Carter's Inc. (NYSE:CRI) announced better-than-expected second-quarter 2018 results early Thursday, highlighting steady growth from both its domestic retail and international operations, partially offset by the continued impact of the liquidation of Toys R Us.

Still, Carter's stock fell more than 6% on the day in response -- a likely consequence of the stock's more than 30% rise in the year leading up to this report, as well as Carter's seemingly conservative third-quarter guidance.

Let's take a closer look at what the kid's clothing retailer accomplished over the past few months, and what investors should be watching in the quarters ahead.

Carter's logo in blue text.

Image source: Carter's Inc.

Carter's results: The raw numbers

Metric

Q2 2018

Q2 2017

Year-Over-Year Growth

Revenue

$696.2 million

$691.8 million

0.6%

GAAP net income

$37.3 million

$37.8 million

(1.4%)

GAAP earnings per diluted share

$0.79

$0.77

2.6%

Data source: Carter's Inc. 

What happened with Carter's this quarter?

  • Adjusted for one-time items, Carter's non-GAAP earnings were the same as its reported figures, but declined 3.4% year over year and were flat on a per-share basis.
  • By comparison, Carter's guidance provided in April called for adjusted earnings of only $0.53 per share on a 1.7% revenue decline.
  • By segment:
    • U.S. retail sales increased 2.7% to $402 million, with comparable sales growth of 0.9% driven by e-commerce growth.
    • U.S. wholesale sales fell 3.8% to $209.5 million, driven by discontinued sales to Toys R Us and Bon-Ton.
    • International revenue grew 2.6% to $84.7 million, driven by growth in Canada and the acquisition of Carter's licensee in Mexico last year.
  • Carter's repurchased and retired 599,314 shares of common stock for $63.9 million, for an average price of $106.62 per share.

What management had to say

Carter's Chairman and CEO Michael Casey stated:

Our growth was driven by our U.S. retail and international businesses. We saw a meaningful improvement in consumer demand for our brands beginning in late April as spring-like weather arrived in more parts of the United States. Earlier than expected wholesale demand, improved price realization and curtailed spending also contributed to better than planned performance. Carter's has the broadest distribution of young children's apparel in the United States. With the Toys R Us store closure process now completed, we believe we are well-positioned to recapture a good portion of our lost sales to this historically good customer, and will further strengthen our leading market share position.

Looking forward

Carter's also reiterated its previous full-year 2018 guidance, Casey says, due to "the strength of our product offerings and growth strategies, together with the benefit from the new federal tax law [...]." That guidance calls for full-year revenue growth of 3%, and 12% growth in adjusted earnings to approximately $6.46 per share.

In the meantime, Carter's also said it expects third-quarter sales to be roughly flat on a year-over-year basis, with adjusted earnings per share similarly comparable to $1.70 in the same year-ago period. By contrast, consensus estimates were technically modeling higher third-quarter earnings of $1.92 per share on 2.3% revenue growth.

Of course, Carter's has also demonstrated a recent habit of under-promising and over-delivering. And nothing in the company's commentary indicates that they're disappointed with the start of -- and prospects for -- the third quarter.

To the contrary, Carter's management is obviously looking forward to putting the Toys R Us headwind behind them. When that happens, I think it should be easier for the market to recognize the brand's underlying strength.

Steve Symington has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Carter's. The Motley Fool has a disclosure policy.