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Can Carter's Strategies Reverse Dismal Run on the Bourses?

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Shares of Carter's, Inc. (CRI - Free Report) have underperformed the industry in the past six months. This Atlanta, GA-based company has declined approximately 12% against the industry’s growth of 5% in the said time frame.

Notably, it is grappling with soft gross margin for a while now. Increased product costs and stringent pricing actions have been hurting its gross margin. Higher shipping costs in the e-commerce channel and changes in customer mix across the U.S. Wholesale segment are added deterrents.

Also, the company’s high inventory levels remain a worry. In second-quarter 2019, Carter's net inventories grew 5.2% due to lower provisions for inventory and product cost increases. Management anticipates mid-single-digit rise in inventories in both the third and fourth quarters of 2019. High inventory levels might result in increased inventory costs, which may hurt margins and profitability.

Carter’s performance is affected by negative movements in foreign currency. Notably, unfavorable foreign-currency impacts hurt its top line by $2.1 million in the second quarter. Also, the international segment was partly dented by currency headwinds. Fluctuations in foreign currency are likely to act as a deterrent in the near term as well.

Although supply-chain initiatives and other efforts have helped alleviate the potential impact of tariffs to some extent, Carter’s remains exposed to additional tariffs. Initially, the imposition of high tariffs took a toll on Carter’s suppliers, resulting in high product costs.

Can Strategies Aid a Turnaround?

Carter’s Retail strategy remains focused on improving store productivity, strengthening the e-commerce business, and enhancing product offerings by introducing extended sizes for the Carter’s brand and expanding Skip Hop brand offerings. The company expects net sales for Skip Hop to increase nearly 20% globally in 2019, in turn contributing to profitability.

Notably, its co-branded stores — one-stop shops for families with young children — are receiving positive response. These stores have been the most productive lately, receiving the maximum return on investment. In the second quarter, co-branded stores were one of the best performing store types. Backed by the success of this store type, management plans to open more than 100 co-branded stores in the next five years.

The company has been experiencing decent growth in the International business on the back of solid performance in Mexico. Encouraged by this, it intends to open four co-branded stores in Mexico, influenced by the best-performing U.S. store model. Carter’s anticipates low-single-digit growth in the International segment in second-half 2019. Moreover, the company projects increased sales in this segment in 2019, owing to favorable trends in Canada. Growth in Canada is anticipated to be primarily driven by improved products and continuous success in Mexico.

Moreover, the company has successfully concluded the transition of the business model in China from a retail and wholesale model to a licensing model, with a single partner in this market. This new model is likely to enable Carter’s to better serve the young children’s apparel market in China in a more profitable way. Keeping in these lines, its licensees intend to launch the company’s brands with Walmart (WMT - Free Report) and Costco (COST - Free Report) in China during second-half 2019.

Carter’s — which shares space with Caleres (CAL - Free Report) in the same industry — is seeking opportunities to strengthen e-commerce capabilities through investments to speed up deliveries. The company witnessed robust growth in e-commerce in the last reported quarter, backed by favorable response mainly from U.S. consumers. Encouragingly, it expects double-digit growth in e-commerce for the rest of the year. Moreover, e-commerce is poised to become the company’s highest-margin business. E-commerce sales growth is expected to be about 10% in 2019, driven by strong demand in the United States. Further, it is on track to expand its range of products.

Furthermore, Carter’s has been making efforts to enhance omni-channel capabilities. In this regard, management has launched the same-date pickup service for online orders that should improve convenience and drive traffic to stores. This move will help the company reduce delivery costs and accelerate the delivery process.

We believe, the aforementioned tailwinds have the potential to bring this Zacks Rank #3 (Hold) stock back on growth trajectory.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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