Carter's Inc.CRI is one among those few retailers that have shown resilience in a tough industry backdrop amid changing consumer preferences. The company displays a robust surprise trend, having delivered an earnings beat in 17 of the last 18 quarters while sales surpassed estimates in nine of 11 quarters. Further, a strong outlook for 2018 and impressive long-term strategies position the company well for growth in the coming quarters.
However, softness in the company's wholesale business due to liquidation of its key wholesale customer, Toys "R" Us, keeps us on the sidelines.
Let's analyze the pros and cons of Carter's.
Strong Suite of Brands
Carter's is the largest marketer of branded apparel and related products for babies and children in North America. The company sells its products through leading department stores, national chains and specialty retailers, both domestically and internationally. It showcases some of its brands at Target TGT , Wal-Mart WMT and the on-line behemoth Amazon AMZN . As of Jun 30, 2018, it operated 826 stores in the United States, 181 in Canada, 41 in Mexico along with more than 17,000 wholesale locations across the United States.
Co-Branded Strategy Holds Promise
Carter's Retail strategy remains focused on improving its store productivity, strengthening e-commerce business and enhancing product portfolio by introducing extended sizes for the Carter's brand and expanding Skip Hop brand offerings. The company's Skip Hop and Age Up initiatives are likely to drive retail sales significantly in 2018.
Additionally, the company is witnessing a positive response for its co-branded stores, which is a one-stop shop for families with kids. These stores have been the most productive lately, receiving the highest promoter scores and return on investment. The company plans to open nearly 160 co-branded stores through 2022. Further, it targets increasing the mix of these stores to at least 50% of its store base compared with 20% at the start of 2017.
International Business to Boost Growth
Carter's continues to experience a strong uptick in its International business, evident from the segment's solid performance witnessed in second-quarter 2018. Gains from this division are mostly driven by the Mexico acquisition and strength in Canada. Notably, more than 60% of the company's International sales are drawn from Canada, which is likely to be the largest contributor to International growth in the next five years.
Further, the company is on track with the integration of the Mexico business, acquired in 2017. It anticipates about $30 million sales contribution from Mexico in 2018 with potential to double its sales in the next five years. Moreover, the company expects China to generate about $20 million sales in 2018 with significant e-commerce sales growth through Tmall.
E-commerce - A Key Growth Avenue
Carter's is seeking opportunities to strengthen e-commerce capabilities via investments in accelerating deliveries. The company also received a favorable response for its omni-channel capabilities rolled out over the past few years. Notably, the company's "Buy Online and Pick Up in Stores" capability and other initiatives aided retail sales growth in the second quarter. Also, Carter's e-commerce sales improved double-digits during the same period. It flaunts the largest share of e-commerce sales in the children's category in the United States, which doubles its closest competitor's tally. Combined with wholesale, the company expects to reach $1 billion in on-line purchases of its brands during 2019.
The company delivered solid top- and bottom-line growth in second-quarter 2018, backed by the strength in Retail and International segments, offset by a soft performance at the Wholesale business. Though concerns over the Toys "R" Us liquidation persist, the company expects solid sales and earnings growth in 2018 owing to a strong product menu, investments in brand marketing and e-commerce capabilities plus gains from the new tax reform. It anticipates 3% revenue growth and about 12% improvement in adjusted earnings per share for 2018.
Headwinds: A Roadblock to Growth
The closure of Toys "R" Us stores across the country is largely weighing on Carter's U.S. Wholesale segmental performance that witnessed a sales decline of 3.8% in second-quarter 2018. Though the company expects to recover lost sales in Toys "R" Us through its solid U.S. retail store presence of more than 18,000 in the long run, it anticipates the absence of planned sales in Toys "R" Us for 2018 to induce some weak wholesale numbers.
For 2018, the company projects disappointing sales in low-single digits range for the Wholesale segment. Additionally, the company's overall sales and earnings for the second quarter and the full year are likely to be hurt by the Toys "R" Us bankruptcy.
Further, higher SG&A expenses due to in-store and e-commerce business growth, higher marketing spending and speedy deliveries have been burdening operating margin growth. Going forward, management expects SG&A rate to be high as it consistently invests in business growth and new initiatives. This is likely to influence operating margin growth in 2018.
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