Carter's Q1 Earnings Decline YoY, Beat Ests - Analyst Blog

Impacted by soaring product and investment costs, Carter's, Inc.'s CRI first quarter 2014 adjusted earnings declined 7.5% year over year to 73 cents a share, but surpassed the Zacks Consensus Estimate by a couple of cents. The GAAP earnings for the quarter slumped 8.7% to 63 cents a share.

Carter's reported record first quarter net sales of $651.6 million that surged 10.3% year over year, propelled by the robust demand for its brands and array of Spring products. However, sales fell short of the Zacks Consensus Estimate of $653.0 million.

Sales were also boosted by the company's Japanese retail business, which it exited by the end of the reporting quarter. However, sales were adversely affected by currency translations in the first quarter, as compared to the comparable prior-year period.

Delving Deeper

Carter's gross profit for the quarter improved 7.7% to $261.7 million, whereas gross margin contracted to 90 basis points (bps) from the prior-year quarter to 40.2%. Adjusted operating income descended 8.3% to $70.1 million, with the margin shriveling 210 bps to 10.8% during the quarter.

The fall in adjusted operating income can be attributed to mounting distribution, retail and technological expenditures incurred in order to facilitate Carter's growth strategies and the rising product expenses, partly compensated by better pricing efforts.    

Segment Details

Sales at Carter's retail segment went up by 10.5% to $230.3 million, on the back of additional sales from new stores and the company's eCommerce channels, partly offset by loss of sales from store closures and a fall in retail comparable store sales (comps).

Carter's direct to consumer sales, comprising both retail and ecommerce comps inched up by 1%. Wholesale sales witnessed an increase of 9.4% to $271.6 million, benefitting from the growth of the Carter's brand.

OshKosh B'gosh retail sales reached $63.6 million, reflecting a year-over-year rise of 14.8%. Sales were augmented by store openings, increased eCommerce revenues and rise in retail comps, partly hindered by sales lost due to store closures. The direct-to-consumer sales, constituting retail comps and ecommerce comps, advanced 7.7%. Sales at the wholesale segment declined 14.3% to $15.6 million.

The company's International segment sales soared 15.9% to $70.5 million, primarily benefitted by Carter's wholesale operations. However, sales were negatively affected by foreign currency translations.

Retail comps in all segments were hit by the harsh winter, which led to store closures during the quarter. Also, the shift of Easter week into April led to dismal sales in the first quarter.

Store Count

During the first quarter, the company introduced 16 Carter's retail outlets and 6 OshKosh retail outlets in the U.S., and closed one of each, taking their respective store counts in the country to 491 and 186 by the quarter end. Also, the company added 2 outlets in Canada, and shuttered 1, taking its Canadian store count to 103 as of Mar 29, 2014.

Balance Sheet and Cash Flows

The leading American marketers of babies and kids apparel ended the year with cash and cash equivalents of $277.2 million, long-term debt of $586.0 million and total shareholders equity of $729.2 million.

Owing to a fall in earnings and unfavorable changes in the net working capital, Carter's cash flow from operating activities plunged 42.4% year over year to $30.6 million.

Dividend Update

Carter's began the year with a 19% hike in the quarterly cash dividend to 19 cents per share, which were paid on Mar 20, 2014.

Share Repurchases

During the first quarter, the company retired 1 million shares from the Accelerated Stock Repurchase ASR agreement, which was authorized in the third quarter of fiscal 2013. Moreover, the company bought back 30.2 million shares worth $2.3 million during the quarter.

Including 83.8 million shares, which Carter's repurchased after the first quarter, the company has bought back nearly 113,951 shares year to date, leaving shares worth $258.7 million remaining under its previous authorization.

Going Forward

For the second quarter of fiscal 2014, Carter's envisions adjusted earnings per share to be near the second-quarter fiscal 2013 earnings of 46 cents a share. However, the current Zacks Consensus Estimate for the quarter stands at 48 cents a share, indicating a prospective downward revision.

For fiscal 2014, Carter's forecasts a 12–15% year-over-year increase in adjusted earnings per share. The current Zacks Consensus Estimate for earnings in fiscal 2014 is pegged at $3.89 per share.

Net sales for both the quarter and fiscal 2014 are expected to surge by 8–10% year over year.

Other Stocks to Consider

Carter's currently carries a Zacks Rank #3 (Hold). Other better-ranked stocks in the shoe and related apparel industry include Skechers USA Inc. SKX, with a Zacks Rank #1 (Strong Buy), along with Brown Shoe Co. Inc. BWS and Rocky Brands, Inc. RCKY, both holding a Zacks Rank #2 (Buy).