It has been about a month since the last earnings report for Carter's (CRI Quick QuoteCRI - Free Report) . Shares have added about 21.9% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Carter's due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Carter's Posts Q1 Loss, Sales Surpass Estimates

Carter's reported a loss against the Zacks Consensus Estimate of earnings in the first quarter of 2020 while sales exceeded the same. Till early March, the company witnessed growth in line with its guidance and expected 2020 to perform well. Negative impacts from the ongoing COVID-19 pandemic begin to be felt in March, when sales slowed down due to consumers’ increased awareness. The company suspended store operations for the safety of employees and customers due to which sales suffered a setback.

However, it is currently operating only online. Further, healthy demand from a few of its largest customers, such as Target and Walmart, comes as a relief. Nevertheless, the government has started lifting restrictions in some states, as a result of which management intends to reopen some stores. Despite this, management withheld its 2020 guidance for the top and bottom lines, anticipating supply-chain disruptions and other unprecedented impacts related to COVID-19. Additionally, it envisions the adverse impact to continue in the second quarter, with a potential recovery in the third quarter.

Q1 Highlights

Carter’s reported first-quarter 2020 adjusted loss of 81 cents against the Zacks Consensus Estimate of earnings of 30 cents and the year-ago quarter’s earnings of 87 cents. The decline can be attributed to store closures in North America, reduced wholesale sales and higher inventory stemming from the COVID-19 pandemic.

On a GAAP basis, the company reported adjusted loss per share of $1.82 compared with earnings of 75 cents in the year-ago quarter.

Net sales declined 11.7% to $654.5 million but surpassed the Zacks Consensus Estimate of $649 million due to store closures in North America and soft wholesale demand stemming from the ongoing pandemic.

Segmental Sales

Sales at the U.S. Retail segment fell 14.9% year over year to $320.7 million due to COVID-19 induced store closures, somewhat offset by sturdy sales in the e-commerce channel.

The U.S. Wholesale segment sales witnessed a decrease of 8.4% to $252.1 million due to soft demand stemming from the closure of wholesale stores.

The International segment witnessed a 7.9% decline in revenues to $81.6 million in the first quarter due to lower retail store sales in Canada along with a delay in shipments. Unfavorable currency movement hurt sales in the segment by 0.8%. Currency-neutral revenues for the segment fell 7.1%.

Margins

Gross profit decreased 27.7% year over year to $228.3 million and gross margin contracted 770 basis points (bps) to 34.9%.

The company posted adjusted operating loss of $26.3 million against adjusted operating income of $60.3 million reported in the prior-year quarter. This is mainly due to reduced sales volume, a rise in inventory and elevated costs related to debt.

Balance Sheet & Shareholder-Friendly Moves

The company ended the quarter with cash and cash equivalents of $759.1 million, net long-term debt of $1,238.8 million and shareholders’ equity of $716 million. In the quarter under review, the company used cash flow of $14.3 million for operating activities.

During the first quarter, Carter’s returned nearly $71.5 million to its shareholders through dividend payout and share buybacks. In the quarter, the company bought back 474,684 shares for $45.3 million, the average price being $95.34 per share. It paid out a dividend of 60 cents per share in the reported quarter.

However, management suspended its share repurchase plan on Mar 26. Post this, it has roughly $650 million remaining under its existing share repurchase program. Also, the company decided to suspend its quarterly dividend on May 1.

Store Update

Carter’s opened three retail stores and shuttered five in the United States in the first quarter. As of Mar 28, the company operated 860 retail stores in the United States alongside 198 in Canada and 43 in Mexico.

COVID-19 Update

In the wake of the ongoing pandemic, the company’s stores across North America remain closed from Mar 19. However, it is operating through is online sites.

Keeping in these lines, the company witnessed robust demand from wholesale customers for its products online, which is likely to continue in the second quarter. Management projects more than $1 billion of its brands to be sold online in 2020. Also, it is working toward implementing ship-from-store options in all stores and expects to roll out this facility in 600 stores by late fall.

Further, it has undertaken various steps to strengthen its financial position and provide some cushion to the top line. Notably, the company withdrew the entire $750 million from its revolving credit facility. Also, Carter’s is planning to significantly lower its inventory.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted -844.44% due to these changes.

VGM Scores

Currently, Carter's has a poor Growth Score of F, however its Momentum Score is doing a lot better with a B. However, the stock was allocated a grade of F on the value side, putting it in the bottom 20% quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Carter's has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.