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Carter's Seen Keeping Up Double-Digit Profit Growth

By: Investor's Business Daily
Posted: 2/15/2013 2:51:00 PM
Referenced Stocks: CRI

Like a lot of its customers,Carter's ( CRI ) is having a growth spurt.

After going through a tough stretch in 2011 amid soaring product costs, the seller of babies' and children's clothes has made an impressive comeback.

Earnings growth bounced to double-digit levels the past two quarters following several quarters of declines.

Watchers expect Carter's to keep up the pace when it reports fourth-quarter results in coming weeks. Analysts polled by Thomson Reuters see earnings rising 33% to 84 cents a share. They expect sales to rise 10% to $670.27 million.

That would follow a solid third quarter. Profits surged 52% to $1.02 a share, sailing past views for 89 cents a share. Sales rose 5% to $668.7 million.

Carter's is the nation's largest branded marketer of apparel and related products exclusively for babies and young children. It sells its Carter's and OshKosh B'gosh brands through more than 600 of its own retail stores in the U.S. and Canada and department stores, national chains, and specialty retailers in the U.S. and overseas. They're also sold online at and

Like a lot of other apparel retailers and wholesalers, Carter's got stung by the huge rise in the price of its key raw material, cotton, that rocketed from 67 cents a pound on Feb. 5, 2010, to $2.15 a pound March 4, 2011.

Raw Material Prices

The company's product costs rose along with the higher raw material prices. While Carter's raised its selling prices on many of its products, it was unable to fully absorb the cost increases, which placed pressure on margins and dampened profit growth in 2011.

But the tide has turned on the cost and pricing front as cotton prices have fallen to historic levels.

"In the last nine months or so, as raw material costs have rolled through, pricing has been relatively stable," said CL King & Associates analyst Steven Marotta. "The benefit to operating margins is powerful, which is why they're bouncing back."

In the third quarter, the company's gross margin increased 950 basis points from a year earlier, reflecting a decline in product costs amid lower cotton prices and higher average selling prices.

Jim Chartier, an analyst at Monness, Crespi, Hardt & Co. says product costs were down 10% vs. a year earlier in the second half of 2012 and should be down by around the same amount in the first half of 2013. He expects costs to start to stabilize in this year's second half.

At the same time, Carter's has seen a nice increase in its retail, eCommerce and international business, resulting in a nice uptick sales and earnings.

Its stock, now trading near an all-time high, has made a comeback along with the company.

"Over the past year and a half, there's been a rush of investors toward growth," said Marotta. "There are few growth stories in retail and Carter's is considered one of them."

The company has been growing its Carter's stores at a rapid clip. Marotta says it will end the year with about 415 Carter's stores, up from 360 a year ago. And it's likely to open another 65 to 70 in 2013.

Carter's, which historically had done most of its sourcing through agents, is shifting the mix of direct sourcing from 5% to 50% over the next five years. The direct sourcing will be done through its new sourcing operations in Hong Kong. It expects to source about 10% of its spring 2013 products and 20% of its fall 2013 products directly, said Chief Executive Michael Casey on the third-quarter conference call. The company expects to "ramp" that mix up over time to improve the performance of its supply chain, he adds.

Marotta says using direct sourcing gives Carter's a little more control over the supply chain and allows for a slightly lower cost per unit.

Another big step forward in its supply chain in 2012 was the investment in a new, million-square-foot, multichannel distribution center, said Casey on the call. Carter's completed the initial phase of the transition to the new facility by discontinuing the use of the high-cost, third-party fulfillment center. Now 100% of its e-commerce demand is being shipped, at a lower cost, from the new facility.

E-Commerce Business Growth

Carter's is seeing rapid growth in its e-commerce business, with sales and profits up significantly as of the 2012 third quarter, said Casey on the call. At the time, he expected e-commerce sales to total $140 million in 2012.

The company's retail operation is also growing at a nice pace. In the third quarter, its sales were up 17.8% to $217.3 million. Its same-store sales rose 2.7% vs. a year earlier.

Marotta estimates that the Carter's stores will post a 3% increase in same-store sales for all of 2012.

The company's international segment sales, which includes its Canadian retail and wholesale operations, rose 16.9% to $69.4 million in the third quarter. International retail sales popped 25.2% to $38.8 million. New store openings helped drive the gain. International wholesale sales increased $2.2 million, or 7.9%, to $30.6 million, driven by strong sales in Mexico and Central and South America.

Analysts polled by Thomson Reuters expect the company to keep up its growth spurt. They see full-year 2012 earnings rising 34% to $2.80 a share. They forecast a 21% increase in profits in 2013.