Carter's (CRI) Q3 Earnings Surpass Estimates, Sales Miss

Zacks Equity Research
·5-min read

Carter's, Inc. CRI came out with third-quarter 2020 results, wherein the bottom line surpassed the Zacks Consensus Estimate while sales lagged the same. Despite a solid start, the back-to-school season witnessed muted demand. However, demand bounced back in September with solid Labor Day sales growth of 15%, driven by demand for winter wear. Also, a robust product portfolio, lesser promotions, reduced spending and sturdy e-commerce growth contributed to quarterly results.

Moreover, this Zacks Rank #2 (Buy) company continued to witness healthy demand from a few of its largest customers, like Target TGT, Amazon AMZN and Walmart WMT. Although store traffic is expected to remain drab, Carter’s envisions online demand and gross margin to retain its momentum in the fourth quarter. However, management refrained from providing any 2020 guidance citing continued uncertainties related to the COVID-19 outbreak, resurge in cases and a tough market environment.

Q3 Highlights

Carter’s reported third-quarter 2020 adjusted earnings of $1.96 per share, exceeding the Zacks Consensus Estimate of $1.67. Moreover, the figure advanced 4.8% year over year from $1.87 in the prior-year quarter.

Net sales decreased 8.3% to $865.1 million and missed the Zacks Consensus Estimate of $882 million. The year-over-year decline was due to lower wholesale sales, soft store traffic and sluggish back-to-school sales, which were somewhat offset by strong e-commerce sales.

Further, the company is witnessing healthy demand for its baby apparel and sleepwear products, which represented 70% of total apparel sales. Apart from this, its e-commerce business is performing well, with its stores fulfilling 24% of online orders. Moreover, its revamped website with improved products, convenient shopping options and enhanced checkout experience aided online sales. Also, management is offering same-day pickup and curbside pickup facilities across 600 stores in the United States. Encouragingly, online sales are anticipated to reach the $1-billion mark in 2020.

Carters, Inc. Price, Consensus and EPS Surprise

Carters, Inc. Price, Consensus and EPS Surprise
Carters, Inc. Price, Consensus and EPS Surprise

Carters, Inc. price-consensus-eps-surprise-chart | Carters, Inc. Quote

Segmental Sales

Sales at the U.S. Retail segment fell 3.2% year over year to $449.2 million due to soft store sales. During the quarter, retail comparable sales declined 3.5% with e-commerce growth of 17%.

The U.S. Wholesale segment sales witnessed a decrease of 14.2% to $302.1 million due to delayed shipments. Despite soft sales, demand for fall products and Little Baby Basics remained positive.

The International segment witnessed a 10.4% decline in revenues to $113.8 million in the third quarter due to lower wholesale shipments stemming from unfavorable currency and market disruptions related to the ongoing COVID-19 situation.

Margins

Gross profit decreased 4.6% year over year to $383.7 million, while gross margin expanded 180 basis points (bps) to 44.4%. The uptick can be attributable to improved pricing efforts and better inventory management.

The company’s adjusted operating income came in at $119.5 million, up 4.2% year over year from $114.7 million reported in the prior-year quarter. Additionally, adjusted operating margin of 13.8% expanded 160 bps in the quarter under review. This is mainly due to reduced SG&A expenses and a solid gross margin. SG&A expenses fell 5.9% to $279.3 million in the quarter.

Balance Sheet & Shareholder-Friendly Moves

The company ended the quarter with cash and cash equivalents of $831.2 million, net long-term debt of $989.1 million and shareholders’ equity of $821.9 million. In the first nine months ending Sep 26, 2020, the company provided cash flow of $320.1 million for operating activities.

Earlier, Carter’s had suspended share repurchase and quarterly dividends on a temporary basis. Also, it did not incur any capital spending in the reported quarter.

The company repaid $244 million of borrowings under its $750-million revolving credit facility. That said, it boasts a liquidity of $1.6 billion at the end of the reported quarter, which is likely to help it stay afloat amid this crisis.

Store Update

Carter’s intends to open less than 100 co-branded stores in the next five years and shut down 25% of stores whose leases have expired. Of these, 60% of store closures are likely to take place by the end of 2021 and 80% of such stores are expected to close by the end of 2022.

Price Performance

We note that shares of the company have lost 1.2% in the past three months against the industry’s growth of 31.7%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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