If the old commercial is to be believed, Carter's (NYSE: CRI) clothes may not wear out. However, the company's patience with its underperforming OshKosh B'Gosh segment may do just that before long.
Carter's acquired OshKosh B'Gosh back in 2005 for $312 million. Since then, the brand has continued to struggle, and it failed to show signs of improvement this quarter. OshKosh wholesale sales plummeted 45% on later shipments of fall products. Management stated that the turnaround project for OshKosh is taking longer than expected, but they believe they have made significant improvements to enhance the brand, including placing the president, Joe Pacifico, in charge of OshKosh's merchandising and design functions.
The poor performance from OshKosh led management to write down the value of the asset by $154.9 million. In other words, that segment is no longer worth what the company paid for it two years ago. Additionally, Carter's is also taking a $5 million charge to close a distribution facility. While the company says these charges are one-time and should be ignored in the earnings report, the bottom line is that management made poor decisions that led to these charges. These particular charges may not reoccur on the income statement, but analysts must decide if management has the potential to make flawed decisions in the future.
The Carter brand continued to achieve strong growth and contributed 80% of the company's overall sales. Still, OshKosh's sluggish performance pulled earnings down to $2.48 per share. Even excluding the one-time charges, the company still came up short and would have recognized $0.13 per share compared to last year's $0.15.
Thanks to the weakness at OshKosh, Carter's cut its earnings forecast for the year to $1.42-$1.46, and the guidance does not include this quarter's impairment charges. While OshKosh only contributes about a fifth of the company's sales, it's enough to drag down overall results. Competitors like Children's Place (Nasdaq: PLCE) and Gymboree (Nasdaq: GYMB) have been posting sales increases, showing that Carter's results aren't from the sluggish retail environment, but are a result of company-specific issues. Carter's is in the process of fixing OshKosh, but it will take a lot of time, money, and effort. In the end, Carter's may find it is not worth it.
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Fool contributor Larry Rothman is happy to receive feedback, and promises to read it when not being wrestled by his three children. He doesn't have any positions in the companies mentioned. The Fool's disclosure policy wears footie pajamas.
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