheet & Shareholder-Friendly Moves

The company ended 2020 with cash and cash equivalents of $1,102.3 million, net long-term debt of $989.5 million and shareholders’ equity of $938 million. In 2020, the company provided cash flow of $589.9 million for operating activities.

Earlier, Carter’s had suspended share repurchase and quarterly dividends on a temporary basis. Also, it did not incur any capital spending in the reported quarter.

The company has $745 million remaining for borrowings under its revolving credit facility. That said, it boasts liquidity of $1.8 billion at the end of the reported quarter, which is likely to help it stay afloat amid this crisis.

Store Update

In 2020, Carter’s revealed plans to shut down 25% of stores whose leases have expired. Of these, 60% of store closures are likely to take place by the end of 2021 and 80% of such stores are expected to close by the end of 2022.

Outlook

Despite drab quarterly results, management expects net sales to grow almost 5% and a bottom-line increase of 10% for 2021. This guidance includes continued impacts of the pandemic and excludes $7 million costs related to additional protective equipment and cleaning supplies. Also, the top and bottom-line growth are likely to be heavily weighted in the first half of 2021.

However, Carter’s envisions adjusted earnings per share to be nearly 25 cents for the first quarter, suggesting a sharp decline from the year-ago quarter’s 81 cents. This too excludes roughly $3 million of COVID-related costs.

Price Performance

We note that shares of the company have lost 7.1% in the past three months against the industry’s growth of 0.8%.

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