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Factors Setting the Tone for Carter's (CRI) Q2 Earnings

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Factors Setting the Tone for Carter's (CRI) Q2 Earnings

Carter's (CRI) Retail and International segments continue to reflect strength, while the weakness in the Wholesale segment, due to the bankruptcy of Toys "R" Us, has been a key concern for the stock.

Carter’s Inc. CRI is slated to release second-quarter 2018 results on Jul 26. In the last reported quarter, the company delivered positive earnings surprise of 12.3%.

A glimpse of the company’s earnings performance in the trailing four quarters shows that it has outpaced estimates by an average positive surprise of 7.9%. Additionally, the company’s surprise history reveals that it delivered an earnings beat in the last six quarters and topped sales estimates in eight of the last 10 quarters.

Carter's, Inc. Price and EPS Surprise

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

However, the Zacks Consensus Estimate for the second quarter is pegged at 54 cents per share, reflecting a year-over-year decline of 31.7%. Moreover, consensus estimates have remained stable in the last 30 days. Analysts polled by Zacks anticipate total revenues of $684.1 million, which reflects a decline of 1.2% year over year.

While the company’s Retail and International segments continue to reflect strength, weakness in the Wholesale segment, due to the bankruptcy of Toys “R” Us, has been a key concern for the stock. Consequently, the stock has declined 0.2% year to date, against the industry’s increase of 18.7%.

How Things are Shaping Up for This Announcement

Carter’s has a robust surprise history, having delivered an earnings beat in 16 of the last 17 quarters while sales surpassed estimates in eight of the last 10 quarters. Though concerns over the Toys “R” Us liquidation remain, the company expects solid sales and earnings growth in 2018, driven by strong product offerings, investments in brand marketing and e-commerce capabilities, and gains from the new tax reform.

The company is gaining from its Retail Strategy, 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 likely to significantly drive retail sales growth in 2018. Additionally, the company 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.

Moreover, Carter’s continues to experience strong growth in its International business, as evident from solid growth witnessed in the first quarter. Gains from the segment are mostly driven by the strength in Skip Hop, Canada and Mexico.

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, the company is on track with the integration of the Mexico business, which has been acquired in 2017. It anticipates about $30 million sales contribution from Mexico in 2018, with the potential to double its sales in the next five years. Moreover, the company expects China to generate about $20 million sales in 2018, with significant e-commerce sales growth through Tmall.

However, the closure of Toys “R” Us stores across the country is largely weighing on the performance of Carter’s U.S. Wholesale segment that witnessed a sales decline of 4% in first-quarter 2018. Though the company expects to recapture lost sales to Toys “R” Us through its 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.

This was well reflected in the company’s trimmed sales forecast for the U.S. Wholesale business for 2018. The company now projects sales to decline in a low-single-digit range for the Wholesale segment compared with the previous outlook of low-single-digit growth. Additionally, the company’s overall sales and earnings for the second quarter and 2018 are also likely to be hurt by the Toys “R” Us bankruptcy. Consequently, the company trimmed its earnings and sales growth guidance for 2018, each by nearly 2%. The company now forecasts growth of 3% for revenues and about 12% for adjusted earnings per share in 2018.

Further, the company’s second-quarter guidance reflected impacts from an early Easter holiday that led to an increased retail demand in the first quarter, slower sales trends so far in the second quarter due to the colder weather and the absence of sales to Toys “R” Us. The company expects net sales of $680 million and adjusted earnings per share of 53 cents in the second quarter.

Additionally, higher SG&A expenses, due to continued investments in business growth and new initiatives, are weighing on the operating margin, which is likely to continue throughout 2018.

What the Zacks Model Unveils

Our proven model does not conclusively show that Carter’s is likely to beat earnings estimates this quarter. 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 +2.30% and Zacks Rank #4 (Sell) make surprise prediction inconclusive.

Stocks Poised to Beat Earnings Estimates

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

Deckers Outdoor Corporation DECK has an Earnings ESP of +0.47% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

lululemon atheletica inc. LULU has an Earnings ESP of +1.91% and a Zacks Rank of 1.

Columbia Sportswear Company COLM has an Earnings ESP of +19.90% and a Zacks Rank #2.

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