Carter’s (CRI) 3Q18 Result: Company Misses Expectations and Lowers Guidance Due to Toys“R”Us and Bon-Ton Closures
- Carter’s reported fiscal 3Q18 revenues of $923.9 million, down 2.5% year over year and lower than the $944.4 million consensus estimate. Adjusted earnings per share (EPS) was $1.61, lower than the consensus estimate of $1.73 and lower than the EPS of $1.70 in the year-ago quarter.
- Total comparable sales were up 0.5%; the company had planned comps to grow by over 3% but saw a decline in traffic during its Labor Day sale.
- For the full year, the company lowered its revenue guidance to1.5% growth from prior guidance of 3.0% growth, compared to the consensus estimate of 2.3% growth. Carter’s lowered its EPS growth forecast for the full year to 5%, $6.05, from 12%, $6.45, which was also the consensus estimate.
Source: Company reports/Coresight Research
Fiscal 3Q18 Results
Carter’s reported fiscal 3Q18 revenues of $923.9 million, down 2.5% year over year and lower than the $933.9 million consensus estimate. Adjusted EPS was $1.61, lower than the the consensus estimate of $1.73 and lower than the year-ago quarter of $1.70.
Segment Update: Wholesale Segment Sales Declined by 8.3% Due to Toys“R”Us and Bon-Ton Closing
By segment, US Retail segment sales increased 1.2% from $453.8 million to $459.1 million, year over year. Retail comparable sales grew by 0.5% in the third quarter, driven primarily by growth in e-commerce sales. The company reported that it saw an atypical decline in its Labor Day sales, with lower demand from international customers and lower-than-expected replenishment trends. The company also reported that its pricing was competitive over the Labor Day weekend, but its marketing messaging did not communicate the company’s value proposition.
US Wholesale segment sales decreased to $338.9 million from $369.6 million, a decline of 8.3%, which reflects lower shipments mainly due to the loss of sales at Toys“R”Us and Bon-Ton. Carter’s forecasts that its wholesale segment sales will be down by 3% for the year. Michael Casey, Chairman and CEO, reported that the sales lost at Toys“R”Us and Bon-Ton are being partially recaptured with other customers and in its stores, the company is seeing the best lift in sales at stores that are within a five-mile radius of the closed Toys“R”Us stores.
Casey also reported that while the company is not seeing the growth it expected on the refresh of its replenishment product offering, “Little Baby Basics,” it is seeing growth in its exclusive product offerings on Amazon, Target and Walmart, the three retailers which the company “believes benefitted the most from Toys“R”Us closures.”
The company’s International segment sales increased by 1.0% to $125.8 million in the third quarter from a year ago due to the contribution of an acquired Mexico licensee business and an increased demand in markets outside of North America, offset by lower demand in China and unfavorable movements in foreign currency exchange rates.
Carter’s expects international sales to grow by approximately 5% this year and contribute approximately 13% of total sales.The company reported that it is exploring the opportunity of changing its China business model. A China-based partner may manage both the online and off-line businesses under a licensing arrangement, whereas today the e-commerce and brick-and-mortar businesses are managed separately—unintentionally competing against each other.
Store Update: Opening 160 Cobranded Stores and Closing 115 Standalone Stores
Carter’s reported that cobranded stores are its best-performing stores, with comps up 6% in the third quarter. Cobranded stores provide two of the company’s best-known brands, OshKosh B’gosh and Carter’s, in one location. The company plans to open 160 more cobranded stores by 2022, improving the mix of cobranded stores to 50% of its store portfolio. Carter’s reported that its multibrand customers grew over 20% over the past year and their annual spend is 2–3 times that of its single-brand customer.
The company plans to close at least 115 stores by 2022, mostly standalone Carter’s and OshKosh B’gosh stores, in declining outlet centers. Approximately one-third of these store closures are planned for this year. The stores that Carter’s is planning to close had less than a 2% operating margin last year, whereas the stores that will remain open had a margin of over 20%. The company reported that as it closes stores, it is seeing approximately 20% of its sales transfer to stores in an adjacent market. Carter’s reported that 83% of its customers are shopping in-store.
For the fourth quarter, the company expects net sales to increase by 5% year over year, approximating to an adjusted EPS of $2.56, compared to the consensus estimate of $2.86. The 4Q18 revenue is expected to grow by approximately 5%, compared to the consensus estimate of 5.2%.
For the full year, the company lowered its revenue guidance to 1.5%, $3.44 billion, from prior guidance of 3.0%, $3.50 billion, compared to the consensus estimate of 2.3%, $3.48 billion. Carter’s lowered its EPS growth forecast for the full year to 5%, $6.05, from 12%, $6.45, which was also the consensus estimate.