Why Is Carter's (CRI) Down 11.9% Since Last Earnings Report?

A month has gone by since the last earnings report for Carter's (CRI). Shares have lost about 11.9% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Carter's due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Carter's Q2 Earnings Beat Estimates on Robust Demand

Carter’s reported second-quarter 2019 results, wherein both top and bottom lines surpassed the Zacks Consensus Estimate. Moreover, both the metrics improved year over year. Results gained from solid growth in its retail and wholesale businesses along with robust demand for its merchandise during the spring and summer seasons. Encouraged by sturdy demand, management expects to deliver a robust performance in the second half of 2019 as well.

Q2 Highlights

Carter’s second-quarter 2019 earnings of 95 cents per share increased 21% year over year. Moreover, the bottom line surpassed the Zacks Consensus Estimate of 80 cents.

Net sales grew 5% to $734 million and beat the Zacks Consensus Estimate of $731 million, driven by growth in its retail and wholesale segments. However, this was partly negated by a decline in International segment sales. Further, unfavorable foreign currency negatively impacted the top line by $2.1 million (0.3%). Sales advanced 5.8% on a constant-currency basis.

Segmental Sales

Sales at the U.S. Retail segment increased 5.3% year over year to $423.1 million. Comparable sales (comps) improved 3.8%, owing to higher in-store and e-commerce sales. Sales also benefited from a late Easter timing this year.

The U.S. Wholesale segment witnessed sales growth of 9.4% to $229.1 million, owing to sturdy demand for exclusive brands.

The International segment reported a revenue decline of 3% to $82.2 million in the second quarter due to softness in markets outside North America and change in business model in China. This was partly offset by higher demand in Mexico. Meanwhile, currency-neutral revenues for the segment dropped 0.5%.

Margins

Gross profit improved 4.2% to $323 million. However, gross margin contracted 50 basis points (bps) to 44%.

Adjusted operating income increased 11.9% to $63.8 million. Adjusted operating margin expanded 50 bps to 8.7%, backed by higher sales and cost leverage.

Balance Sheet & Shareholder-Friendly Moves

The company ended the quarter with cash and cash equivalents of $118.5 million, long-term debt of $604.4 million and shareholders’ equity of $827.9 million. Inventories as of Jun 29, 2019, increased 5.2% to $697.6 million.

In the first half of 2019, the company generated $104.5 million in operating cash flow. Capital expenditure in the quarter totaled $25 million.

During the quarter, Carter’s returned nearly $75 million to its shareholders, including $22.5 million in dividend payout and $52.5 million of share buybacks. The company bought back 545,620 shares for $52.5 million, the average price being $96.18 per share. As of Jul 24, 2019, Carter’s had $285 million remaining under its current share repurchase program. It paid a dividend of 50 cents per share in the reported quarter.

Store Update 

In the second quarter, Carter’s opened five retail stores and shut down six in the United States. As of Jun 29, 2019, the company operated a total of 833 retail stores in the United States alongside 189 in Canada and 42 in Mexico.

Outlook

Following a strong quarter, management issued guidance for third-quarter 2019 and retained its full-year view. For the third quarter, the company anticipates top-line growth of roughly 1%. Further, adjusted earnings are expected to improve nearly 3-4% from $1.61 reported in third-quarter 2018.

For 2019, the company still projects net sales growth of 1-2% and adjusted earnings per share increase of 4-6% from $6.29 reported in 2018. This view excludes a $7.8-million charge related to the early removal of debt, $1.6 million of restructuring costs, $2.1-million benefit from sale of inventory in China and $0.7-million reversal of store restructuring expenses recorded in third-quarter 2017.

How Have Estimates Been Moving Since Then?

Estimates revision followed a downward path over the past two months. The consensus estimate has shifted -11.21% due to these changes.

VGM Scores

Currently, Carter's has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Carter's has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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