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Key Takeaways
- Anticipated price cuts and increased promotional activities to stimulate demand may pressure profit margins and overall profitability.
- Strategy to open new stores and close underperforming ones carries real estate and capital expenditure risks, impacting balance sheet and efficiency.
- Carter's focus on U.S. wholesale growth, strategic cost management, and multichannel market leverage signifies a strong potential to enhance profitability and market leadership.
Catalysts
About Carter's- Designs, sources, and markets branded childrenswear under the Carter's, OshKosh, Skip Hop, Child of Mine, Just One You, Simple Joys, Little Planet, and other brands in the United States and internationally.
- Lower U.S. Retail and International sales expectations, driven by decreased consumer traffic and conversion rates, suggest a challenging macroeconomic environment impacting revenue.
- Anticipated price reductions on a significant portion of the product line to combat a slowdown in e-commerce and retail store sales may lead to decreased gross margins.
- Increased promotional activity to stimulate demand, particularly in the U.S. Retail segment during the holiday season, could pressure profit margins and overall profitability.
- Investments in new stores and brand marketing, aimed at driving traffic and customer acquisition, indicate increased operating expenses that could impact net margins.
- The strategy to close underperforming stores and open new ones in potentially better locations involves risks related to real estate and capital expenditure, possibly affecting balance sheet strength and operational efficiency.
Assumptions
How have these above catalysts been quantified?- Analysts are assuming Carter's's revenue will decrease by -0.2% annually over the next 3 years.
- Analysts assume that profit margins will shrink from 8.1% today to 5.8% in 3 years time.
- Analysts expect earnings to reach $166.7 million (and earnings per share of $5.7) by about October 2027, down from $233.8 million today.
- In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.9x on those 2027 earnings, up from 10.2x today. This future PE is lower than the current PE for the US Luxury industry at 19.0x.
- Analysts expect the number of shares outstanding to decline by 6.78% per year for the next 3 years.
- To value all of this in today's dollars, we will use a discount rate of 8.05%, as per the Simply Wall St company report.
Risks
What could happen that would invalidate this narrative?- Strong growth in U.S. Wholesale sales, driven by an increase in demand, points towards a robust channel that can positively affect revenue and net margins.
- Record gross profit margins achieved through strategic cost management and inventory control could contribute to sustained or improved profitability, enhancing earnings.
- Effective negotiation of lower product costs for the balance of the year, along with the expected decrease in inbound freight costs by over 20%, could lead to lower operating expenses, positively affecting net margins.
- Growth strategies focused on elevating product offerings, deepening customer relationships, and leveraging a multichannel market presence are aimed at strengthening the company’s leading market position, potentially increasing market share and revenue over time.
- Investments in targeted price adjustments and brand marketing are expected to improve traffic to stores and websites, which could result in higher sales volumes and potentially boost revenue and earnings.
Valuation
How have all the factors above been brought together to estimate a fair value?- The analysts have a consensus price target of $58.6 for Carter's based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $72.0, and the most bearish reporting a price target of just $50.0.
- In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $2.9 billion, earnings will come to $166.7 million, and it would be trading on a PE ratio of 12.9x, assuming you use a discount rate of 8.0%.
- Given the current share price of $66.08, the analyst's price target of $58.6 is 12.8% lower.
- We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.
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Disclaimer
Warren A.I. is a tool utilizing a Large Language Model (LLM) that ingests data on consensus price targets, forecasted revenue and earnings figures, as well as the transcripts of earnings calls to produce qualitative analysis. The narratives produced by Warren A.I. are general in nature and are based solely on analyst data and publicly-available material published by the respective companies. These scenarios are not indicative of the company's future performance and are exploratory in nature. Simply Wall St has no position in the company(s) mentioned. The price targets and estimates used are consensus data, and do not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that Warren A.I.'s analysis may not factor in the latest price-sensitive company announcements or qualitative material.
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