A month has gone by since the last earnings report for Carter's (CRI). Shares have lost about 10.6% 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 Earnings & Sales Surpass Estimates in Q2
Carter's posted better-than-expected second-quarter 2020 results. However, both top and bottom lines declined year over year. Despite 80% of stores being closed during this period and other COVID-19 impacts like supply-chain disruptions, results benefited from solid demand in wholesale stores that remained open during the second quarter along with robust e-commerce operations.
Moreover, it continued to witness healthy demand from a few of its largest customers, like Target, Amazon and Walmart. With the lifting of government restrictions in some states, the company reopened several its stores across the United States by the end of June. Further, it is witnessed improved trends with healthy demand during the Jul 4 shopping season.
However, the company has refrained from providing any full-year guidance citing the unprecedented impacts of COVID-19 and uncertainty related to market recovery.
Carter’s reported second-quarter 2020 adjusted earnings of 54 cents per share, exceeding the Zacks Consensus Estimate of loss of 38 cents. However, the figure declined 43.2% year over year from 95 cents in the prior- year quarter. On a GAAP basis, the company reported adjusted earnings per share of 19 cents, down 80.4% from 97 cents in the year-ago quarter.
Net sales decreased 29.9% to $514.9 million but surpassed the Zacks Consensus Estimate of $511 million. The year over year decline was due to store closures in North America, particularly in April and May, as well as soft wholesale demand stemming from the pandemic.
Sales at the U.S. Retail segment fell 25.3% year over year to $316 million due to COVID-19-induced store closures since mid-March, which extended in to April and most of May. However, stores began reopening from early May and roughly 97% of stores were reopened by the end of the second quarter. Following store reopening, it witnessed sturdy demand with comps growth of 8% in the quarter, driven by higher conversion and transaction which more than offset the drab traffic.
The U.S. Wholesale segment sales witnessed a decrease of 33.8% to $151.7 million due to the closure of the majority of wholesale stores for most of the second quarter along with delayed shipments.
The International segment witnessed a 29.9% decline in revenues to $514.9 million in the second quarter due to lower retail store sales in Canada and Mexico along with a delay in shipments stemming from the COVID-19 pandemic.
Gross profit decreased 27.1% year over year to $235.5 million, while gross margin expanded 170 basis points (bps) to 45.7%. The uptick can be attributable to improved pricing efforts and better inventory management.
The company’s adjusted operating income came in at $41.1 million, declining 35.6% year over year from $63.8 million reported in the prior-year quarter. Additionally, adjusted operating margin of 8% contracted 70 bps from 8.7% reported in the last-year quarter. This is mainly due to reduced sales volume and sluggish royalty income, somewhat offset by reduced SG&A expenses and a solid gross margin. SG&A expense fell 18.6% to $218.1 million in the quarter.
Balance Sheet & Shareholder-Friendly Moves
The company ended the quarter with cash and cash equivalents of $1 billion, net long-term debt of $1,232.6 million and shareholders’ equity of $733.3 million. In the first half of 2020, the company provided cash flow of $238.8 million for operating activities.
Earlier, Carter’s had suspended share repurchase and quarterly dividends on a temporary basis. Also, it did not incur any capital spending in the reported quarter.
Out of $750 million of the revolving credit facility, the company has $501 million in unused borrowing capacity. Notably, management boasts liquidity of $1.5 billion at the end of the second quarter, which is likely to keep Carter’s afloat during these trying times.
Carter’s intends to close more than 200 stores, which accounts for nearly 25% of its total stores in North America, by 2024. As of Jun 27, the company operated 1,100 retail stores in the United States, Canada and Mexico.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates.
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