Carter's Inc. (CRI 2.57%) announced third-quarter 2018 results on Thursday morning, detailing the impact of the bankruptcies of Toys R Us and Bon-Ton, as well as softer-than-expected demand at the beginning of the fall season. And though the children's clothing specialist described improving trends heading into the holidays, its forward outlook left the market wanting more.
With shares down around 5% as of this writing, let's dig through the racks to get a better picture of how Carter's kicked off the second half and what to expect in the coming months.
IMAGE SOURCE: GETTY IMAGES.
Carter's results: The raw numbers
| Metric |
Q3 2018 |
Q3 2017 |
Year-Over-Year Growth |
|---|---|---|---|
|
Revenue |
$923.9 million |
$948.0 million |
(2.5%) |
|
GAAP net income |
$71.8 million |
$82.3 million |
(12.8%) |
|
GAAP earnings per diluted share |
$1.53 |
$1.71 |
(10.5%) |
DATA SOURCE: CARTER'S, INC.
What happened with Carter's this quarter?
- On an adjusted (non-GAAP) basis, which excludes items like restructuring costs and acquisition expenses, Carter's earnings declined 8.2% year over year to $75.3 million, and fell 5.4% on a per-share basis to $1.61.
- These results were below Carter's guidance provided in July, which called for revenue to be roughly flat from the same year-ago period with adjusted earnings of $1.70 per share.
- By segment:
- U.S. retail sales grew 1.2% year over year to $459.1 million, including a 0.5% comparable-sales increase thanks to growth from e-commerce.
- U.S. wholesale sales dropped 8.3% to $339 million, primarily due to the loss of sales to the now-bankrupt Toys R Us and Bon-Ton retail chains.
- International revenue climbed 1% to $125.8 million, driven by Carter's acquired Mexico licensee and higher demand in various other markets outside of North America. This growth was partially offset by weak demand in China and unfavorable currency exchange.
- Carter's repurchased and retired 543,793 shares of common stock for $56.4 million during the quarter.
What management had to say
Carter's Chairman and CEO Michael Casey elaborated:
We did not achieve our growth objectives in the third quarter. We saw less robust demand than expected for our fall transitional product offerings, especially during the Labor Day holiday shopping period. In the latter part of September, as cooler weather arrived in more parts of the United States, sales trends improved meaningfully and were more in line with our expectations. Given the improved trend in sales, together with the strength of our fall and holiday product offerings, we are expecting good growth in sales and earnings in the fourth quarter.
Looking forward
For the fourth quarter, Carter's expects net sales will increase roughly 5% year over year, translating to roughly 10% growth in adjusted earnings to $2.56 per share. These targets assume Carter's will be able to partially recover lost sales initially expected to Toys R Us and Bon-Ton.
By comparison -- and though we don't usually pay close attention to Wall Street's demands -- consensus estimates predicted higher earnings of $2.86 per share on roughly the same revenue.
Accordingly, Carter's reduced its full-year 2018 outlook to call for net sales growth of 1.5% (down from 3% before) and 5% growth in adjusted earnings per share (down from 12% previously) from $5.77 in fiscal 2017.
In the end, that hardly makes Carter's a broken business, and its long-term story remains firmly intact. But coupling that lowered outlook with the loss of bankrupt customers and Carter's tepid start to the quarter, it's hardly surprising to see shares pulling back today.
