Excuse me for sounding self-promotional, but I called this sucker a year ago. Carter's management has been self-inflecting deep paper cuts over the past 4 years, and is officially at the point where the company needs a transfusion. Current CEO Fred Rowan is 'retiring' and the company is passing over reigning resident Joe Pacifico for the top job. CFO Mike Casey is getting the nod - which is the best decision I've seen from this Board since just about ever. Consider the following...
Pre 2003: Carters is the dominant brand in the babywear market, with about a 35% share in this space. One of the most defendable brands in apparel retail. The product is very basic, has virtually no fashion risk and is more like a consumer packaged goods model than an apparel model.
2003-'05: CRI steps up its Playwear, Company Retail and mass market (WMT, TGT) businesses. Fashion risk enters the equation. Starts to compete with the likes of Old Navy. Initially does not feel the brunt of competitive pressure as sourcing savings more than offset unit margin pressure.
2005: Buys Osh Kosh, a family-owned brand with even greater fashion risk than Carter's Playwear.
So by 2006/7, CRI's business model shifted to a mix where less than half of sales comes from that core 'packaged goods' business and the rest is fashion. Not high fashion, obviously, but one where the competitive set is far more complex than CRI had when it sold mostly onesies and baby blankets.
CRI's response? It was to cut costs, of course. I love this example... Osh Kosh had about 500 employees when CRI purchased it in 2005, and now that employee count is closer to 150. A simple fact in this business is that brands don't sell themselves. It takes talent. Designers, merchandisers, marketing, etc... CRI aggressively cut costs from its model in order to buoy earnings. CRI did not appreciate this.
Think about it like this - how could a company consistently miss sales targets across virtually all of its fashion-driven businesses, subsequently face a 1,500bp slowdown in sales growth, and only see EBIT margins slip from 12% to 10%? It's what I call 'pulling the goalie.' Mask underlying weakness by cutting costs for a last shot at winning the game. As far as I'm concerned, the first team lost the game. The coaching staff was turned upside down, and now some tough choices need to be made before starting the clock and facing a new opponent.
What next? I still think a 10% margin rate is too high. Mr. Casey needs to buy himself some ammo. There's nothing stopping him from clearing the deck and resetting the margin bar at 6-8%, which is a level my math suggests would give him the resources to head closer to a profitable growth trajectory. That would take EPS from $1.40 to somewhere between $0.75 and $1.00, and is when the name gets more interesting to me. I think it's more likely than not that we see it.
(The chart below shows the disconnect between such a lack of EBIT margin change in the face of such severe business pressure. This is not sustainable...)
Pre 2003: Carters is the dominant brand in the babywear market, with about a 35% share in this space. One of the most defendable brands in apparel retail. The product is very basic, has virtually no fashion risk and is more like a consumer packaged goods model than an apparel model.
2003-'05: CRI steps up its Playwear, Company Retail and mass market (WMT, TGT) businesses. Fashion risk enters the equation. Starts to compete with the likes of Old Navy. Initially does not feel the brunt of competitive pressure as sourcing savings more than offset unit margin pressure.
2005: Buys Osh Kosh, a family-owned brand with even greater fashion risk than Carter's Playwear.
So by 2006/7, CRI's business model shifted to a mix where less than half of sales comes from that core 'packaged goods' business and the rest is fashion. Not high fashion, obviously, but one where the competitive set is far more complex than CRI had when it sold mostly onesies and baby blankets.
CRI's response? It was to cut costs, of course. I love this example... Osh Kosh had about 500 employees when CRI purchased it in 2005, and now that employee count is closer to 150. A simple fact in this business is that brands don't sell themselves. It takes talent. Designers, merchandisers, marketing, etc... CRI aggressively cut costs from its model in order to buoy earnings. CRI did not appreciate this.
Think about it like this - how could a company consistently miss sales targets across virtually all of its fashion-driven businesses, subsequently face a 1,500bp slowdown in sales growth, and only see EBIT margins slip from 12% to 10%? It's what I call 'pulling the goalie.' Mask underlying weakness by cutting costs for a last shot at winning the game. As far as I'm concerned, the first team lost the game. The coaching staff was turned upside down, and now some tough choices need to be made before starting the clock and facing a new opponent.
What next? I still think a 10% margin rate is too high. Mr. Casey needs to buy himself some ammo. There's nothing stopping him from clearing the deck and resetting the margin bar at 6-8%, which is a level my math suggests would give him the resources to head closer to a profitable growth trajectory. That would take EPS from $1.40 to somewhere between $0.75 and $1.00, and is when the name gets more interesting to me. I think it's more likely than not that we see it.
(The chart below shows the disconnect between such a lack of EBIT margin change in the face of such severe business pressure. This is not sustainable...)
