Can Carter's (CRI) Retain Its Positive Earnings Trend In Q3?

Carter's, Inc. (NYSE:CRI) is scheduled to report third-quarter 2019 numbers on Oct 24, before the opening bell. The company delivered a positive earnings surprise of 18.8% in the last reported quarter. It has outperformed the Zacks Consensus Estimate in three of the trailing four quarters, the average positive earnings surprise being 12.2%. Let’s discuss the factors that are likely to be reflected in the upcoming quarterly results.

Estimates Look Bright

The Zacks Consensus Estimate for third-quarter earnings is pegged at $1.69, which indicates a rise of nearly 5% from $1.61 reported in the year-ago quarter. Notably, the consensus mark has moved north by a penny in the past 30 days.

For revenues, the consensus estimate stands at $934.9 million that suggests an increase of approximately 1.2% from the year-ago quarter’s figure.

Factors to Consider

Carter’s has been gaining from favorable U.S. Retail and Wholesale trends, which are expected to be visible in its top- and bottom-line performance throughout 2019. In the last earning call, management guided top-line growth of roughly 1% with adjusted earnings expected to increase 3-4% in the third quarter.

Benefits from the Retail strategy that focuses on store productivity, e-commerce growth and enhanced product offerings are likely to get reflected in third-quarter results. Furthermore, the top line is expected to reflect significant gains from the international segment on growth in Canada and Mexico. Moreover, transition of its business model in China from a retail and wholesale model to a licensing one is expected to reflect in the upcoming quarterly results.

Carter’s benefited from its omni-channel efforts that included investments to speed up deliveries and the launch of same-date pickup service for online orders. The company’s e-commerce business has been reporting strong gains for quite some time. This trend is likely to have continued in the third quarter. The company anticipates double-digit growth in e-commerce for the second half of 2019.

However, the company has been struggling with soft gross margin for a while due to high product costs and stringent pricing efforts. Higher shipping costs in the e-commerce channel and changes in customer mix across the U.S. Wholesale segment were added deterrents. Meanwhile, the company had earlier anticipated gross margin to expand in the third quarter. However, it expects a low single-digit growth in SG&A, partly offseting the rise in margins.

Also, the company’s high inventory levels might have increased inventory costs, which is likely to reflect in its margins and profitability. In second-quarter 2019, Carter's net inventories grew 5.2% due to lower provisions for inventory and product-cost increases. In its last earnings call, Carter’s projected mid-single-digit rise in inventories for both the third and the fourth quarter of 2019.

What Our Model Says

Our proven model predicts an earnings beat for Carter’s this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the chances of an earnings beat. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Carter’s has a Zacks Rank #3 and an Earnings ESP of +0.83%.

Other Stocks With Favorable Combination

Deckers Outdoor Corporation (NYSE:DECK) currently has an Earnings ESP of +3.17% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Columbia Sportswear Company (NASDAQ:COLM) has an Earnings ESP of +1.57% and a Zacks Rank #1 at present.

V.F. Corporation (NYSE:VFC) currently has an Earnings ESP of +0.51% and a Zacks Rank #2.

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