CRI: Conference Call Takeaways

CRI trumped the high end of its own guidance as well as expectations by more than a dime this morning and provided 2Q EPS guidance 40%-70% above the street. Despite the full year Sales/EPS increase reflecting 1H outperformance, the implied 2H earnings remains 6%-12% below the street. Additionally, we can’t ignore that organic EPS was down year over year and although 2Q revenue guidance suggests a sequential reacceleration in the top line, the incremental Bonnie Togs revenue trails off in 2H which will return organic growth to +MSD from the low teen levels it sits at today.


Below are the Key Takeaways from the call this morning as well as the deltas between the forward looking commentary provided on the fourth quarter call and this morning's F12 guidance update.


Note: Commentary below is from the CRI Fourth quarter conference call, comments in red reflect any deltas on the margin following this morning’s Q1 update:



Financial Guidance (Headed into 2012)


First Quarter Guidance:


"For Q1, which is one of our lighter volume periods, we’re expecting good revenue growth in the range of 11% to 13% over Q1 last year" 1Q12 Revenues +18%


"We expect that adjusted EPS for Q1 will be in the range of approximately $0.38 to $0.43 compared to an adjusted $0.56 last year " 1Q12 EPS $0.56



Full Year Guidance (provided on the fourth quarter call relative to this morning’s update):


"For the full year, we expect net sales will increase 8% to 10%" Increased to +9%-11%


"And adjusted EPS will increase 15% to 20% over this year’s adjusted result of $2.09" Increased to +20%-25%


"If we are successful maintaining our pricing, our operating margin should improve meaningfully in H2 this year" On Track, Margins expected to exceed 10% in F12 vs. ~9% in F11, long term goal of 14% (4-5 years)


"We now expect eCommerce sales to exceed $100mm in 2012" CRI delivered E-Commerce sales of $29 in 1Q12


"We expect improvement in profitability for H2 and for the year" Unchanged- Product costs expected to be down 10% in 2H


"Our goal over the next five years is to grow OshKosh sales to $500mm with a 10% to 12% operating margin compared to the 8.5% operating margin it achieved in 2010" Unchanged


"In 2012, we expect our total CapEx to be in the range of $90mm to $100mm, which we expect to fund from strong cash flow from operations" Unchanged





Key Takeaways from the Call:



Quarter in Review:


Revenues: +17.6%

  • US Sales: +11.3%
  • Carter's Brands Sales: +12.4%
  • Retail: +29% (Comp +6.7%, ASP +11.4%, # trans +2.6%)
    • Ended w 372 stores
    • E-commerce sales: $23mm, +$14mm YoY
    • Wholesale +3% (units -7%, ASP +11%)
      • Fall bookings planned +LSD-MSD
  • OshKosh Sales: +5.7%
  • Retail: +7% (Comp +4.7%, ASP +11.7%, # trans -0.3%)
    • Ended with 168 stores
    • Wholesale: +1% (units -16%, ASP +20%)
      • Fall bookings planned -LSD
  • International: now represents 9% of sales vs. 3% last year (Comp +13.6%)
  • Existing wholesale business grew by over 20%
  • Royalties down $500K relative to last year driven by loss of former Bonnie Togs licensee


 Gross Margin: +165bps

  • Off-price sales dropped nearly 70% due increased effectiveness of promos
  • Greater penetration in DTC positively impact margins
  • Canada is a higher gross margin business
  • ASP positive across all business segments


SG&A:  +31.2% (+278bps as % of sales)

  • Increase due to Canada Acq, 45 net new stores, higher 2012 performance compensation, e-comm investments & Marketing spend


EBIT Margin: -153bps


Inventories: +22%

  • Higher product costs contributed 14 points of 23% growth
  • Timing of Product launch accounted for 12 points of growth
  • Canada Acq added 11 pts of growth
  • Inventory management offset 15 points of growth





Second Quarter:


Revenues: +20% vs. +13E

  • Growth to be led by Canada, Carter's Retail, E-commerce


EPS: $0.26 to $0.30 vs. $0.18E


Inventories: projecting 2Q ending inventories to be down 10% to 15% in dollars and 10% in units


Full year:


Sales:  Increased to +9%-11% ($2.3bn) vs. prior +8%-10%

  • Wholesale sales will be impacted by a meaningful reduction in off-price selling


EPS: Increased to +20%-25% vs prior +15%-20% vs. +19E


EBIT Margin: Expect to be up over 10% this year vs. last year


OshKosh wholesale full year sales excluding off-price planned comparable to LY, total sales guided down -5%


