Carter's: An Investment That Is Appealing To More Than Just Parents

seekingalpha06-18

Carter's is a household name for anyone with a child ranging from infant to pre-teen.The Children's Place is going through some rough times and CRI is bound to benefit from PLCE's store closures and ...

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I expected that quite a bit would change in my life, but I never expected that this new journey would have an impact on how I look at investing, specifically an investment like Carter's (NYSE:CRI). Even before my son was born, our house became the unofficial warehouse for hand-me-down items along with an equal number of new items from the baby registry. After seven months, I have gathered the following insights about baby clothing:  If your child manages to wear the same onesie more than five times, you are doing laundry way too often, or you need to check the fit because it's not worth squeezing every last use out of it if it means your child is suffocating.  There is nothing practical about children's clothing when it comes to the quantity of clothing purchased for each stage of the child's life. The reality is you need to buy clothing for future stages ahead of time because it's not uncommon to have a 7-month-old that only fits in 9-12 month old clothing. As the kind of person who will wear clothing until my wife makes me throw it out, I have really struggled to fully grasp this. When in doubt, throw it out. We have experienced a few blow-out situations where the most reasonable thing to do is toss the entire outfit. The best way to avoid going through multiple outfits and additional loads of laundry is to have a healthy supply of bibs on hand. At this point, I would say that our bib-to-outfit ratio is close to 3:1. Grandmothers can justify just about anything when it comes to buying things for their grandkids. If anything, I hear more about the lack of selection available, which leads me to believe that they would purchase even more than they currently do if they could find more variety.  Between all of these, there is a common thread, and it's that CRI has an excellent business model that I am at the mercy of as a consumer. Honestly, what other choice do I have when at least half of everything I see has the name Carter's on it? The ultimate goal with this analysis is to determine if my anecdotal evidence can be validated and whether or not the stock price has further downside or if this represents an excellent entry point that has strong upside potential for capital gains and dividend income. Carter's Valuation The stock price has recently trended off its lows a few times since mid-2023, and the most recent rally came off a strong Q4-2023 earnings (Q4-2023 represents the largest quarter for CRI sales). Over the last three years, we can see that there is a pretty strong correlation between CRI's share price and the trend of which way earnings is headed. Data by YCharts The stock price for CRI has recently slid after the momentum from Q4-2023 earnings beat ran out of steam. It currently appears to be priced for an earnings disappointment when Q2-2024 is announced. Just to make this even more interesting, CRI has handedly beat its EPS estimates for the last six straight quarters or in 11 of the last 13 quarters. For this reason, a decent beat on Q2-2024 earnings is likely to warrant upside potential for the stock price. Carter's Competition There are a handful of competitors that are publicly traded, but many babies and children's clothing brands are privately held. Of the publicly traded companies, the major names out there include:  Abercrombie & Fitch (ANF) Gap (GPS) The Children's Place (PLCE)  Data by YCharts What's interesting is that for the last decade, CRI has maintained an unbelievably strong operating margin (even during COVID, CRI's operating margin took less of a hit than its competition). This also paints a picture of just how important execution is. PLCE has a very comparable business model in the sense that they operate through all of the same channels as CRI does, but have clearly failed to differentiate their product in a way that makes them unique. Reading the article Children's Place: Betting Against Mithaq's Lifeline, But Wait For Likely Canada Exit by Jeffrey Fischer summarizes the problem with photos of PLCE's storefront advertising discounts that make it look more like the store is closing its doors as opposed to a successful marketing campaign aimed to increase sales. For CRI, I expect margins to continue to improve as they converted 150 retail stores to cobranded Carter's/OshKosh formats and the stores overwhelmingly represented the best performing format in Q1-2024. PLCE is expected to shrink its retail footprint and close its Canadian stores, which would represent an opportunity for CRI to accrue additional market share. I think that Jeffrey Fischer makes an excellent point regarding the challenge experienced by US retailers when they entered the Canadian market.  