Company Overview: Carter's, Inc. (Carter's) is a marketer of apparel for babies and young children in the United States and Canada. The Company owns two brand names in the children's apparel industry, Carter's and OshKosh B'gosh (OshKosh). The Company operates through five segments: Carter's Retail, Carter's Wholesale, OshKosh Retail, OshKosh Wholesale and International. Its International segment includes company-operated retail stores and online Websites, wholesale operations, and royalty income from its international licensees. It markets products for consumers, and offer various product categories, including baby, sleepwear, play clothes, and related accessories. Its multi-channel international business model - retail stores, online and wholesale - enables it to reach a range of consumers around the world. As of December 31, 2016, its channels included approximately 18,000 wholesale locations, 792 stores in the United States, 164 stores in Canada, and its Canadian and the United States Websites.


CRI Details

Carter’s Inc. (NYSE: CRI) seems to be tracking well on its mid-term growth plan and long-term growth plan (of mid-single digit top-line growth and about 10% earnings growth through 2022) while 1Q FY18 looks little conservative. Transition of its stores to co-branded ones and shift to digital platform are expected to benefit the group.

Solid potential for growth: Carter's, Inc. has a growth potential in online segment as only 17% of young children's apparel were bought online. The group is targeting this to rise to over 30% by 2022 assuming that 70% of children's apparel would still be purchased in stores. Accordingly, for the next five years, they are planning to open 160 co-branded stores closer to their consumers. The group is planning net door growth of about 45 stores, less than 10 stores a year, after closures and conversions to the co-branded format. Emanuele, multi-channel, multi-brand consumer is still the most valuable consumer in terms of frequency of visit and annual spending. Over 85% of the group’s customers shop both online as well as in the stores. In 2017, the group’s eCommerce business was the fastest growing, highest margin business. As a result, they are planning to reinvest a portion of the tax savings to further strengthen their consumers' online experience with the brands this year. International eCommerce net sales were strong during the fourth quarter of 2017 and rose 17%, boosted by strong sales in Canada.
 

FY17 Result (Source: Company Reports)
 
Targeting strong growth for International business: The group’ International business delivered a major milestone in 2017, surpassing $400 million in sales and contributing 12% of their overall sales. They are planning a double-digit growth in International sales this year, boosted by their initiatives in Canada, Mexico and China, and the full-year benefit from Skip Hop. The group continues to see a solid demand for their brands from International customers on their U.S. website. Carter's is among the top four most popular websites for International shoppers, together with Amazon, Ralph Lauren and Gap. Moreover, their U.S. website, saw the largest International demand coming from Brazil and Argentina wherein the demand rose 50% against last year. Going forward, the group expects better trends in their tourist and southern border stores. The group is also expecting the Wholesale component of their International business to be comparable to last year with the growth driven by their Retail business.

Striving for a better customer experience: The group is taking initiatives with regards to their supply chain to improve the speed of delivery of their eCommerce orders leading to a better customer experience. As per their research, the quicker the delivery, the higher the satisfaction rating and annual spend by consumers. The group sees this initiative to enhance their position as the absolute leader in online sales of young children's apparel.

Skip Hop contribution: The group’s Skip Hop acquisition has been a major contributor to the top line performance of the group in 2017 as sales across all channels rose over 20% for the full year, with fourth quarter sales growing nearly 30%. Skip Hop contributed over $96 million to the group’s consolidated sales since their acquisition and over $33 million to the fourth quarter. However, Skip Hop did not contribute to earnings in 2017, on the back of integration activities and rising bad debt and inventory costs. During the fourth quarter, the group launched a small, focused Skip Hop assortment in nearly all of their U.S. stores in time for holiday selling, with good response from consumers. The group is expecting another strong year of growth for Skip Hop in 2018 boosted by a better distribution as well as ongoing product innovation.

