When it comes to selling clothing for the toddler set, there are few companies that can match the name recognition of Carter's (CRI -1.65%). Owner of its eponymous clothing line, and since 2005 the owner of the just-as-famous OshKosh B'Gosh line of clothing, Carter's bills itself as "the largest branded marketer in the United States of apparel exclusively for babies and young children."

If only they could be the most profitable.

That goal eluded Carter's in Monday's report on fiscal Q1 2014 earnings, which showed Carter's:

  • Growing sales 10% to $652 million, beating estimates.
  • Growing direct-to-consumer (catalog and Internet) sales even faster, with Carter's brand merchandise sales growing 11%, and OshKosh 15%.
  • But experiencing fast-paced growth in cost of goods sold (up 12% year over year) and selling, general, and administrative expenses (or SG&A, which was 13%) as well.
  • With the result that on the bottom line, the company's earnings shrank nearly 9% in Q1, to just $0.63 per diluted share.

That last number looks like a pretty sizable earnings miss for Carter's, which analysts had predicted would earn $0.71 per share in Q1. Yet with the stock rising about 0.8% in Monday trading, it appears investors (rarely a forgiving lot where earnings misses are concerned) have decided to give Carter's a pass.

Should they?

Second verse, same as the first?
If you ask me, no, they shouldn't. Q1 was clearly a disappointment, and Carter's doesn't look likely to do much better in Q2, either. According to management's guidance, sales in the fiscal second quarter will only rise about 8% to 10% -- so less than they grew in Q1, despite all the investments in SG&A to grow the business.

Profits, meanwhile, are only going to be about $0.46 per share in Q2 (and potentially worse than that, as management excluded a raft of one-time items from its forecast). This would be flat against year-ago levels, and $0.03 worse than analysts are predicting -- so a second-in-a-row earnings miss.

Granted, for the full year, management still predicts a turnaround in its fortunes, and 12% to 15% growth in "adjusted diluted earnings." But that's again excluding certain expenses. It only matches analyst estimates if earnings growth hits the very top level of guidance. To top it all off, even 15% growth would fall short of the long-term growth estimate that Wall Street has told investors to expect from Carter's: 16%.

Valuation
At Carter's P/E ratio of 26, even 16% growth probably wouldn't suffice to make the stock cheap. Plus, Carter's is currently running free cash flow negative, indicating that even the earnings it does have are of low quality. Long story short, there just doesn't seem to be a whole lot to recommend this stock -- and even less reason for investors to have bid it up yesterday.