The Canadian retail landscape is littered with failures by U.S. companies, including Nordstrom (JWN) and Target (TGT), even though many of them continued to operate profitably south of the border. The word on the street is that Canadian retailing and Canadian consumers are substantially different than those in the U.S. Numerous U.S. retailers think they can just export their business strategy to Canada, but learn that it doesn't work so well. Now, PLCE has been operating Canadian stores since 2002, so it's had a more successful stint than many others (Children's Place's \"International\" segment has been more profitable than the U.S. segment, but the trend is the same and those profits have dried up). But the need for a distinct strategy, in addition to other arrangements and investments in Canada, is something Mithaq will likely decide isn't worth the 63 stores (~12% of total). Especially for a CEO with no evident retail experience. Also, Children's Place didn't renew the lease for a 95,000 sq. ft. Canadian distribution center, moving those operations to Alabama. I think the company's new majority owner and management is destined to leave the Canadian retail market (the bricks and mortar) like many others, and that it might be one of their first major moves in trying to right the ship.  All of this is to say that CRI's performance against its closest pure-play publicly traded company shows a tale of two different outcomes, with CRI potentially able to experience further upside at PLCE continues to close stores. In a one-year timeframe (January 28, 2023 to February 3, 2024) PLCE elected to close 90 stores were approximately 14.7% of its retail outlets in the United States, Canada, and Puerto Rico. The following for CRI shows that the company expanded the number of stores by 31 from April 1, 2023 to March 30, 2024. CRI projects that will be an increase of another 22 stores by the end of 2024. CRI - Store Count (CRI Q1-2024 Business Update) Unless the situation PLCE hits a magic turnaround, it is hard to imagine that CRI would be unable to capitalize on the situation, especially when PLCE's financial situation continues to deteriorate based on the most recent earnings report issued on June 12th. PLCE - 2024-6 Consolidated Statement (PLCE - June 2024 10-Q) From these financials it is enough for me to say that things are not trending in the right direction and a look at PLCE's financial debt to equity and total long-term debt paints a rather concerning picture moving forward. Data by YCharts A Deeper Look At Carter's The problem with looking at PLCE's financials is that we can't tell exactly what is going on because there are a lot of moving pieces when an activist company comes into the picture and the total long-term debt increases substantially while the market craters (the current long-term debt for PLCE said that nearly four times its market as of market close on June 14). So what does the situation look like for CRI? Data by YCharts What I see here is a company that has performed extremely well since the financial crisis in 2008 whose management has been very favorable towards shareholders in the sense that they have reduced share count rapidly since 2012/2013 which has greatly contributed to overall growth in EPS and CRI's stock price. Even more impressive is the generous dividend issued post-COVID which further benefited shareholders. One thing to consider is that it is possible for a company to payout a growing dividend and reduced share count even when the company isn't performing well, and this is achieved through taking on debt. Not every company is trying to \"game the system\" by using this approach, but it does cause the company to take on additional risk with variables/factors that they haven't fully taken into consideration/planned for. Data by YCharts Looking at CRI's figures, we can see that debt levels took a jump close to 2014 and then jumped further during 2020 before dropping back below 2014 levels that we see today. One explanation for this is that during COVID, most major companies were borrowing money to increase liquidity and prepare for an event with an unknown timeframe. This would also explain why debt levels dropped back to and below pre-COVID levels within the next two years. Based on this, I am able to confidently say that CRI's dividend yield, EPS growth, share count reduction, and debt levels all paint a picture that these metrics are improving because the company is performing well. PLCE is actually an example of what I would be concerned to see when it comes to stock price manipulation of share buybacks by using excessive debt. Data by YCharts My Primary Concern With Carter's The only real concern I have with CRI is the declining birth rate in the United States and this would have a direct impact on CRI's numbers because even with 10% of the market it doesn't bode well if the number of children being born is decreasing. What is most disturbing is in