Infant and baby clothes maker Carter's
Carter's bought OshKosh for $312 million -- or 19 times EBITDA, according to data from Capital IQ at the time of the sale -- hoping to get a larger slice of the $22 billion children's clothing industry. With Carter's a leading name in baby and infant wear, it wanted to capture the kids from diapers to toddlers. The growing-up process hasn't been without problems.
Carter's is still looking for a retail president to lead the group, and inventory control policies ended up cutting stock at stores too deeply. Inventory in the second half of 2006 was 25% to 30% lower than the year before. Things just didn't look as bad as they might have; sales at Target
Same-store sales, an important retail metric that measures sales at stores open for at least one year, were off at both the OshKosh stores and Carter's own retail outlets. Despite overall sales at Carter's stores rising 6% in the quarter, comps were down 1.6% from the year-ago period, only somewhat better than the 7% comps decline at OshKosh.
In addition to a rich valuation paid for the retailer, OshKosh's operating margins were pretty slim too, at just 2.2% at the time of the sale. The best retailers can have margins of around 10%, and Carter's own now hover at that level, so the acquisition is serving as a drag on what would otherwise be an outstanding operation.
Over the past year, Carter's stock has taken its lumps. From a 52-week high of $34 a share, it's sunk as low as $20 a stub. It has recovered somewhat since the earnings release last week, to $24 a share. It features some of the lowest valuations among competitors Children's Place
It hasn't been a smooth move for Carter's, but it's been learning to crawl, assimilating OshKosh into its operations. If it can introduce the OshKosh line to Wal-Mart, that would provide a huge outlet for expanding growth. As yet, only Carter's own Child of Mine line is featured there, so we may have to give management the extra time it's looking for.
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Fool contributor Rich Duprey owns shares of Wal-Mart, but does not own any of the other stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.