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Kids' Apparel Is a Growing Business

ovenerio

ovenerio

5 followers
According to GuruFocus Real Time Picks, Larry Robbins (Trades, Portfolio) added Carter's, Inc. (CRI) at an average price of $69.5 and currently holds 3,673,608 shares of the stock. This makes me feel that he is betting that the textiles, apparel, and luxury goods industry will expand in the near future.

Carter’s is a marketer of apparel for babies and young children. Under its Carter’s brand, the company designs, sources, and markets a range of products, mainly for sizes newborn to seven. Under its OshKosh brand, the company designs, sources, and markets a range of young children’s apparel, mainly for children in sizes newborn to twelve.

Acquisition

In June 2011, Carter´s acquired Bonnie Togs, a children's apparel retailer based in Toronto, Canada. This specialty retailer focused exclusively on the children's apparel and accessories marketplace. The company acquired 97 retail locations, including 14 branded stores and 83 additional retail points of distribution, from a former licensee in Japan. I think this deal contributes to a long-term strategy to extend the reach of Carter's and OshKosh B'gosh brands to consumers in international markets and predicting total annual revenues of more than $200 million by 2016.

The company continues to focus on bringing quality and value in order to keep is position in the markets it competes. In addition to the U.S. and Canada, the firm is improving its distribution network in promising countries like Japan and making further inroads in Canada through well-known companies such as Target (TGT) and Walmart stores (WMT).

Revenues, Margins and Profitability

Looking at profitability, the gross profit margin has decreased from the same quarter the previous year (40.16% vs 41.89%) and the net profit margin was not the exception (from 5.55% to 5.26%).

With respect to revenues rose by 10.2% in the last quarter compared to the same quarter one year prior, but earnings per share declined by 8.7%.

During the past fiscal year, the company improved earning ($2.77 versus $2.69 in the prior year). For this year, Wall Street expects a new improvement ($3.87).

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.



Ticker



Name



ROE (%)



KORS



MICHAEL KORS HOLDINGS LTD



46,4



HBI



HANESBRANDS INC



29,2



VFC



VF CORP



22,8



RL



RALPH LAUREN CORP



19,9



OXM



OXFORD INDUSTRIES INC



18,4



CRI



CARTER'S INC



17,4



UA



UNDER ARMOUR INC-CLASS A



17,2



CTAS



CINTAS CORP



15,2



ICON



ICONIX BRAND GROUP INC



15,1



WWW



WOLVERINE WORLD WIDE INC



14,3



COLM



COLUMBIA SPORTSWEAR CO



8,76



PVH



PVH CORP



4,15



JNY



JONES GROUP INC/THE



-1,9



ZQK



QUIKSILVER INC



-48



Average



13,2



The company has a current ratio of 17.4% which is higher than the industry mean and the ones exhibits by Under Armour (UA), Cintas Corp. (CTAS), Iconix Brand Group (ICON), Wolverine World Wide (WWW), Columbia Sportswear (COLM), PVH Corp (PVH), Jones Group Inc (JNY) and (ZQK) Quicksilver Inc.

In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment, so the ROE of Ralph Lauren (RL), VF Corp. (VFC), Hanesbrands Inc. (HBI) and Michael Kors (KORS) look very attractive.

It is very important to understand this metric before investing and it is important to look at the trend in ROE over time. Let´s see now the evolution across the end of the quarters:



ROE (%)



Ind Avg



S&P 500



Q1 2014



21.02



22.73



14.43



Q1 2013



16.64



21.62



13.15



Q1 2012



13.54



19.83



14.26

Strong Cash

Carter announced that its Board of Directors has approved a quarterly cash dividend of $0.19 per share. The current dividend yield is above 1% which is not good to protect the purchasing power.

Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 25.4x, trading at a discount compared to an average of 24.6x for the industry. The metric indicate that the stock is relatively undervalued and seems to be an attractive investment relative to its peers.

As we can see in the next chart, the stock price and EPS showed an interesting upward trend in the last five years.

1405518811461.png

Analyst Recommendation

The firm is currently Zacks Rank # 3–Hold, and it also has a longer-term recommendation of “Neutral”. A Hold rating indicates that the stock, over the next 1 to 3 months, will perform at an annualized rate of 10.56%, very similar to the S&P 500.

Final Comment

Although it is difficult to predict the future performance of the stock in the future, I think that the largest branded marketer in the U.S. of apparel exclusively for babies and young children, has growth opportunities in Canada. When considering other aspects such as the company's strengths that we have seen, such as its revenue growth and good valuation levels, I feel more confident on my bullish sentiment.

Hedge fund guru Jim Simons (Trades, Portfolio) and Alan Fournier (Trades, Portfolio) added this stock to his portfolio company in the first quarter of 2014.The recent buy makes Robbins the second largest guru shareholder following Chase Coleman (Trades, Portfolio)’s Tiger Global Management.

Disclosure: Omar Venerio holds no position in any stocks mentioned

About the author:

ovenerio
We provide independent fundamental research and hedge fund and insider trading focused investigation.

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