Here’s one of the 20+ exhibits in our CRI Black Book that we think is worth calling out. It highlights what we think is the root of many of the company’s challenges.
Specifically, CRI has little product differentiation relative to other brands. You can get CRI product in Carter’s own stores, at Wal-Mart, Amazon, Kohl’s, JC Penney, or Macy’s and it all pretty much looks the same. You can get away with that as a small brand – like how big CRI was a decade ago. But with over $3bn in (retail equivalent) sales, you’ve got to be careful – especially with so many new competitors coming into the space today (GILT, Giggle, Children’s Place at Sam’s, etc…).
Take a look at some of the premium branded apparel/footwear manufacturers in retail like NKE, Ralph Lauren, Under Armour, Coach, and you’ll see a very clear product stratification and segmentation strategy. What is sold through company direct channels (owned-retail/e-commerce) is higher-end, often exclusive, and priced accordingly. Product sold through specialty retail channels is often exclusive in some regard (colorways, limited quantity, etc.) along with other premium brand product. Then you have the entry level product at mass/department stores and 3rd party e-commerce, which covers some combination of mass and specialty, but not company direct. This is not how CRI sells through to the market. It’s the same product, same price. Or even worse, similar product, different price.
Is it fair to compare CRI to these brands? As long as people are arguing that CRI will get to 14% EBIT margins, the answer is yes. NKE has 40% market share in footwear, 15% in apparel, and has pricing power. Yet it has only has a 12-13% margin. RL has about 7-8% share in the US. It too has pricing power, and it has a similar retail/wholesale mix as CRI. RL’s margins are about 14%. UA has a high growth trajectory with RL-like market share in an oligopoly with pricing power. Yet it has only 10% EBIT margins.
CRI has a very promotional model, with 90% of the product hitting the floor on day 1 with an average 40% discount. In other words, it has no pricing power. It has 24% market share in its core business, and 12% share in kids – about midway between a NKE and RL. But should CRI have the same margins as these other players? We have a hard time arguing that they do.
For a more detailed analysis, please see our CRI Black Book “CRI: The Margin Rebound Disconnect”