Shares of Carter's, Inc. (CRI, Financial) reached a 52-week high of $108.34 on June 23. Investors’ confidence got a boost after the company announced its quarter results.
In fact, shares have been gaining momentum since the company reported better-than-expected first quarter revenues and results. Shares of the firm closed at $107.35, amassing a year-to-date return of 59.6%, which I consider very good when compared to a market benchmark such as the SPDR S&P 500 ETF (SPY, Financial).
Earnings outlook
This year, Wall Street analysts expect an improvement in earnings to $4.53. Making the assumption that the payout ratio remains the same at 20% then I anticipate the company to distribute about $0.91 annually next year, or $0.227 on a quarterly basis. Earnings growth projections for the company are at a rate of 25% so it wouldn't be surprising if Carter´s increases the dividend at around that level for next year. Assuming this payout ratio is sustainable for the long term and if the dividend is growing by 25%, the share price must go up by the same percentage to keep the yield at the same level, which is close to a one year low.
Operations outlook
For next year, I expect an increase in operations in retail, ecommerce and international sales, which will lead to continue improving the company´s margins. Operating margin was among the best in the peer group last year, principally helped by the reduction in costs. It has achieved an operating profit of $333 million, a record number.
In Canada, the firm reached a leading position with a 12.4% market share, due to a replication of the U.S. multi-channel business model. Canada will be extremely important because of its large exposure in that country and it will be the key market for the next five years. Further, others regions, with huge population like Brazil or China, can have good potential in that time frame.
I believe that the principal drivers for growth are the merchandising strategy and distribution. With almost 18,000 points of distribution shows that Carter´s is the largest supplier of young children’s apparel to the largest retailers in North America; and for the future is expected to continue growing the wholesale business by improving the scope and performance of their brands.
Relative valuation
From a valuation standpoint, trading at a 26.88 P/E, which stands at a slight discount compared to the industry mean, which indicates that other companies operating in the same subindustry are overvalued. The following table compares the current valuations:
| Ticker | Name | Mkt Cap (millions USD) | Last Price | P/E | ROE | Div. Yield |
| CRI | CARTER'S INC | 5687.3 | 108.25 | 26.8798447 | 27.1294572 | 0.72979215 |
| VFC | VF CORP | 30105.2 | 70.84 | 22.94 | 19.50 | 1.64 |
| OXM | OXFORD INDUSTRIES INC | 1470.6 | 88.68 | 27.97 | 16.62 | 0.99 |
| PVH | PVH CORP | 9547.6 | 115.46 | 14.95 | 11.60 | 0.19 |
| KATE | KATE SPADE & CO | 2959.1 | 23.18 | 29.14 | 53.16 | 0.00 |
| COLM | COLUMBIA SPORTSWEAR CO | 4418.6 | 62.75 | 32.01 | 10.76 | 0.92 |
| HBI | HANESBRANDS INC | 13769.5 | 34.281 | 23.76 | 31.37 | 0.95 |
| RL | RALPH LAUREN CORP | 11700.8 | 136.52 | 17.20 | 17.72 | 1.36 |
| GIL | GILDAN ACTIVEWEAR INC | 8204.8 | 33.91386 | 22.19 | 20.37 | 0.67 |
| UA | UNDER ARMOUR INC-CLASS A | 18497.1 | 85.78 | 89.48 | 16.54 | 0.00 |
| KORS | MICHAEL KORS HOLDINGS LTD | 8941.1 | 44.95 | 10.47 | 43.54 | 0.00 |
| ICON | ICONIX BRAND GROUP INC | 1272.6 | 26.66 | 14.32 | 16.63 | 0.00 |
| WWW | WOLVERINE WORLD WIDE INC | 3021.2 | 29.27 | 18.38 | 14.53 | 0.82 |
| CTAS | CINTAS CORP | 9776.2 | 85.46 | 27.18 | 21.09 | 1.99 |
| Average | Average | 8631.7 | 63.106464 | 26.92 | 21.24 | 0.68 |
Considering that the industry mean is at 26.92, the current price level shows a fairly valuation relatively to its peers. Michael Kors Holdings Limited (NYSE: KORS) trades for almost 10.5 times trailing earnings, and looks the most attractively valued looking back the trailing ratio.
Final comment
Carter´s operates in a highly competitive industry which is highly fragmented which means that Carter´s needs to be able to adapt to consumer´s changes, deploy capital to the area of marketing and be prepared for a more aggressive pricing strategy if needed.
Moreover, markets outside the U.S. and Canada could behave differently because of different demand, cultures or even trends that are not the same. In addition, there are some risk factors such as political instability, regulations or general macroeconomic fluctuations that could affect conducting business in these areas.
Since 2013, this maker of children's apparel and accessories has been regularly rewarding shareholders with dividend payments. Last year, the company returned $123 million to shareholders through share repurchases and dividends. I think the company will maintain this policy in the future due to its financial health.
The fact that Israel Englander is strongly bullish on the stock makes me feel comfortable with my buy recommendation. The guru upped his stake by almost 5000% in the quarter to $40.2 million with 434,696 shares as of the end of the first quarter of 2015. In addition, it has 7,600 shares in call options, which denotes that the guru is speculating from rising prices in the underlying. Further, hedge fund gurus like Paul Tudor Jones (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio) initiated new positions in the stock with 10,152 and 416,867 shares, respectively.
Disclosure: Omar Venerio holds no position in any stocks mentioned
