When my kids were little, I often bought clothes for them at Carter’s (NYSE:CRI). They make good-quality clothing at very reasonable prices. I was pretty bummed when the kids grew out of the sizes that Carter’s offers. Alas, kids grow up, don’t they?
(Pause here. Cry eyes out. Return to writing.)
It stands to reason that Carter’s is a stock I should look into, not even realizing it was public until recently. The company has 359 stores, along with 170 OshKosh-branded stores and 65 other stores in Canada, and it also sells its products in Target (NYSE:TGT) and Wal-Mart (NYSE:WMT).
Carter’s just beat analysts’ forecasts for the fourth quarter, but it is forecasting as much as a 30% year-over-year EPS decrease in Q1. So while things look pretty good for the company going forward, there are some concerns.
Q4 was a solid quarter for Carter’s. Sales increased over 22% across its entire case, so how bad must the cost situation be if that only translated to flat operating income? The answer: pretty bad. You can thank the surging commodity markets for that — particularly cotton. You don’t make kids clothes out of sandpaper, after all. Net income did manage to increase about 7%, fortunately. Alas, these cotton costs really smacked the company badly for the entire year. Again, despite an annual sales increase of 20.6%, net income fell 16%.
Carter’s believes these cost issues are going to continue in the spring, elevating costs by 15% year-over-year before falling 10% in the fall. The company is looking at diluted earnings per share of $2.40 to $2.50 compared to $2.09 for 2011. The good news, thus, is CRI’s bottom line should grow by almost 20%.
Carter’s also has done a good job in managing its balance sheet. The company carries only $236 million in debt, and that’s offset by an almost equivalent amount of cash. So no matter how much costs might increase, the company sure ain’t going bankrupt. Operational cash flow is perfectly acceptable at $81 million, with about $45 million going out the door in capex.
So what to do with CRI stock? I think it’s safe to assume that commodity costs always are going to be volatile, and following 2011’s surge, they might still go higher. Plus, India’s recent pullout from cotton exports doesn’t bode well, considering it’s the second-largest producer. I’d factor that into future projections. Also, Carter’s trades at 20 times earnings, equal to its EPS growth rate.
On the surface, then, I’d consider buying. I also note that Berkshire Partners (no relation to Warren Buffett) owns 13% of the stock and purchased shares last fall. That’s a big vote of confidence.
I think, overall, Carter’s stock is a bit pricey when factoring in the cost issues. I’d wait for a 10% to 20% pullback before jumping in, and I certainly would hold the stock if you own it.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Capital, Inc., which brokers secure high-yield investments to the general public and private equity. You can read his stock market commentary at SeekingAlpha.com. He also has written two books and blogs about public policy, journalistic integrity, popular culture and world affairs.