We don't make investment decisions based on the actions of others, but the major push back we’ve had on taking the short-side of CRI is the ‘Berkshire’s buying’ argument – that just got debunked. Berkshire filed last night revealing they just sold 40% of their stake. Oh, and short interest at 5% of the float now stands at 12-months lows at the same time valuations sit at near seven-year peak levels.
These latest factors add to what is becoming a growing list of reasons why CRI is one of our top short ideas headed into year-end.
Here’s are take on CRI coming out of Q2:
“Strength in Carters' wholesale drove the beat this quarter – and we’ll give them that, but that alone isn’t enough tosupport a stock with such lofty expectations. Importantly, with little delineation and differentiation of product by channel, stronger wholesale performance is actually competing against CRI’s own retail. In fact, this has been reflected by the decline in new store productivity. With Carter’s retail accounting for nearly 2/3 of 2H revenue growth and ~50% of CRI’s top-line in F13, the company is increasingly reliant on increasing the volume of less productive stores. It should come as no surprise then that store growth has continued to increase over each of the past two years at +14% and +17% in F11 and F12 respectively up from +10% in F10. This is simply not sustainable. Assuming CRI maintains this rate of growth, it would hit its ~600 store opportunity threshold by F14 – then what? We think it will have blown up its wholesale business long before then -- there's your risk.
Lastly, the timing of management choosing to go dark on AUR disclosure for “competitive reasons” headed into 2H just smells bad. With product cost pressures now turning to a tailwind down -10% in 2H, the company will have to continue to post solid gross margin results for EPS to meet or exceed current guidance. The opacity in AUR disclosure does little to increase confidence in that regard.
All in, we’re reducing our 2H EPS numbers by $0.05 to $1.45 primarily reflecting higher SG&A spend (e-commerce and marketing) offsetting stronger trends at wholesale. At the time of writing this note, consensus was at $1.84 for 2H and $2.67 in F12 and $3.38 in F13. We’re at $2.40 and $2.95 respectively. If our estimates prove correct, this name has another 25-40% downside from these levels.”
Berkshire reduces holding by ~40% after realizing nearly 120% return since becoming CRI’s top shareholder in October 2010: