U.S. Markets closed

Why new store openings and ecommerce drive Carter’s Q1 growth

Smita Nair

Key opportunity: Glenview Capital raises its stake in Carter's (Part 3 of 6)

(Continued from Part 2)

Glenview Capital and Carter’s

Larry Robbins’ Glenview Capital filed a Schedule 13G with the SEC last week. The fund disclosed that it increased its stake in Carter’s Inc. (CRI) to 6.84%.

Carter’s is the largest branded marketer in the United States of apparel exclusively for babies and young children. The company saw double-digit revenue growth during the first quarter—higher than its closest peers, The Gap (GPS) and Children’s Place Retail Stores (PLCE)

Earnings

Carter’s is scheduled to report its 2Q 2014 earnings this week. It beat estimates for earnings and revenue for 1Q 2014.

The company’s consolidated net sales increased $60.6 million, or 10.3%, to $651.6 million. But adjusted earnings per diluted share in the first quarter of fiscal 2014 decreased 7.5% to $0.73, compared to $0.79 per diluted share in the first quarter of fiscal 2013.

Gross margin decreased from 41.1% in 1Q 2013 to 40.2% in 1Q 2014. Gross margin was unfavorably affected by higher product costs.

Management said, “Our sales growth in the first quarter was driven by our Carter’s brand with strong performance in both our wholesale and retail businesses. As expected, earnings were affected by higher product costs and investments to support our growth strategies.”

Management added it expects “the negative impact of higher product costs and the growth rate and spending to moderate over the balance of this year.”

Operating income in 1Q 2014 decreased 8.1%, to $61.5 million due to net expenses totaling $8.6 million related to amortization associated with the acquisition of H.W. Carter and Sons trade names, office consolidation, the revaluation of contingent consideration associated with the acquisition of Bonnie Togs in 2011, the Hogansville, Georgia, distribution center closure, and the Japan retail operations exit. Operating income was also affected by increased retail, distribution, and information technology spending to support its growth initiatives.

Segment sales improve but retail store comparable sales decline

In terms of segments, Carter’s retail segment sales increased 10.5% to $230.3 million. This increase was driven by new retail store openings and eCommerce sales growth. However, retail store comparable sales declined 4.7%. The company said this decline was largely driven by the severe winter weather leading to a higher number of store closures and the shift of Easter shopping into April.

Wholesale segment sales rose 9.4% to $271.6 million, reflecting growth across all Carter’s brands. Management noted on the earnings call that its “Carter stores may have benefited from a higher mix of wear now products given the weather.”

OshKosh retail segment sales increased 14.8% to $63.6 million. These sales were driven by incremental sales of $4.6 million from new retail store openings, $2.9 million in higher eCommerce sales, and a retail store comparable sales increase of 3.0%. But wholesale segment sales fell 14.3% to $15.6 million due to a decline in units shipped compared to the first fiscal quarter of 2013.

Carter’s said it has seen a good response to its “side-by-side” locations, where stores for Carter’s and OshKosh brands are connected, allowing customers to shop for both brands. The model has helped the company to “leverage store expenses and improve store profitability.” The company operated a total of 24 “side-by-side” locations in 2013 and has plans to open an additional 24 stores.

International segment sales surged 15.9% to $70.5 million, principally driven by growth in the company’s wholesale businesses. Management said on the earnings call that “the largest contributor to this growth was from sales to our wholesale customers outside the United States particularly to Target (TGT) and Walmart (WMT) in Canada.”

Sales saw a negative impact from changes in foreign currency exchange rates. Canadian comparable-retail-store sales declined 10.2%, or approximately $2.8 million, due to severe winter weather and shift in Easter shopping.

Royalty income in 1Q 2014 was approximately $9.9 million, including $1.4 million of international royalty income. This was an increase of 7.1% compared to 1Q 2013, reflecting strength in domestic royalties.

eCommerce sales poised to grow

In 2013, Carter’s U.S. eCommerce business grew nearly 50% to $211 million and represented 17% of its total retail segment sales. The company said it’s investing to improve its eCommerce capabilities and that “eCommerce sales are trending to growth about 30% this year.”

eMarketer estimated in April that U.S. retail eCommerce sales will increase 15.5% in 2014 to reach $304.1 billion, up from $263.3 billion in 2013. Forrester Research expects that online sales will account for 11% of total U.S. retail sales by 2018. According to comScore, online shopping on personal computers rose 12% year-over-year and the product categories that performed well were apparel and accessories.

These trends will benefit Carter’s and its peers in apparel retail, like The Gap (GPS), Children’s Place Retail Stores (PLCE), Kohl’s (KSS), and Macy’s (M), as well as retail exchange-traded funds (or ETFs) like the SPDR S&P Retail ETF (XRT) and Market Vectors Retail ETF (RTH).

Continue to Part 4

Browse this series on Market Realist: