Goldman Favors Carters Over Children's Place In Kids Apparel

Kids apparel stocks have performed well this year, with shares of Childrens Place Inc PLCE and Carter's, Inc. CRI gaining 45 percent and 17 percent, respectively, year-to-date. This compares with a mere 1 percent increase in the S&P 500 and a 5 percent increase in the XRT over the same period.

Goldman Sachs has a Buy rating for Carter’s and a Neutral rating for Children’s Place. Analyst Taposh Bari attributed the YTD outperformance of both the stocks to robust SSS growth, continued sales momentum into 2016, declining product costs, favorable competitive dynamics and a recovery in US birth trends. He added that said that Carter’s is a compounder with several near-term catalysts.

Carter’s: The Compounder

The price target for the company has been raised from $122 to $127. Bari recommended investment in the stock, despite the recent upturn, citing various growth levers, including new stores, ecommerce growth, improved profits, international expansion, declined product costs and a more efficient capital structure.

The EPS estimates for FY16, FY17 and FY18 have been raised from $5.28 to $5.37, from $6.08 to $6.35 and from $6.99 to $7.44, respectively, to reflect improving 1Q trends and accelerated share repurchases. “We expect the company to provide an update on its capital structure review by its annual shareholder meeting on 5/11/16,” Bari stated.

Children’s Place: Showing Promise But Rich Valuation

The price target for the company is at $74. Although Children’s Place is poised to generate margin expansion and EPS growth in the near future, its rich stock valuation dampens the sentiment, Bari commented.

“PLCE currently trades near parity with CRI on NTM P/E (20x), compared to a nearly 3x turn discount, on average, over the past five years. While we are modeling teens EPS growth for both companies in 2016, we prefer CRI due to its large wholesale business, market leadership in baby apparel and a longer track record of success,” the analyst added.

There is limited product overlap between the two companies and, thus, their success may not be mutually exclusive.