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Conclusion: The strategic implications of this CRI deal with JCP are spot-on with what we think is a very underappreciated risk in retail. It may give CRI a near-term revenue lift due to channel-fill, but it is ill-equipped to manage undifferentiated product across channels with polarized price points. This will ultimately be its undoing.

We’ve been waiting for this announcement that Carter’s is opening a shop inside JC Penney. It makes perfect sense, actually, in the context of the store that JCP is trying to build. But while these ‘partnerships’ seem equal, the reality is that they’re not, and this one favors JCP by a country mile. Ultimately, we think that this will be CRI’s swan song.

Consider the following…

1)      JCP has a bidding process for all its shops. CRI no doubt went up against Gerber, Disney, Circo, Zutano (highest unit count on Amazon) and others for this business. It is definitely a sales/margin trade off. Note that VFC’s Lee recently lost out to Levi’s in JCP as it did not chase price. Good long term for VFC. Bad short term. CRI is the opposite.

2)      CRI’s challenge is that it puts similar product into every channel of distribution. Look inside Wal-Mart, Target, Macy’s, Amazon, and Kohl’s. They all have product that is remarkably similar. That’s fine when a brand is small, but as it grows up, it gets very dangerous.

3)      Oh and by the way, the same product is in Carter’s own stores, and on its web site, and it’s almost always 40-50% off.

4)      Look at what happened when Liz Claiborne launched Liz & Co inside none other than JC Penney 6 years back. The product looked very similar to what was selling at Macy’s, but at a lower price. It didn’t take Macy’s too long to cut Liz. The market’s reaction was not pretty – the stock went from $43 to $2.

5)      How does Carter’s in-store promotional strategy synch with Johnson’s ‘Every Day Low Price’ strategy? So if a product is $14.99 list in a Carter’s store, it will be knocked down to $8.99 on day 1. On average, the whole lot will clear at about $6.00. If Johnson holds true to his Plan, then he’s going out with an initial price in the $6 range. How will Macy’s feel about that when they’re selling the same thing down the hall for $10? Wal-Mart at $9?   

6)      CRI is setting up this deal with its largest customer’s top competitor – KSS. Let’s think of how that discussion went for the CRI sales rep to Kohl’s. “Hey…Just want to let you know that we’re starting a program with JC Penney to do exclusive shops with product that is at least as good as what we’re selling to you, but will be listed at a 30% discount. You cool with that? Good. Nice knowing you.”

7)      CRI does not need to disclose how big Kohl’s is as a customer, because the reality is that as a percent of aggregate sales no one is within a stone’s throw of 10%. But that’s bc CRI’s own retail business accounts for about 55% of sales versus only 29% for Carter’s wholesale. But that’s comparing apples and oranges. We need to either gross up wholesale, or take down retail for an even comparison. Either way, looking at EBIT is a fair comparison. In the regard, both Carters US brand wholesale and retail each account for about 45-47% of EBIT. International accounts for the rest, more than making up for Osh Kosh, which is perennially in the red. KSS might only account for 3-4% of CRI’s total sales, but it is closer to 6-7% of profits.

8)      This is not just about KSS. There are going to be so many moving parts across retail in 2H. Heck, there already are. That will intensify. The dominoes that fall in footwear, housewears, underwear, fragrances, etc…will cause reverberations that are impossible to predict. For example, JC Penney’s Tourneu shop could take share from Macy’s on the margin at ridiculously low prices. Macy’s might not strike back in the jewelry category, but rather in its terms or pricing with Outerwear vendors like Columbia, Underwear like Hanesbrands, or moderate ends of the portfolio of apparel/footwear from companies like Jones Group. The cross-currents here will be fierce, and we have yet to gain conviction that anyone is really prepared for it.

Growth has come from Playwear. That’s less defendable than the core baby biz (i.e. Competes w/Old Navy)

CRI: Turning Point - category

Can’t look at the wholesale/retail split by revenue, as it grossly understates the importance of the wholesale business.

CRI: Turning Point - revebit

Company-Operated retail stores and mass retailers have grown in importance

CRI: Turning Point - channel