Carter’s CRI has been gaining from better price realization, strength in its solid online show and improved store performance. The company continued to witness higher-than-planned demand in its wholesale business for the third consecutive quarter in second-quarter fiscal 2023. This was mainly driven by the strength of product offerings and lower inventory. Management envisions an improved demand trend for the second half of 2023.
The company has been implementing several measures, including improved pricing and optimized inventory management, to counteract the impacts of decreased consumer demand. These efforts have yielded positive results, surpassing expectations in terms of earnings and cash flow from operations in the second quarter of 2023.
CRI is trying to reduce inventory levels to improve product sell-throughs, price realization and the gross profit margin. It also expects significant improvement in sales and earnings in the second half this year, driven by stronger product offerings, improved on-time shipping performance, and lower ocean freight rates and product costs.
The company has been on track to strengthen its e-commerce capabilities through investments to speed up deliveries. Its e-commerce business’s strength continued in second-quarter 2023 on expanded omnichannel facilities, including curbside pickup, same-day pickup, buy online and pickup at store and ship from store. This, along with the easy access to a broad array of online products when shopping in stores, bodes well.
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Driven by these factors, this Zacks Rank #3 (Hold) stock has gained 3.2% in the past three months against the industry's decline of 13.4%.
Hurdles on the Way
Carter’s is reeling from macroeconomic headwinds, including inflation, higher interest rates, rising consumer debt levels and risk of recession, affecting the demand from consumers and wholesale customers. This resulted in a sluggish year-over-year performance in second-quarter fiscal 2023. Adjusted earnings of 64 cents per share fell from the $1.30 reported in the prior-year quarter. The company reported net sales of $600 million in the second quarter of 2023, which declined 14.3% from the $700.7 million reported in the year-ago period.
As a result, management projects fiscal 2023 sales of $2.95-$3 billion compared with the earlier mentioned $3 billion. Notably, it reported net sales of $3.2 billion in the previous year. Adjusted earnings per share (EPS) are likely to be $5.95-$6.15 compared with the prior stated $6.15. Notably, it reported an EPS of $6.90 in 2022.
Adjusted operating income is forecast to be $325-$340 million, down from the previously communicated $350 million. The estimate indicates a decline from the $388.2 million reported in the year-ago period. We expect adjusted operating income to decline 16.2% year over year in 2023.
For the third quarter of 2023, net sales are expected to be $770-$790 million, whereas it reported $819 million in the second quarter of 2022. Adjusted earnings are likely to be $1.45-$1.55, suggesting a decline from the $1.68 reported in the prior-year quarter. Adjusted operating income is expected to be $80-$85 million, implying a dip from the $91.6 million recorded in the year-ago quarter.
The third-quarter guidance indicates continued inflationary pressure on consumer demand. The company also expects comparable interest expenses, a higher effective tax rate, SG&A rate deleverage and a lower average number of shares outstanding for the second quarter of 2023.
We believe that Carter’s strategic measures, stronger product offerings, improved on-time shipping performance and robust pricing efforts will play a pivotal role in mitigating the ongoing demand challenges.
The P/CF ratio for Carter’s is just 7.65, a level that is far lower than the industry average of 9.28. Clearly, CRI is a solid choice on the value front from multiple angles. Topping it, a VGM Score of A reflects its inherent strength.
Stocks to Consider
Some better-ranked companies are Crocs CROX, Royal Caribbean RCL and MGM Resorts MGM.
MGM Resorts currently sports a Zacks Rank #1 (Strong Buy). The company has a trailing four-quarter earnings surprise of 81%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for MGM’s 2024 sales and EPS indicates year-over-year increases of 2.2% and 31%, respectively.
Royal Caribbean sports a Zacks Rank #1 at present. RCL has a trailing four-quarter earnings surprise of 26.4%, on average.
The Zacks Consensus Estimate for RCL’s 2023 sales and EPS indicates increases of 47.9% and 158.3%, respectively, from the year-ago period’s reported levels.
Crocs, which offers casual lifestyle footwear and accessories, presently carries a Zacks Rank #2 (Buy). The expected EPS growth rate for three to five years is 15%.
The Zacks Consensus Estimate for Crocs’ current financial-year sales and earnings suggests growth of 13.1% and 2.8% from the year-ago period’s reported figure. CROX has a trailing four-quarter earnings surprise of 21.8%, on average.
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