Carter's Expected Inflection Not Materializing As Planned

Carter's, Inc. CRI inflection isn't materializing as planned, Wells Fargo analysts said while downgrading the stock to Market Perform from Outperform.

The downgrade comes as the second half was set to be a key positive catalyst for CRI due to lapping pricing pressures and international comp headwinds from last year. If comps slow in the third quarter, the analysts said it leaves little room "for confidence this holiday."

"Specifically, our store work points to choppy QTD retail traffic trends and we have also witnessed deeper pricing/promotional pressure that has built throughout the quarter (deeper/earlier Friends & Family event, incremental offers)," lead analyst Ike Boruchow wrote in a note.

"The potential softening of comps would be coming at a tough time, as CRI recently talked down their Spring 2017 order book (while 2016 is shaping up to be the slowest wholesale growth in 10+ years)," Boruchow continued.

Meanwhile, the analyst is surprised at headwinds within their resilient wholesale business (40 percent of sales) amid dept store door closures (Macy's/Sears), dept store inventory reductions (Kohl's) and bigger pushes into private label (Target).

"Our primary concern is essentially that the stock's multiple (currently 17-18x) could be negatively impacted if the investment community begins to believe that cannibalization fears could be coming to fruition (store comps could be negative at Carter's for the 3rd year while wholesale is no longer growing)," the analyst highlighted.

As such, the analyst slashed his valuation range to $92 to $94 from $110 to $112.

[W]hile CRI is one of the stronger brands in a consistent space, we feel it's time to step to the sidelines and look for a better entry point later," Boruchow added.

At time of writing, shares of Carter fell 4.08 percent to $89.57.