Carter’s Inc. CRI has displayed spectacular momentum in the year-to-date period, courtesy of its focus on improving store productivity, strengthening e-commerce business and enhancing product offerings. Additionally, robust growth in the International business has been a key driver. Further, the company’s second straight quarter of positive earnings surprise in first-quarter 2019 lifted investors’ sentiment, making it an attractive investment option.
Notably, the stock has gained 17% year to date, outperforming the industry’s growth of 11.6%. Moreover, this Zacks Rank #3 (Hold) company’s impressive long-term earnings growth rate of 7.7% indicates that the stock’s momentum is likely to continue.
Further, Carter’s growth potential is evident from its robust outlook. For the second quarter, the company anticipates top-line growth of roughly 4-6%. Adjusted earnings are expected to be flat year over year. For 2019, it projects net sales growth of 1-2%, with adjusted earnings per share growth of 4-6%. It reported adjusted earnings per share growth of $6.29 in 2018.
Management projects gross margin expansion in the second half of 2019 along with reduced SG&A costs, increase in operating margin and more share repurchases. Moreover, its wholesale segment is likely to witness higher sales in the current year. In 2019, the company’s top line is expected to grow on the back of its retail segment (the largest segment of Carter’s), which in turn may result in sales of more than $1.9 billion.
We observe that Carter’s has been experiencing decent growth in its International business. For 2019, the company projects increased sales growth in this segment, with Canada being the highest contributor. Further, growth in this region is anticipated to be driven primarily by the retail segment. Apart from Canada, the segment is also projected to record sturdy growth in Mexico in 2019 on efforts like launching of new co-branded stores and enhancing e-commerce capabilities in the second half of 2019. The company recently initiated e-commerce operations in Brazil, which is witnessing strong traffic.
Moreover, Carter’s successfully concluded the transition of its business model in China from a retail and wholesale model to a licensing model, with a single partner in this market. This new model is likely to enable the company to better serve the young children’s apparel market in China in a more profitable way. Keeping in these lines, its licensees intend to launch Carter’s brands with Walmart WMT and Costco COST in China in the second half of 2019.
Additionally, the company is seeking opportunities to strengthen e-commerce capabilities through investments to speed up deliveries. Moving ahead, e-commerce is poised to become its highest margin business, with e-commerce sales growth of about 10% in 2019, driven by strong demand in the United States. Further, the company is on track to expand its product range.
Carter’s has also been making efforts to enhance omni-channel capabilities. The company tested its “Buy Online and Pick Up in Stores” initiative, which received favorable response. This facility will now offer customers the option to pick up online orders from stores on the same day of purchase. Later this year, management intends to roll out the new same-date pickup service for online orders, which should improve convenience and drive more traffic to stores. This move will help the company to lower delivery costs and accelerate the delivery process.
Moreover, Carter’s Retail strategy remains focused on improving store productivity, strengthening e-commerce business and enhancing product offerings by introducing extended sizes for the Carter’s brand and expanding Skip Hop brand offerings. The company estimated net sales for Skip Hop to increase nearly 20% globally in 2019, contributing to total profitability. Additionally, it is witnessing a positive response for its co-branded stores, which is a one-stop shop for families with young children. Backed by the success of these stores, management plans to open more than 40 co-branded stores, which are more profitable.
While Carter’s earnings performance remained robust in first-quarter 2019, the loss of sales to Toys “R” Us and Bon-Ton stores impacted quarterly sales to some extent. Additionally, adjusted gross margin contracted 140 basis points (bps) due to the loss of sales to Toys “R” Us and Bon-Ton, which were high-margin businesses. Moreover, higher expenses due to investments in technology, brand marketing and expedited shipping, have been denting the company’s operating margins for the past few quarters. Also, high level of inventory is likely to linger in 2019.
Carter’s is oscillating between long-term positives and near-term hurdles. On that note, we would suggest holding on to the stock for the long term.
Meanwhile, investors can count on a better-ranked company, Deckers Outdoor Corporation DECK, from the same industry. The company has a long-term earnings growth rate of 11.6% and it currently carries a Zacks Rank #2 (Buy). You can seethe complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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