Israel Englander More Than Doubles Stake in Carter's

Shares of Carter's Inc. ( CRI ) reached a monthly high of $89 at the end of April. Investors' confidence got a boost when the children's apparel company announced its first-quarter results, and the stock went up by nearly 3%.

The company posted diluted EPS of 95 cents, a decrease of 9%. Its revenue of $733 million was higher than the figure reported a year earlier by 1.2%. Both figures beat the market consensus by 13 cents and $18.82 million.

Despite a fall in international sales, revenues were up reflecting the growth in the domestic retail and wholesale sales. The recent acquisition of Skip Hop showed a positive with a $10.4 million sales in the first quarter of fiscal 2017. Moreover, the evolution of the dollar against other currencies had a positive effect.

Operating income decreased by 15.5% while net income was down by 13.6%. Moreover, the cash generation of Carter was thin. Cash flow from operations were $84.2 million, down by 34% when compared to the same quarter a year ago. Despite this, Carter returned $64.6 million to shareholders through share repurchases and cash dividends.

In the first months of 2017, Carter opened 15 stores but closed five stores in the U.S. For the coming quarters, we could expect an increase in operations in retail and e-commerce to improve the margins.

Although sales in the international segment dropped almost 2%, growth in Canada and the Skip Hop acquisition offset the decline. Canada is important because Carter reached a leading position with a good market share, and it will be a key market in the future.

For the entire year, the company projects net sales to increase by 4% to 6% while adjusted earnings per diluted share will do the same but at a higher rate: about 8% to 10%. To reach those numbers, Carter?s drivers for growth are crucial, and the merchandising strategy and distribution should contribute with it.

Relative valuation

From a valuation standpoint, trading at a 17.65x PE, which stands at a discount compared to the industry mean, indicates that other companies operating in the same subindustry are richly valued. Considering that the industry mean is at 20.0x, the current price level shows a fair valuation relative to its peers.

Final comment

Carter operates in an extremely competitive environment, and the company needs to constantly adapt to changes in demand. Markets outside the U.S. should provide more profitability despite some political risks inherent to the regions.

Israel Englander is strongly bullish on the stock; he upped his position by 140% in the quarter to $74.4 million with 816,905 shares.

Disclosure: Author holds no position in any stocks mentioned.

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This article first appeared on GuruFocus .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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