Product Costs expected to be down 10% in 2H


Capex: $90-$100mm


Operating Cash flow at the upper end of $180-$200mm range


Inventories: projecting year end inventories to be flat in dollars and +MSD in units



Store Additions/Miscellaneous:


F12 additions:

Carters: 63

OshKosh: 7

Canada: 18


Expect to open 100 stores in Canada over the next 5 years


On track to launch wholesale brands in Canada at Target in early 2013


Planning growth in sales/profitability in OshKosh in 2012 weighted towards 2H12




Q&A Rundown:


April Trends:

  • Is pretty much on plan, slightly slower due to the shift in Easter
  • On a combined basis, both brand comps tracking +1.5%-2%
  • Overall, very much in line with both top line and operationally 

OshKosh Performance:

  • Mall based store performing at the top of comp range
  • Mall store first quarter comp was 12%
  • First quarter OshKosh costs were up over 28% due to supply chain strategy
  • Brand is currently a $400mm business with low operating margin - expect the brand to be $500mm over next next 4-5 years with a 10%-12% EBIT Margin


  • Strong Canadian comps driven in part by lower competition
  • No major wholesale presence in Canada until Target next year


  • Carter's wholesale growth has been inline with expectations
  • Off price selling is way down
  • Off price selling has represented ~1%-2% of total sales
  • Wholesale customers are being conservative on inventory commitments


  • Expecting peak revenues at WMT in 2012 near $150mm vs. prior 2008 peak of $146mm

 AUR/Unit growth in 2H:

  • Biggest challenge in product cost increases was in 2H11, raised prices about 10% as an offset (less than $1.00 given CRI AUR)
  • Cost pressures continued into 1H12, Fall pricing will be similar with Fall pricing in 2H11
  • Have reinvested some of cost benefits into product which has resulted in sharper price points
  • Toughest category in terms of pricing has been sleepwear (most price sensitive)
  • Will not be putting all of cost reductions in 2H back into earnings, some into product
  • Expecting margin expansion this year- 9% LY should exceed 10% this year

 JC Penney:

  • Looking at prototype designs for new stores
  • Staying very close- relationship is excellent
  • Hoping they're successful with their new strategy

 Gross Margin Swing:

  • Big driver was mix shift with greater penetration in DTC
  • Canada is a very high GM business
  • lower off price sales

 Q2 Revenue Drivers

  • Expect wholesale to tick up
  • Contribution from Canada which is incremental to last yr for one more quarter
  • Easter pulled a little bit of volume forward and some of the revenue expected in Q3 may be pulled into Q2

 Sales/Square Foot in Carter's Stores:

  • Average store basis: $408
  • Believe there is upside to the current metric
  • Have reduced the density of the store by removing fixtures in the store which improved the flow through/experience in store

 Marketing Initiatives for the year

  • Direct mail has been working and will build on these in F12
  • Continue to build on Social Media
  • Have invested in systems around customer relationship management 


CRI: Conference Call Takeaways - CRI SIGMA

Did the US Economy Just “Collapse”? "Worst Personal Spending Since 2009"?

This is a brief note written by Hedgeye U.S. Macro analyst Christian Drake on 4/28 dispelling media reporting that “US GDP collapses to 0.7%, the lowest number in three years with the worst personal spending since 2009.”

read more

7 Tweets Summing Up What You Need to Know About Today's GDP Report

"There's a tremendous opportunity to educate people in our profession on how GDP is stated and projected," Hedgeye CEO Keith McCullough wrote today. Here's everything you need to know about today's GDP report.

read more

Cartoon of the Day: Crash Test Bear

In the past six months, U.S. stock indices are up between +12% and +18%.

read more

GOLD: A Deep Dive on What’s Next with a Top Commodities Strategist

“If you saved in gold over the past 20 to 25 years rather than any currency anywhere in the world, gold has outperformed all these currencies,” says Stefan Wieler, Vice President of Goldmoney in this edition of Real Conversations.

read more

Exact Sciences Up +24% This Week... What's Next? | $EXAS

We remain long Exact Sciences in the Hedgeye Healthcare Position Monitor.

read more

Inside the Atlanta Fed's Flawed GDP Tracker

"The Atlanta Fed’s GDPNowcast model, while useful at amalgamating investor consensus on one singular GDP estimate for any given quarter, is certainly not the end-all-be-all of forecasting U.S. GDP," writes Hedgeye Senior Macro analyst Darius Dale.

read more

Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more