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Factors Likely to Decide Carter's (CRI) Fate in Q4 Earnings

Zacks Equity Research

Carter’s, Inc. CRI is slated to release fourth-quarter 2018 results on Feb 25. The company reported negative earnings surprise of 4.8% in third-quarter 2018. However, it delivered average positive surprise of 13.5% in the trailing four quarters.

For the to-be-reported quarter, the Zacks Consensus Estimate for earnings is pegged at $2.57 per share, which has moved down by a penny in the past 30 days. Nevertheless, the estimate reflects a year-over-year growth of 10.8%. Further, the Zacks Consensus Estimate for revenues in the fourth quarter is pegged at $1,069 million, up 4% year over year.

Carter's, Inc. Price and EPS Surprise

 

Carter's, Inc. Price and EPS Surprise | Carter's, Inc. Quote

For fourth-quarter 2018, Carter’s expects net sales to grow 5% compared with the fourth quarter of 2017. Adjusted earnings per share are also anticipated to rise 10% from the prior-year quarter’s earnings of $2.33.

How Things are Shaping Up for This Announcement

Carter’s has been in the doldrums presumably due to the bankruptcy of Toys “R” Us, the company’s key wholesale customer. The closure of Toys “R” Us stores across the country is largely weighing on the U.S. Wholesale segment’s performance that witnessed a sales decline of 8.3% in third-quarter 2018.

Though the company expects to recapture lost sales to Toys “R” Us through solid U.S. retail store presence of more than 18,000 in the long run, it anticipates the absence of planned sales to Toys “R” Us for 2018 to result in soft wholesale sales for the year. For 2018, Carter’s anticipates growth of 1.5% for net sales and about 5% for adjusted earnings per share in 2018.

Further, the liquidation of Toys “R” Us has led to higher inventory levels, which can result in higher inventory costs overtime that may hurt gross margin. Carter’s witnessed 14% growth in net inventories at the end of third-quarter 2018 mainly due to latest growth strategies, timing of inventory receipts and increased baby replenishment inventory. The company expects net inventory growth to be moderate to up 8% by the end of 2018, driven by efforts to balance lost sales to Toys “R” Us.

Further, the company is extensively investing in initiatives to boost business growth, mostly for the e-commerce channel. It continues to make investments in technology, brand marketing and expedited shipping to drive growth of the business segments. This has resulted in higher SG&A expenses, which have been weighing on operating margin growth. Adjusted operating margin contracted 220 bps in the third quarter. Although the company witnessed lower SG&A expenses initially in the fourth quarter, it expects SG&A expenses to remain a threat to the operating margin in 2018.

Consequently, the stock has gained 1.9% in the past three months, underperforming the industry’s 16.4% rally.

 



Nonetheless, Crater’s is poised to benefit from the Retail strategy, which is 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’s Skip Hop and Age Up initiatives are expected to drive retail sales in 2018. Additionally, it is witnessing a positive response for its co-branded stores, which is a one-stop shop for families with young children. These stores have been the most productive lately, receiving the highest promoter scores and return on investment.

Carter’s also continues to experience robust growth in the International business, which is likely to contribute meaningfully to fourth-quarter sales. Notably, more than 60% of the company’s International sales come from Canada, which is likely to be the largest contributor to International growth in the next five years. Further, it is on track with the integration of the Mexico business, which was acquired in 2017. It anticipates about $30-million sales contribution from Mexico in 2018, with the potential to double sales in the next five years. Moreover, the company expects China to generate about $20 million in sales for 2018, with significant e-commerce sales growth through Tmall.

A Look at the Zacks Model

Our proven model does not conclusively show that Carter’s is likely to beat estimates this quarter. That is because a stock needs to have both — a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — for this to happen. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Carter’s Earnings ESP of -0.07% and a Zacks Rank #4 (Sell) make surprise prediction difficult.

As it is, we caution against stocks with a Zacks Ranks #4 or 5 (Strong Sell) going into an earnings announcement, especially when the company is seeing a negative estimate revision.

Stocks Poised to Beat Earnings Estimates

Here are some companies you may want to consider as our model shows that these have the right combination of elements to beat estimates:

Steven Madden, Ltd. SHOO has an Earnings ESP of +3.09% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Foot Locker, Inc. FL has an Earnings ESP of +2.78% and a Zacks Rank of 2.

NIKE, Inc. NKE has an Earnings ESP of +8.37% and a Zacks Rank #3.

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