Carter's (CRI) Up 17% in 6 Months: Will the Momentum Prevail?

Zacks Equity Research

Carter's, Inc. CRI is gaining from efforts to enhance omni-channel and e-commerce capabilities. Also, the company’s Retail strategy remains focused on improving store productivity, strengthening e-commerce business and enhancing product offerings.

All these factors helped the company to deliver robust third-quarter 2019 results, wherein top and bottom lines surpassed the Zacks Consensus Estimate and improved year over year. Results reflected strong retail and wholesale businesses along with robust demand for its fall and holiday season merchandise.

In the past six months, shares of this Zacks Rank #3 (Hold) company have increased approximately 17%, outperforming the industry’s growth of 14%.

Factors Driving Carter's Performance

Carter’s is seeking opportunities to strengthen e-commerce capabilities through investments to speed up deliveries. Notably, the company registered double-digit growth in e-commerce sales in the third quarter, with e-commerce penetration improving to 30% of sales. E-commerce investments in the past year included re-launch of its website in summer, better engagement for online customers, and higher conversion rates.

Additionally, the company is making investments to strengthen its mobile app, which is likely to be re-launched in 2020. Further, its brands are sold online at sites of its wholesale customers. On a combined basis (including sales at its website and through wholesale customers), the company expects total online sales of its brands to exceed $1 billion in fiscal 2020.

Furthermore, Carter’s has been making efforts to enhance omni-channel capabilities. In this regard, the company is gaining from its same-day pickup service for online orders, easy access to a broad array of online products and to its new credit card program. This has led to an increase of 13% in sales from multi-channel customers driven by improved experiences.

Apart from these, Carter’s is on track with its Retail strategy. 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 of these stores, management plans to open more than 100 co-branded stores in the next five years. Additionally, it envisions over 80% of its stores to be co-branded by 2021.

Near Term Hurdles

Carter’s is witnessing high inventory levels for a while now. In third-quarter 2019, its net inventories grew 4.4% due to rise in wholesale demand and new retail stores, lower provisions for inventory, and product cost increase. Although, the company’s excess inventory levels were significantly lower than the same period last year, it still anticipates mid-single-digit rise in inventories at year end.

Also, the company is exposed to tariff threats, due to the introduction of tariffs on List 4 goods. It expects negative impacts of tariff to be around $4 million in the fourth quarter.

Nevertheless, we expect all aforementioned growth drivers to offset minor hurdles and help Carter's to sustain momentum.

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