It's not the toddlers that are getting spoiled at clothing retailer Carter's (CRI 0.13%), but the investors. The kids-only apparel maker once again topped Wall Street's expectations for both sales and earnings to turn in a solid performance for the fourth quarter of 2014.

It was the 26th straight year of revenue growth, and at least the sixth straight quarterly earnings beat for Carter's. In a world of fickle fashion, these are the types of retail trends shareholders want to see. Carter's will face some currency headwinds in 2015, but strong demand in its retail and international segments bodes well for its long-term outlook.

By the numbers
A strong holiday season carried Carter's ahead of analysts' expectations during the latest period, as sales topped a consensus forecast of $853.3 million, and earnings per share beat the $1.27 quarterly target. The actual reported results are shown below along with the year-over-year growth rates:

Metric

Q4 2014

Year-Over-Year Growth

Sales

 $869.2

12.9%

Adjusted Operating Income

 $116.9

24%

Adjusted EPS

 $1.32

30%

$USD in millions, except EPS. Source: Carter's press release.

To be sure, Carter's received the benefit of a longer than usual quarter -- 14 versus 13 weeks -- due to 2014's extended calendar, but the results were healthy, even with this impact removed. Quarterly sales growth would have amounted to 7.2% (versus 12.9%) if we take out the additional week for 2014. And for the year, sales grew 9.7% including the extra week, and 8% if we exclude it.

An unsteady retail environment has posed problems for other outlets, so Carter's steady demand and operating efficiency is being rewarded by the market: Its shares were up 4% in midday trading on Thursday.

What was particularly impressive was Carter's balanced growth across the business. Demand was soft on the wholesale side, but that's to be expected as management focuses more on selling through its own channels -- where the profit margins are higher. So, it's good to see that every other segment ticked up nicely in the fourth quarter, led by OshKosh retail (results are shown for 13-week comparable period):

  • OshKosh retail: 12.7%
  • Carter's retail: 11.1%
  • International: 3.5%
  • Carter's wholesale: 3.4%
  • OshKosh wholesale: (7.7%)

Looking ahead, the international business will be the one to keep an eye on. It was hit with currency headwinds in recent months, and these could persist well into 2015. Management indicated that the strengthening of the U.S. dollar dampened the international segment's Q4 sales by 6.7%, and the full-year sales by 5.7%. Further, an "unfavorable FX and 53rd week comparison are estimated to reduce expected growth by approximately 2%" heading into 2015.

On the cost side, management considered its belt-tightening efforts to be "the highlight" of their achievements in 2014, and this was borne out in the numbers reported. For the fourth quarter and full year, respectively, selling, general, and administrative expenses dropped from 31% to 28.6% (240 basis points) and from 30.8% to 29.8% (100 basis points) as a percentage of sales. This trickled down to boost the fourth-quarter adjusted operating income as a percentage of sales by 110 basis points, and the full year's by 30 basis points.

Finally, free cash flow increased from $27 million in 2013 to $179 million in 2014 because of higher net income, favorable movements in net working capital, and lower capital spending for the year. Increased cash allows Carter's to pay out more to shareholders, so the company authorized a 16% increase to its dividend to reach $0.22 per share as part of the latest announcement.

Can Carter's keep up?
The takeaways from fiscal year 2014 were almost universally positive for Carter's. Parents continue to gravitate to both the Carter's and OshKosh brands for their little tykes' outfits. The e-commerce focus is paying off with Q4 online sales growth of 18.3% for Carter's, and 17.4% for OshKosh. And the international demand is still robust, even as the translated figures look less so because of currency changes.

The pace of growth is sure to slow down, however, especially as Carter's grapples with west coast port shutdowns, challenging winter weather, and the weight of currency fluctuations. In 2015, Carter's management expects sales to increase just 5%, and adjusted earnings per share to grow 10% to 14%. Most of this growth will be back-loaded since the aforementioned headwinds will likely place an uneven burden on the first half of the year.

Still, cash flow is predicted to jump even higher from $179 million to a range of $275 to $300 million, so Carter's will have plenty of capital to spend on its expected 65 new retail store outlets. And, from my perspective, management is investing wisely while keeping these two classic children's brands fresh to draw in new customers. The market seems to agree since it sent shares 23% higher in 2014.

The year ahead could be more difficult, but Carter's looks poised to deliver healthy growth over the long run.