Weak Retail Traffic And Rising Costs Will Lead To Earnings Decline Amid $30 Million Compensation Increase

Key Takeaways

• Declining U.S. retail sales and currency exchange challenges threaten Carter's future revenues and international profitability.
  
• Planned investments in pricing and marketing aim to boost customer retention but may reduce margins due to increased costs.
  
• Carter's exceeded expectations with strong holiday sales, market growth in core segments, marketing improvements, successful brand partnerships, and international expansion, supporting future revenue growth.

Catalysts

Designs, sources, and markets branded childrenswear and related products 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 is experiencing a decline in U.S. retail comparable sales, driven primarily by weakness in attracting traffic, which could impact future revenues negatively.
  
• The company is planning significant investments in pricing and marketing, which might improve customer acquisition and retention but could lead to lower net margins due to higher costs.
  
• The expected full-year 2025 operating income is projected to decrease, partly due to a planned $30 million-$35 million increase in compensation costs, which could affect overall earnings.
  
• The company's international segment may face profitability challenges due to the stronger U.S. dollar, which affects currency exchange rates and could negatively impact revenues.
  
• Carter’s is making a $20 million investment in residual targeted price reductions in the first half of 2025, which may positively impact sales volume but could compress gross margins in the short term.

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 6.4% today to 4.9% in 3 years time.
• Analysts expect earnings to reach $139.7 million (and earnings per share of $4.0) by about March 2028, down from $181.8 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 14.6x on those 2028 earnings, up from 8.7x today. This future PE is lower than the current PE for the US Luxury industry at 17.2x.
• Analysts expect the number of shares outstanding to decline by 1.34% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.4%, as per the Simply Wall St company report.

Carter's Future Earnings Per Share Growth

Risks

• Carter's experienced a stronger-than-expected fourth quarter performance, with sales and earnings exceeding guidance due to favorable holiday selling conditions and increased consumer confidence, potentially supporting revenue stability.
  
• The company's core baby and toddler apparel offerings, which are its most consistent and best-performing segment, saw market share growth in 2024, which can positively influence revenue and earnings.
  
• Carter's marketing improvements, including new personalization capabilities and an expanded loyalty program, have been driving incremental sales and enhancing customer relationships, potentially supporting future revenue growth.
  
• The success of Carter's exclusive brand products in major retail channels like Walmart, Target, and Amazon led to record sales in 2024, potentially stabilizing wholesale revenue and margins.
  
• International markets, particularly Canada and Mexico, showed strong fourth-quarter performance, contributing positively to Carter's overall revenue and showing potential for international earnings growth despite currency fluctuations.

Valuation

• The analysts have a consensus price target of $45.75 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 $49.0, and the most bearish reporting a price target of just $41.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.9 billion, earnings will come to $139.7 million, and it would be trading on a PE ratio of 14.6x, assuming you use a discount rate of 9.4%.
  
• Given the current share price of $43.96, the analyst price target of $45.75 is 3.9% 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.