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Carter's Swings Back to Growth on Seasonal Demand

By Steve Symington - Updated Jul 25, 2019 at 1:34PM

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The children's clothing company also seems to expect light growth in the second half. Here's what investors need to know.

Carter's (CRI -5.49%) announced second-quarter 2019 results early Thursday, reflecting strong domestic demand for its spring and summer children's clothing lines. Notably, the kids' apparel specialist swung back to revenue and earnings growth as it distances itself from the painful bankruptcies of Toys R Us and Bon-Ton.

But Carter's also "merely" reaffirmed its full-year outlook despite its relative outperformance to end the first half. Let's take a closer look at what the company had to say, as well as what investors should be watching in the coming months.

Stack of colorful folded children's clothing on a wood floor.

IMAGE SOURCE: GETTY IMAGES.

Carter's results: The raw numbers

Metric

Q2 2019

Q2 2018

Change

Net sales

$734.4 million

$696.2 million

5.5%

GAAP net income

$43.9 million

$37.3 million

17.9%

GAAP earnings per diluted share

$0.97

$0.79

22.8%

Data source: Carter's. 

What happened with Carter's this quarter?

  • Adjusted for store restructuring costs, Carter's (non-GAAP) net income grew 21% year over year to $0.95 per share.
  • Carter's guidance, provided in late April, called for earnings to be approximately flat at $0.79 per share on a 4% to 6% increase in net sales.
  • U.S. retail sales grew 5.3% to $423.1 million, driven by 3.8% comparable-sales growth (including both retail store and e-commerce growth).
  • U.S. wholesale sales climbed 9.4% to $229.1 million, driven by demand for Carter's exclusive brands.
  • International sales declined 3% to $82.2 million, as higher demand in Mexico was more than offset by a combination of lower sales in other international markets and the recently completed transition of Carter's business model in China to a licensing arrangement with a China-based children's apparel retailer and wholesaler.
  • Carter's repurchased and retired 545,620 shares of stock for $52.5 million this quarter, for an average per-share price of $96.18. As of July 24, it had $285 million remaining under its existing repurchase authorization.

What management had to say

Carter's chairman and CEO Michael Casey elaborated:

We achieved our sales and earnings growth objectives in the second quarter. Our growth was driven by our retail and wholesale businesses, and reflects good demand for our spring and summer product offerings. Given the strength of our product offerings and related marketing strategies, we are expecting good growth in the second half and reaffirming our sales and earnings growth objectives for 2019.

Looking forward

More specifically, Carter's continues to expect full fiscal-year 2019 net sales growth of 1% to 2%, with a 4% to 6% increase in adjusted earnings per share (from $6.29 per share in 2018).

So why reaffirm full-year guidance after such a strong quarter? For the third quarter, Carter's expects net sales will climb 1% year over year, which should translate to 3% to 4% growth in adjusted earnings per share from $1.61 in last year's Q3 (or to an approximate range of roughly $1.66 to $1.67). By comparison -- and though we don't usually pay close attention to Wall Street's demands -- most analysts were modeling higher Q3 earnings of $1.87 per share on a slightly more pronounced 3.3% increase in sales.

Carter's has made a habit of underpromising and overdelivering in recent quarters, which could be why -- with the stock up around 5% in the morning's early trading as of this writing -- it seems the market is willing to forgive its seemingly light near-term outlook.

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