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Carter's (CRI) Down 13% in 3 Months: Is a Reversal Likely?

Carter's, Inc. CRI is losing footing in investors’ books, owing to headwinds such as high inventory level, higher expenses and softness across its U.S. Wholesale business due to the bankruptcy of Toys “R” Us. A glimpse at this stock’s price performance reveals that it has underperformed the industry in the past three months. Shares of this Atlanta, GA-based company have lost approximately 13% wider than the industry’s 0.7% decline.

Nevertheless, Carter’s Retail strategy remains focused on improving store productivity, strengthening e-commerce business and enhancing product offerings. Further, the company is experiencing robust growth at its International business. Let’s take a closer look at both sides of the story.

Hurdles in Carter's Path

Carter’s is witnessing sluggishness across its U.S. Wholesale business due to the bankruptcy of Toys “R” Us. The closure of these stores across the country is largely weighing on Carter’s top-line performance. The company’s bottom line declined due to reduced sales along with changes in channel and customer mix, owing to loss of sales to Toys “R” Us and Bon-Ton. Notably, the U.S. Wholesale business was affected the most by the loss of planned sales to these stores.

In the first quarter, sales in this segment decreased 1.9%. Notably, Toys “R” Us and Bon-Ton contributed $13 million to the segment’s net sales in first-quarter 2018. Additionally, adjusted gross margin contracted 140 basis points due to loss of sales to these retailers, which were high margin businesses.

Additionally, higher cost of investments toward technology, brand marketing and expedited shipping have been denting operating margin. In the first quarter, adjusted operating margin contracted 150 bps, owing to higher e-commerce shipping costs and promotions, adverse impact of the Toys “R” Us bankruptcy, and increased mix of lower margin new businesses.

Moreover, the company’s high inventory levels remain a worry. In the first quarter, it witnessed 8% growth in net inventories. The company expects this quarter’s year-over-year inventory growth to be the highest in 2019. This growth is mainly due to product cost increases, higher in hand baby replenishment inventory, late Easter timing and increased retail stores. Moving ahead, management forecasts inventory growth in mid-single digits for each of the remaining quarters in 2019.

Can Efforts Aid a Turnaround?

Carter’s Retail strategy remains focused on improving store productivity, strengthening e-commerce business and enhancing product offerings by introducing extended sizes for the Carter’s brand and expanding Skip Hop brand offerings. The company had estimated net sales for Skip Hop to increase nearly 20% globally in 2019, contributing to total profitability.

Additionally, it is witnessing a positive response for its co-branded stores, which is a one-stop shop for families with young children. Backed by the success, management plans to open more than 40 co-branded stores, which are more profitable.

Also, Carter’s is seeking opportunities to strengthen e-commerce capabilities through investments to speed up deliveries. Moving ahead, e-commerce is poised to become the company’s highest margin business, with e-commerce sales growth of about 10% in 2019, driven by strong demand in the United States. Further, it is on track to expand its range of products.

In addition, Carter’s has been making efforts to enhance omni-channel capabilities. In this regard, the company tested its “Buy Online and Pick Up in Stores” initiative and received favorable response. This facility will now offer customers the option to pick up online orders from stores on the same day of purchase.

Later this year, management intends to rollout the new same-date pickup service for online orders, which should improve convenience and drive more traffic to stores. This move will help the company lower its delivery costs and accelerate the delivery process.

Apart from these, the company has been experiencing decent growth in its International business. For 2019, it projects increased sales growth in this segment, with Canada being the highest contributor. Further, growth in this region is anticipated to be driven primarily by the retail segment.

Apart from Canada, the segment is also projected to record sturdy growth in Mexico in 2019 on efforts like launching of new co-branded stores and enhancing e-commerce capabilities in the second half of 2019. The company recently initiated e-commerce operations in Brazil, which is witnessing strong traffic.

Moreover, the company has successfully concluded the transition of its business model in China from a retail and wholesale model to a licensing model, with a single partner in this market. This new model is likely to enable Carter’s to better serve the young children’s apparel market in China in a more profitable way. Keeping in these lines, its licensees intend to launch the company’s brands with Walmart WMT and Costco COST in China during the second half of 2019.

The company anticipates top-line growth of roughly 4-6% for the second quarter. Adjusted earnings are expected to be flat year over year. For 2019, it projects net sales growth of 1-2%, with adjusted earnings per share growth of 4-6%.

Backed by these aforementioned tailwinds, we expect this Zacks Rank #3 (Hold) stock to return on its growth trajectory.

Stock to Consider

Deckers Outdoor Corp. DECK has a long-term earnings growth rate of 11.6% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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