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Carter's (CRI) Beats on Q3 Earnings & Sales, Ups 2019 View

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Carter’s Inc. (CRI - Free Report) reported third-quarter 2019 results, wherein top and bottom lines surpassed the Zacks Consensus Estimate and improved year over year. Results gained from strong retail and wholesale businesses along with robust demand for its fall and holiday season merchandise.

Further, management updated view for 2019.

We note that shares of this company have gained 19.3% year to date, underperforming the industry’s 27.9% growth.

 


Q3 Highlights

Carter’s third-quarter 2019 adjusted earnings of $1.87 per share grew 16% year over year. Moreover, the bottom line surpassed the Zacks Consensus Estimate of $1.69.

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

 

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

Carter's, Inc. price-consensus-eps-surprise-chart | Carter's, Inc. Quote

Including a non-cash impairment charge of nearly 53 cents for the Skip Hop tradename, the company reported earnings per share of $1.34 on a GAAP basis. This compared unfavorably with $1.53 earned in the year-ago quarter.

Net sales grew 2.1% to $943.3 million and beat the Zacks Consensus Estimate of $941 million, driven by growth in retail and wholesale segments, and strong demand for its fall and holiday season merchandise. However, unfavorable foreign currency affected the top line by $1.3 million (0.1%). Sales advanced 2.2% on a constant-currency basis.

Segmental Sales

Sales at the U.S. Retail segment rose 1.1% year over year to $464.1 million. Comparable sales (comps) declined 0.6%, owing to lower in-store sales, offset by growth in e-commerce sales.

The U.S. Wholesale segment witnessed sales growth of 3.9% to $352.3 million, owing to sturdy demand for the exclusive Carter’s brand.

The International segment witnessed nearly 1% rise in revenues to $127 million in the third quarter due to growth in markets outside North America, partly offset by the change in business model in China and effects of negative currency. Currency-neutral revenues for the segment rose 1.9%. Foreign currency marred the segment’s sales by nearly $1.3 million or 1%.

Margins

Gross profit improved 3.8% to $402.2 million and gross margin expanded 70 basis points (bps) to 42.6%.

Adjusted operating income grew 7.1% to $114.7 million. Adjusted operating margin expanded 60 bps to 12.2%, backed by improved gross margin and cost leverage.

Balance Sheet & Shareholder-Friendly Moves

The Zacks Rank #3 (Hold) company ended the quarter with cash and cash equivalents of $153.9 million, net long-term debt of $769.5 million, and shareholders’ equity of $812.7 million. Inventories as of Sep 28, 2019, increased 4.4% to $723.2 million.

In the first three quarters of 2019, the company generated $73.4 million in operating cash flow. Capital expenditure in the quarter totaled $46.1 million.

During the quarter, Carter’s returned nearly $77 million to its shareholders, including $22.3 million in dividend payout and $55 million of share buybacks. The company bought back 602,043 shares for $55 million, the average price being $91.39 per share. As of Oct 23, 2019, Carter’s had $230 million remaining under its current share-repurchase program. It paid out a dividend of 50 cents per share in the reported quarter.

Store Update

In the third quarter, Carter’s opened 14 retail stores and shut three in the United States. As of Sep 28, 2019, the company operated 845 retail stores in the United States alongside 198 in Canada and 44 in Mexico.

Outlook

Following the strong third quarter, management issued guidance for fourth-quarter 2019. It also raised view for the year. For the fourth quarter, the company anticipates top-line growth of roughly 1%. Further, adjusted earnings are expected to improve nearly 1% from $2.84 reported in fourth-quarter 2018.

For 2019, the company now projects net sales growth of 1.5%, which is at the mid-point of the previously mentioned 1-2% growth. Adjusted earnings per share are now expected to rise 4% compared with 4-6% growth stated earlier. In 2018, the company reported earnings of $6.29 per share.

Earnings view excludes a $30.8-million impairment charge related to the write-down of the Skip Hop tradename asset, $7.8-million charge related to the early removal of debt, $1.6 million of restructuring costs, $2.1-million benefit from the sale of inventory in China, and the $0.7-million reversal of store restructuring expenses recorded in third-quarter 2017.

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