Financial performance: For fiscal year of 2017, the consolidated net sales rose to $201.2 million, or 6.3%, to $3.4 billion driven by U.S. Retail segment as well as contribution from the Skip Hop acquisition. The Skip Hop and Mexico acquisitions contributed $96.3 million and $15.4 million, respectively, to consolidated net sales in fiscal 2017. As per the segment performance, the U.S. Retail segment sales rose $118.9 million, or 7.2%, to $1.78 billion while the U.S. Retail comparable sales enhanced 2.7%, comprised of eCommerce comparable sales growth of 21.6% which offset a comparable retail store sales decline of 3.3%. Skip Hop contributed $8.8 million to segment net sales in fiscal 2017. As per the U.S. Wholesale segment performance, the sales rose $31.6 million, or 2.7%, to $1.21 billion, showing the contribution from the Skip Hop acquisition, which was partially offset by a decrease in demand for Carter’s and OshKosh products. Skip Hop contributed $55.7 million to segment net sales in fiscal 2017. Meanwhile, the International segment delivered a solid performance with sales rising $50.7 million, or 13.9%, to $415.5 million. The Skip Hop and Mexico acquisitions contributed $31.8 million and $15.4 million, respectively, to segment net sales in fiscal 2017. Overall, fiscal 2017 Diluted EPS reached $6.24, which is a growth of 23%. Adjusted operating income rose $13.4 million, or 3.1%, to $444.8 million, from $431.4 million in fiscal 2016.
 

FY17 Sales (Source: Company Reports)
 
New tax law led to better forecasts: The new tax law has been slated to provide a benefit of about $40 million for 2018, and the group now expects over 20% growth in earnings per share. Since the last two months, the group explored alternative uses for that tax savings and planning to reinvest $20 million of the $40 million tax benefit into two major components of their business which is brand marketing and a faster shipping of their eCommerce orders.

Guidance: The group sees their multi-channel business model enabling sales growth of over 5% a year, on average, for the next five years. They are planning to grow sales by $1 billion or more by 2022 and aiming for about $400 million of growth in their eCommerce sales; $100 million of growth from stores, net of store closures as well as $300 million of growth in International sales driven by Canada, Mexico and China. The group is also targeting $200 million of growth in their Wholesale business. Meanwhile, for the first quarter, the group forecasts their net inventories to be up in the mid-teens as compared to last year, boosted by new business growth including Skip Hop, Simple Joys and Mexico as well as the earlier receipt of certain programs in Retail. They forecast the year-over-year rise in net inventories to moderate over the balance of the year while the current year-end projection reflects a rise in the low to mid-single-digits. The year-end debt rose by $37 million from last year, at the back of short-term borrowings to support seasonal working capital needs, funding for the two acquisitions in 2017, and their ongoing return of capital to shareholders. Free cash flow for the year was strong at $260 million. For the next five years, the group intends to open over 160 new stores and close 115. They are also planning to convert over 40 current single brand stores to the co-branded format. During the fourth quarter, the group opened 9 net new stores. For fiscal 2017, they added 38 net new stores leading to the year-end U.S. Retail store count to 830.
 

Long term growth for Net Sales (Source: Company Reports)
 
Boosting marketing investment in older age segments: The group is targeting to boost their marketing investment in their older age segments. They see their investments to boost their number one market share position in the newborn and toddler age segments and enable market share gains in the older age segment. The retail sales in the 0 month to 24-months age segment grew by over 5%. Sales in their 3-year to 10-year old age segment, which represented over 40% of their U.S. Retail sales, grew by over 9%. Two years ago, the group extended the age range of their Carter's brand to size 8 and OshKosh to size 14. The group is targeting to extend the Carter's product offering to size 14, consistent with OshKosh.
 

Followers on Instagram (Source: Company Reports)
 
Stock performance: The group is a major young children's apparel brand in the online channel in the United States, with three times the share as compared to their nearest competitor. They are even strengthening their position as the leader in young children's apparel. The group has the largest share of the $20 billion young children's apparel market in the United States and expects more opportunities to achieve their growth objectives. E-commerce and International markets are the new growth opportunities for Carter’s. On the other side, the Board of Directors authorized a new $500 million share repurchase program lately as well as approved a 22% increase ($0.08 per share) in its quarterly cash dividend, to $0.45 per share, for payment on March 23, 2018, to shareholders of record at the close of business on March 12, 2018. CRI stock rallied over 27.4% in the last one year (as at March 14, 2018) and we believe there is a further upside. CRI has maintained a strong return on equity much above the industry median of 10%. Accordingly, we give a “Buy” recommendation on CRI at the current price of $112.56
 

CRI Daily Chart (Source: Thomson Reuters)

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