Carter's, Inc. (CRI)

CRI 
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Carter's (CRI)

Q3 2012 Earnings Call

October 25, 2012 8:30 am ET

Executives

Michael D. Casey - Chairman, Chief Executive Officer and President

Richard F. Westenberger - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

James C. Petty - President of Retail Stores

Analysts

Susan K. Anderson - Citigroup Inc, Research Division

Susan R. Sansbury - Miller Tabak + Co., LLC, Research Division

Scott D. Krasik - BB&T Capital Markets, Research Division

Steven Louis Marotta - CL King & Associates, Inc., Research Division

Howard Tubin - RBC Capital Markets, LLC, Research Division

Tom Walton - FBR Capital Markets & Co., Research Division

Margaret B. Whitfield - Sterne Agee & Leach Inc., Research Division

Presentation

Operator

Good day, everyone, and welcome to Carter's Third Quarter 2012 Earnings Conference Call. On the call today are Michael Casey, Chairman and Chief Executive Officer; Richard Westenberger, Executive Vice President and Chief Financial Officer; Jim Petty, President of Retail Stores; and Sean McHugh, Vice President of Investor Relations and Treasury.[Operator Instructions]Carter's issued its third quarter 2012 earnings press release today before the market opened. A copy of the release and additional presentation materials for today's earnings conference call have been posted on the company's website at www.carters.com. Click on the Investor Relations section, then News & Events on the left side of the screen. Before we begin, let me remind you that statements made on this conference call and in the company's press release, other than those concerning historical information, should be considered forward-looking statements and actual results may differ materially. For a detailed discussion of factors that could cause actual results to vary from those contained in the forward-looking statements, please refer to the company's most recent annual report filed with the Securities and Exchange Commission. Also on this call, the company will reference various non-GAAP financial measurements. A reconciliation of these non-GAAP financial measurements to the GAAP financial measurements is provided in the company's earnings release. Also today's call is being recorded. And now, your host for today's call, Mr. Casey.

Michael D. Casey

Thanks very much. Good morning, everyone. Thanks for joining us on the call. Before we walk you through the presentation on our website, I'd like to share some thoughts on our business with you. Since our last update, we've achieved a number of significant milestones in our business. We achieved a record level of sales and earnings in our third quarter. We opened our 400th Carter store, we surpassed $100 million in eCommerce sales and completed the transition to our new eCommerce fulfillment center.

Sales growth in the quarter was driven by our retail, eCommerce and international businesses. Our profitability in the quarter was driven by the success of our product and pricing strategies and lower product costs. We achieved our pricing objectives in the third quarter. This is particularly noteworthy given the challenge of maintaining prices in this highly promotional and relatively weak retail environment. Our Carter's brand continues to drive the growth of our business. We have very good growth in our Carter's retail segment. We are on track to open 63 Carter's stores this year and our new stores achieved their performance goals.

Traffic to our comp stores was inconsistent in the quarter. There were more peaks and valleys in our weekly sales than expected. To drive more consistent traffic to our stores, we have strengthened our direct marketing messages to drive a higher transaction value per visit and encourage repeat visits. And we are investing in a national marketing campaign for Carter's that will launch next week. The objective of this marketing initiative is to further strengthen Carter's as the leading brand in young children's apparel in all channels of distribution.

Our holiday marketing arrives in homes this week. It's beautifully executed and focused on holiday dressing. It'll be followed by Black Friday promotions, which includes several key items we believe will provide great value to consumers. Promotions in the fourth quarter are planned at a level comparable to last year. Our focus has been to make our promotions more effective and the related sales more profitable. Our eCommerce sales and profitability are up significantly this year. We now expect our eCommerce sales would be about $140 million this year. This is only our second full year with eCommerce capabilities. Given the strong response by consumers to the beauty and convenience of our brands online, we believe this component of our business has the potential to double in sales and earnings over the next 5 years. All key eCommerce metrics improved since last year. The number of visits to our websites, the conversion rate and the average order value all improved. We had over 18 million visits to our co-branded websites in the third quarter, and 37% of those visits were from international addresses, up from 29% last year. With the help of a third-party resource, our brands are now available online in over 80 countries. We envision an opportunity someday to support international online demand for our brands directly and more profitably.

For the year, Carter's wholesale sales are on track to grow about 5%, which is better than what we had originally planned. Spring bookings for Carter's were also a bit better than what we have forecasted on our last call. The second largest contributor to growth in the quarter was our international segment. Growth in this high-margin segment was driven by our Canadian operations and growth in Central and South America. As a reminder, our vision is to be the world's favorite brands in young children's apparel. We hope to replicate the successful multi-channel model we've built in the United States and global markets. We are the market leader for young children's apparel in the United States, with 17% share of a $22 billion market, and 3x the share of our nearest competitor. Our primary focus is in Canada, China and Japan, and to a lesser extent, South Korea, Australia and Mexico, given the relative size of those markets. Collectively, the newborn to size 7 market in these countries is $25 billion. We currently do business in each of these markets, but we own about 1% share. A relatively small market share gain in these international markets could contribute meaningfully to our sales and earnings. With respect to Oshkosh, our focus this year has been to improve its profitability and profits more than doubled in the third quarter. If we're successful with our balance of year plan, we should see meaningful improvement in Oshkosh's earnings in the fourth quarter, too. This year, we've strengthen Oshkosh's product offering, eliminated unprofitable sales, tested a new store format and built direct sourcing capabilities for Oshkosh.

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