Can Carter's (CRI) Efforts Boost Stock Amid Margin Woes?

Shares of Carter's, Inc. (NYSE:CRI) have lost 15.6% in a year due to soft gross margin for a while. Increased product costs coupled with stringent pricing actions have been hurting gross margin. Higher shipping costs in the e-commerce realm and changes in customer mix across the U.S. Wholesale segment are added deterrents. Meanwhile, the industry has rallied 3.5% over the course of a year.

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

Additionally, Carter’s performance is affected by negative movements in foreign currency. Notably, unfavorable foreign-currency impacts hurt the 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.

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 had taken a toll on Carter’s suppliers, resulting in high product costs. This might be a concern going ahead too.

Will Carter's Endeavors Offset Hurdles?

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

Additionally, the company is receiving a positive response for its co-branded stores, which is a one-stop shop for families with young children. These stores have been the most productive lately, receiving the maximum return on investment. Impressively, co-branded stores were one of the best-performing store types in the second quarter. As a result, management plans to open more than 100 co-branded stores in the next few years.

Carter’s has also been making efforts to enhance omni-channel capabilities, including e-commerce capabilities, through investments to speed up deliveries. 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 its delivery costs and accelerate the delivery process.

Encouragingly, it experienced robust growth in e-commerce in the reported quarter backed by favorable response, mainly from U.S. consumers. Management now expects double-digit growth in e-commerce for the rest of the year. Looking forward, e-commerce is poised to become the company’s highest-margin business with sales growth of about 10% in 2019 backed by strong demand in the United States. Further, Carter’s is on track to expand its range of products. All these initiatives are likely to drive sales and profitability.

The aforesaid initiatives have also aided Carter’s International business with solid performance in Mexico. As a result, it intends to open four co-branded stores in Mexico, influenced by the best-performing U.S. store model. For the second half of 2019, Carter’s anticipates low-single-digit growth in the International segment. The company also projects increased sales in this segment for 2019 owing to favorable trends in Canada. Further, growth in Canada is anticipated to be primarily driven by improved products and consistent success in Mexico.

In China, the company has successfully concluded the transition of its business model from retail and wholesale to a licensing one, 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. Notably, its licensees intend to launch the company’s brands with Walmart (NYSE:WMT) and Costco (NASDAQ:COST) in China during the second half of 2019.

Backed by these strategic initiatives, we expect this Zacks Rank #3 (Hold) stock to bring itself back on the growth trajectory.

A better-ranked stock in the same space is Skechers U.S.A., Inc. (NYSE:SKX) , which has an impressive long-term earnings growth rate of 15%. The company currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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