The Mystery of the Declining U.S. Birth Rate by Econofact where it states \"the U.S. birth rate has fallen by 20% since 2007. This decline cannot be explained by demographic, economic, or policy changes\". CRI - Econofact - Birth Rates - 1980 - 2020 (Econofact) The next image from Pew Research gives a longer term view on this problem. CRI - PEW Research - Birth Rates 1920-2010 (Pew Research) So is it true that the number of births have declined over the last fifteen years - the answer is absolutely yes. What the data is uncertain about is just how significant it is (or will be) that couples are choosing to wait until they are older before having children, and this is likely due to a number of factors that I won't get into for the sake of keeping this article a reasonable length. For example, my wife and I were both 34 years old at the time our son was born and based on the image below, the data wasn't available at the time this was done. The real question then becomes how much potential is there for the lines of the cohorts in the image below to J-curve, and is our data set being skewed by the fact that people aren't having children at as young of an age as they did in the past? CRI - Econofact - Birth Rates By Cohort (Econofact) Another way to present this is that we saw the largest uptick in births during the baby boomer era, and it makes sense that WWII ended and America hit one of the greatest period of economic prosperity. During this time, we also saw the average age of marriage of both men and women reach the lowest median age on record (according to United States Census Bureau data) and the average age of marriage has been steadily increasing since the 1970s. CRI - US Census Bureau - Median Age At First Marriage (US Census Bureau) The data specifically focuses on median age at first marriage - This means the information provided has had the outliers minimized (we don't need 80-year-old's getting married for the first time skewing the data). Seeing this data makes me question how much we can trust the data from the cohort in 1988-1992 and 1993-1997 (especially the later) since both of these would have a significant chance of a man or woman having not been married for the first time. This doesn't mean that there is nothing behind this concern, but I operate in a world that requires enough verifiable data to say that Americans are losing interest in having children and starting a family before I would be willing to accept that idea as gospel. At the same time, I don't have enough proof to say American's are interested in starting families, but they are choosing to wait. Conclusion After the recent pullback, we see this as a great entry point and time to invest in CRI. One thing I want to be considerate of is the potential PE Ratio we use when forecasting even though analysts are expecting a flat EPS growth year-over-year in 2024, the expected growth for 2025 and 2026 is 4% and 12%, respectively. The PE Ratio from 10-20 years of history ranges between 16X-17X earnings, but on the shorter end the five-year average PE Ratio is 13.7X. I believe that 13.7X is entirely reasonable to use as a multiple, and we expect that this will trend back up into the 17X range within the next few years. If we assume that 13.7X is the PE Ratio by the end of FY-2026 CRI would have generated an annualized rate of return of 22.23% (with dividends included) but the high end of the goal range would be 17.2X (which is the 20-year average PE Ratio) and that would represent an annual rate of return of 32.88% (with dividends included). CRI - FAST Graphs - 5 YR PE Estimate (FAST Graphs) CRI - FAST Graphs - 20 YR PE Estimate (FAST Graphs) Part of the reason why I am looking towards the higher PE multiple is with the estimate earnings growth in the past we saw the stock price reach comparable levels and with the high operating margins (especially when we consider how stable they have been relative to competitors) it gives us supporting reasons why upside exists. Another item from the images above is that the current PE ratio of 10.35X has served as a floor a handful of times over the last few years and the current stock price at $64.05/share also represents a floor over the last five years (and that includes the lowest level the stock price reached during COVID).  CRI has demonstrated that it is focused on being shareholder-friendly and has engaged in a reasonable use of debt, while also avoiding the use of debt to repurchase shares and manipulate investors to think their financials are better than they really are. Looking at PLCE's financials, we could make a strong argument that this is the kind of practices they are now engaging in under new leadership. Meanwhile, CRI's debt load previously shown with shares outstanding show that its use of debt was in the course of normal daily business.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.28.1","shortVersion":"4.28.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2444512197"}