Carter's Gains From Robust Strategies Amid Inflation Woes

Carter's, Inc. CRI has been capitalizing on its pricing strategy, efficient inventory management and enhanced product offerings. It has also witnessed benefits from favorable ocean freight rates, lower inventory levels and decreased distribution and freight costs, all of which have been positively impacting margins and bottom-line growth.
CRI observed significant improvement in wholesale segment demand trends in the first quarter of 2024. This improvement is attributed to leaner inventories among wholesale customers. However, the ongoing unfavorable impact of inflation on Carter's top line and the subsequent reduction in consumer spending cannot be ignored.   

Factors Contributing Growth

Carter's has experienced a considerable expansion in margin rates, with lower ocean freight rates and reduced product costs being the primary drivers. These factors contributed to a gross margin expansion of 310 bps in the first quarter, with lower inventory levels also contributing positively to the gross margin. This underscores its commitment toward efficient cost management and operational improvements.
The company's U.S Wholesale business marked a notable increase in its results, mainly backed by lower product and transportation partially offset by selective price investments. Also, sales of this segment grew by 5.7% year over year. Management envisions sales in the U.S. wholesale business in low single digits for 2024.
CRI appears well poised to benefit from its pricing efforts, which are addressing adverse market conditions and enhancing profitability. It is strategically focused on essential core products, especially in the inflationary markets.
It stands to benefit from the recent launch of Everyday Value program. This initiative helps parents manage budgets more effectively during inflationary periods by offering consistent and competitive prices on essential items. Since its inception, the Everyday Value categories have positively impacted sales and consumer sentiment. Also, management plans to use supply-chain cost savings to strategically adjust prices on roughly 15% of its products.
Moreover, CRI's dedication to comprehensive inventory management was evident in its first-quarter 2024 results, where it continued to operate with leaner inventories. During this period, the company experienced improved price realization and profit margins, largely driven by lower product costs, inbound freight rates and effective inventory management.
Due to the challenges prevailing in the discretionary spending avenues for consumers, Carter's has been trimming expenses, where possible, resulting in lower as well as improved quality of inventory. The company envisions continued conservative inventory commitments by some wholesale customers.

Hurdles in its Way

Carter's has been experiencing the challenges of enduring inflation which has affected its top-line performance in the first quarter of 2024. Factors such as inflation, record-high interest rates and the suspension of pandemic-related stimulus payments to child-care centers have placed pressure on families with young children and their demand for the company's brands.
Apart from this, management highlighted that sales trends in the U.S. retail segment have been soft due to factors such as early occurrence of the Easter holiday in March this year, as well as the continuation of cooler weather in April, which dampened demand for warmer weather apparel.
From a valuation perspective, this Zacks Rank #3 (Hold) company looks stretched. Shares of CRI have lost 24.9% in the past six months compared with the industry's decline of 2.6%.

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Final Thoughts

Carter's anticipates an improvement in the macroeconomic environment and consumer demand as the year progresses. This is expected to result in a return to low-single-digit comparable sales growth in the U.S. Retail segment during the second half of the year. Management also envisions low-to-mid single-digit growth in adjusted earnings per share for 2024.

3 Picks You Can't Miss Out On
We have highlighted three better-ranked stocks in the broader sector, namely Hasbro, Inc. HAS, Hanesbrands HBI and Crocs, Inc. CROX.
Hasbro, a leading operator of toy and games company, currently sports a Zacks Rank #1 (Strong Buy). It has a trailing four-quarter average earnings surprise of 17.5%.
The Zacks Consensus Estimate for HAS' current fiscal-year earnings indicates growth of 45.8% from the year-ago reported figures.
Hanesbrands engages in designing, manufacturing, sourcing and selling of apparel essentials for men, women and children in the United States and internationally. It currently flaunts a Zacks Rank #1. It has a trailing four-quarter earnings surprise of 10.2%, on average.
The Zacks Consensus Estimate for Hanesbrands current financial-year earnings suggests 666.7% surge from the year-earlier levels.
Crocs develops and manufactures lifestyle footwear and accessories. It currently has a Zacks Rank #2 (Buy). It has a trailing four-quarter earnings surprise of 17.1%, on average.
The Zacks Consensus Estimate for Crocs current financial-year sales and earnings implies an improvement of 4.3% and 5.2%, respectively, from the prior-year actuals.

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