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Carter's (CRI) Earnings Beat, Sales Miss Estimates in Q1

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Carter’s Inc. (CRI - Free Report) reported first-quarter 2019 results, wherein the bottom line surpassed the Zacks Consensus Estimate while the top line lagged. Earnings were driven by robust demand for its brands during the Easter week.

We note that shares of this Zacks Rank #2 (Buy) company have rallied 27.8% in the past three months, outperforming the industry’s 8.3% growth.

Q1 Highlights

Carter’s first-quarter 2019 earnings of 87 cents per share decreased 20.4% year over year. However, the bottom line surpassed the Zacks Consensus Estimate of 70 cents. Earnings were impacted by soft sales along with changes in channel and customer mix.

Net sales declined 1.9% to $741.1 million and also missed the Zacks Consensus Estimate of $742 million due to sluggishness in the U.S. Retail and U.S. Wholesale segments. Moreover, unfavorable foreign currency impacted the top line by $3 million. Sales fell 1.5% on a constant-currency basis.

Segmental Sales

Sales at the U.S. Retail segment decreased 1.7% year over year to $377.1 million. Also, comparable sales (comps) declined 3.7% in the first quarter. The decrease in comps can be attributed to reduced store sales, which was partly negated by solid e-commerce sales growth. Sales were hurt due to late Easter timing, freezing weather and the Gymboree liquidation.

The U.S. Wholesale segment witnessed sales decline of 1.9% to $275.4 million, indicating reduced shipments of the Carter’s brand due to loss of sales to Toys “R” Us and Bon-Ton. In first-quarter 2018, Toys “R” Us and Bon-Ton contributed $13 million to sales.

The International segment reported a revenue decline of 2.8% to $88.6 million in the first quarter due to soft demand in Canada and China, and unfavourable currency rates. This was partly offset by higher demand in Mexico and markets outside North America. Meanwhile, currency-neutral revenues for the segment inched up 0.5%.

Margins

Adjusted gross profit decreased 5% to $315.9 million while adjusted gross margin contracted 140 basis points (bps) to 42.6%.

Adjusted operating income slumped 17% to $60.3 million. Adjusted operating margin contracted 150 bps to 8.1% owing to elevated distribution and freight costs along with changes in channel and customer mix.

Balance Sheet & Shareholder-Friendly Moves

Carter’s ended the quarter with cash and cash equivalents of $160.1 million, long-term debt of $625.3 million and shareholders’ equity of $849.4 million. Inventories as of Mar 30, 2019, tumbled 9.5% to $519.8 million.

In the quarter under review, the company generated $37 million in operating cash flow. Capital expenditure in the quarter totaled $9.4 million.

During the quarter, Carter’s returned nearly $63 million to its shareholders including $22.8 million in dividends and $40 million through share buybacks. Additionally, the company bought back 460,257 shares for $40 million, the average price being $86.83 per share. As of Apr 29, 2019, Carter’s had $335 million remaining under its current share repurchase program. It also paid a dividend of 50 cents per share in the reported quarter.

Store Update

Carter’s opened four new stores and shut down 14 stores in the first quarter, bringing the total store count to 834 in the United States. Going forward in 2019, management intends to open roughly 45 stores and close 25.

Carter's, Inc. Price, Consensus and EPS Surprise

Carter's, Inc. Price, Consensus and EPS Surprise | Carter's, Inc. Quote

Outlook

Following a strong start to 2019, management has issued a guidance for second-quarter 2019 and retained its full-year view. For the second quarter, the company anticipates top-line growth of roughly 4-6%. Further, adjusted earnings are expected to remain flat year over year during the same period. 

For 2019, the company still projects net sales growth of 1-2%, with adjusted earnings per share growth of 4-6% from $6.29 reported in 2018. This view excludes $7.8 million charges related to early removal of debt, $1.6 million of restructuring costs and $2.1 million benefit from sale of inventory in China.

These apart, management projects gross margin expansion in the second half of 2019 along with reduced SG&A costs, increase in operating margin and more share repurchases. Moreover, its wholesale segment is likely to witness higher sales in the current year. Carter’s also sees favourable business trends, which is anticipated to aid the bottom and top lines for the rest of the year. In 2019, the company’s top line is expected to grow backed by its retail segment (the largest segment of Carter’s), which in turn may result in sales growth of more than $1.9 billion. 

Moving ahead, e-commerce is touted to become the company’s highest margin business, with e-commerce sales growth of about 10% in 2019 driven by strong demand in the United States. Also, the company has been making efforts to enhance omni-channel capabilities and will now onwards offer customers the option to pick up online orders from its stores on the same day of purchase. This move will help the company lower its delivery costs and accelerate the delivery process. 

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