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Carter's Beats Expectations, Boosts Capital Returns -- and Falls Anyway

By Steve Symington - Feb 27, 2018 at 4:00PM

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The kid's clothing retailer ended 2017 on a high note and sees more of the same strength in the coming year.

Carter's Inc. (CRI -0.72%) announced solid fourth-quarter 2017 results on Tuesday morning, including broad-based demand for its products in all distribution channels. Carter's also announced an ambitious new stock-repurchase authorization, increased dividend, and additional plans for its unexpected windfall resulting from recent U.S. tax reform.

Still, shares of the children's-clothing retailer fell as much as 11% in Tuesday's early trading after the company followed with what appeared to be conservative guidance. Let's take a closer look at what Carter's accomplished over the past few months, as well as what investors can expect from the company this year.

Four toddlers wearing Carter's clothing

IMAGE SOURCE: CARTER'S INC.

Carter's results: The raw numbers

Metric

Q3 2017

Q2 2016

Year-Over-Year Growth

Revenue

$1.027 billion

$934.2 million

10%

GAAP net income

$135.7 million

$87.1 million

55.8%

GAAP earnings per share (diluted)

$2.84

$1.76

61.4%

DATA SOURCE: CARTER'S INC.

What happened with Carter's this quarter?

  • Carter's GAAP results include a $40 million tax benefit related to the December implementation of the U.S. Tax Cuts and Jobs Act of 2017, offset by $21.2 million for special compensation and related payroll taxes awarded to employees as a result of this benefit.
  • Excluding one-time items, Carter's adjusted (non-GAAP) net income grew 30% year over year, to $2.32 per share.
  • These results compare favorably to Carter's guidance provided last quarter, which called for the same 10% revenue growth, but a more modest 21% increase in adjusted earnings per share.
  • Sales from the Skip Hop brand -- which Carter's acquired just under a year ago -- totaled $32.9 million.
  • Sales from Carter's acquired licensee in Mexico (which closed in early August) were $8.8 million.
  • The company repurchased and retired 375,814 shares of common stock for $37.8 million, or an average price of $100.55 per share.
  • By segment:
    • U.S. retail sales increased 7.2% year over year, to $565.7 million, including 4.5% comparable-sales growth. Within the latter, e-Commerce comparable sales grew 19.1%, while comparable retail-store sales declined 1%.
    • U.S. wholesale revenue grew 11%, to $329.8 million, driven by Skip Hop and strong demand for Carter's brand products.
    • International revenue grew 20.7%. to $131.8 million, driven by Skip Hop, Mexico acquisitions, and growth in Canada and China.
  • On February 22, 2018, Carter's approved a new $500 million share-repurchase program and a 22% increase to its quarter cash dividend, to $0.45 per share.

What management had to say

Carter's Chairman and CEO Michael Casey stated:

We saw strong demand in all channels of distribution in the fourth quarter, and are reporting another year of record sales and earnings. In 2017, we achieved our 29th consecutive year of sales growth, strengthened our business with the acquisitions of Skip Hop and our largest international licensee based in Mexico, and returned $260 million to shareholders through dividends and share repurchases. The Tax Cuts and Jobs Act of 2017 is expected to have a significant and positive impact on our Company's future earnings, cash flow, and ability to invest in its growth strategies. In 2018, we plan to reinvest approximately half of the $40 million benefit from the lower corporate tax rate in brand marketing and improved eCommerce capabilities.

As I mentioned above, the other half of Carter's unexpected tax benefit is being used to reward Carter's full- and part-time employees in the form of one-time cash bonuses, as well as a 100% match to their company-sponsored retirement plans -- a very "Foolish" investment by the company in its culture and rapport with employees.

Looking forward

Casey further insists that Carter's is poised for "another good year of sales, earnings and cash flow in 2018."

To start, Carter's expects first-quarter 2018 net sales will increase roughly 2% year over year, which should translate to adjusted earnings of $0.97 per diluted share. By comparison -- and though we don't normally pay close attention to Wall Street's demands -- consensus estimates predicted higher first-quarter revenue growth of 6.9% and adjusted earnings of $1.19 per share.

For the full year of 2018, Carter's anticipates net sales will grow roughly 5% year over year, which should result in a 15% increase in adjusted earnings, to roughly $6.62 per share. By contrast, Wall Street was looking for slightly more aggressive 5.9% revenue growth and full-year adjusted earnings of $6.64 per share.

Carter's elaborated that its outlook reflects a "significant" increase in investments in both brand marketing and improved e-commerce capabilities -- though we know a hefty chunk of those investments will come from its tax windfall. But even then, Carter's minuscule guidance shortfall relative to expectations would seem hardly enough to merit the market's severe negative reaction today.

Of course, it's worth noting that Carter's stock had climbed nearly 40% in the year leading up to this report, likely tempting some skittish investors to take profits off the display rack. But all things considered, I think patient, long-term shareholders should be more than happy with what Carter's had to say today.

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