Can Carter's, Inc. Go 12-for-12?

Image source: Carters, Inc.

Carter's Inc. (CRI -0.94%) is set to release second-quarter 2016 results before the market opens on Wednesday, July 27. If its last 11 quarterly earnings beats are any indication, there's a good chance this week that the kid's clothing retailer will mark three straight years of beating expectations. 

It's unsurprising, then, to see Carter's stock trading near an all-time high as I write. But what does Carter's need to do to keep the ball rolling uphill?

For perspective, Carter's latest financial guidance calls for second-quarter revenue to increase 3% to 4% year over year, equating to a range of $631.1 million to $637.3 million. That should translate to a 10% to 15% decline in adjusted earnings per share (EPS), to a range of $0.62 to $0.66, which sounds disappointing until we recall Carter's CFO Richard Westenberger explained during last quarter's call the company is making significant investments in marketing, technology, and supply chain improvements to better support long-term growth.

What's more, Carter's not only reiterated its full-year 2016 revenue guidance, which now calls for sales to increase 6% to 7% over 2015, but also increased its 2016 EPS guidance to a range of $5.07 to $5.16, good for 10% to 12% growth from last year (up from its previous guidance of 8% to 10% growth). Note that raise was primarily implemented to reflect the benefit of more recent share repurchases. And considering Carter's ended last quarter with $449 million remaining under its existing repurchase authorization, don't be surprised if the company continued returning capital to shareholders in this way over the past few months.

We can also expect Carter's to break down the various segment-based performances of its business, including retail and wholesale segments for both its core group of namesake locations and its smaller portfolio of OshKosh stores. 

Three months ago, Carter's retail comparable-store sales declined a modest 0.1%, as a 4% drop in stores comparable sales more than offset a healthy 15.2% increase in e-Commerce comps. The culprit for the former, according to Carter's, was the strong dollar deterring international consumers from shopping in U.S. locations and on its websites. Meanwhile, Carter's wholesale revenue climbed 4% year over year, thanks to strong product demand and a new playwear initiative.

Next, OshKosh retail enjoyed relative strength last quarter with an 11.9% increase in revenue. That result was helped by new locations and 2.7% growth in comps, the latter of which was comprised of a 1.9% decline in stores comps (for the same reason Carter's retail suffered) and 19.8% growth in e-Commerce sales. That said, management also noted just 5% of its OshKosh stores (or nine locations) generated the entire comp decline last quarter, and those locations happened to be high-volume stores with a typically high proportion of international consumers. Unless that narrow source of weakness at OshKosh has changed since then, it seems fair to say investors shouldn't view this comps decline as indicative of a broader negative trend. 

Finally, listen for updates on Carter's international business, which saw revenue increase a solid 13.9% year over year last quarter (20.1% at constant currency), to $77.9 million. For this, Carter's typically credits the strength of and demand for its brand in Canada, where comps grew 14.9% including a 46.6 increase in e-Commerce comps and stores comparable-sales growth of 12.8%. To that end, Carter's is also excited for the potential of China, where it sells children's apparel on the popular Tmall platform. Considering the number of annual births in China is four times that of the United States, it's no surprise Carter's management expects China sales to increase from more than $20 million this year to over $100 million by 2020.

All told and given its history, I don't expect much excitement surrounding Carter's results later this week -- but that's not a bad thing. As long as Carter's gradually increases its store base, invests to bolster margins, and continues systematically returning capital to shareholders through dividends and repurchases, investors should remain perfectly content with where the business stands.