Upcoming Pricing Strategy Changes Will Pressure Future Margins And Earnings

Key Takeaways

• Investments in pricing and brand marketing may protect volume but could harm gross margins if not counterbalanced by efficiencies or strong volume increases.
  
• A shift toward varied product pricing may cause revenue and margin pressures if mid-tier product sales decline.
  
• Carter's strong financial performance and strategic initiatives in marketing, retail, and omnichannel capabilities suggest potential for stable revenue growth and long-term profitability.

Catalysts

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.

• Carter's plan to invest $40 million in lower prices and $10 million in additional brand marketing may protect unit volume but could weigh on the company’s gross margins, impacting future earnings if not offset by cost efficiencies or significant volume gains.
  
• The company’s shift toward increasing the mix of opening-price and premium-priced product offerings could result in revenue pressures if mid-tier products continue to decline, impacting overall gross margins.
  
• Planned capital allocation focusing on opening new stores while closing underperforming ones might not provide the expected returns if consumer spending patterns do not improve, potentially impacting net margins and earnings growth.
  
• With Carter’s optimistic sales growth projection in Mexico being potentially offset by a decline in Canadian sales, any further unexpected market downturns in these regions could hinder international revenue growth.
  
• The pace of Carter’s retail sales recovery and future growth might be constrained if inflationary pressures and macroeconomic conditions continue to drive consumers toward discount and mass retailer channels, which could challenge revenue targets.

Carter's Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Carter's's revenue will decrease by 0.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 8.0% today to 6.2% in 3 years time.
• Analysts expect earnings to reach $177.9 million (and earnings per share of $5.19) by about December 2027, down from $226.1 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 13.7x on those 2027 earnings, up from 8.7x today. This future PE is lower than the current PE for the US Luxury industry at 19.6x.
• Analysts expect the number of shares outstanding to decline by 1.69% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.51%, as per the Simply Wall St company report.

Carter's Future Earnings Per Share Growth

Risks

• Carter's reported better-than-expected third-quarter results, with sales and earnings exceeding forecasted guidance, driven by favorable consumer response to product offerings and new pricing and marketing strategies. This indicates potential for stable or improving revenue.
  
• The company achieved higher-than-forecasted cash flow and maintained over $1 billion in liquidity, suggesting strong financial health and capability to support future growth, which could help maintain or grow net margins.
  
• Investment in new marketing campaigns and product offerings showed positive outcomes, with increased conversion rates, transactions, and new customer acquisition, indicating potential for sustained or increased earnings.
  
• Carter's has a robust retail presence, with plans to open high-margin stores and close low-margin ones, while maintaining a strong wholesale business through exclusive relationships with major retailers, which could stabilize or increase revenue.
  
• The company received positive results from investments in omnichannel capabilities, including a 12% increase in omnichannel sales, which are margin-accretive and could support long-term profitability and net margin improvement.

Valuation

• The analysts have a consensus price target of $56.25 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 $65.0, 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 $177.9 million, and it would be trading on a PE ratio of 13.7x, assuming you use a discount rate of 8.5%.
• Given the current share price of $54.55, the analyst's price target of $56.25 is 3.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.