Here’s The TAIL Call on CRI:
What was a mid-high teens EPS grower for the better part of 5-years is setting up to earn between $5-$5.50 for the better part of 3-5 years. The Street is naturally looking for EPS to climb to $6.75. So we’re looking at an increasingly commoditized brand that is…
a) seeing demographic pressure with core wearer AND buyer,
b) seeing share erode for the first time in a decade,
c) unable to grow around wholesale – which is shrinking at the greatest rate in CRI’s history.
d) is unable to comp at a time when stores are in the sweet spot of the maturation curve,
e) tapped out in store growth and outlets – so it’s deploying capital in Canada.
f) is not differentiating product by channel – which opens up margin pressure (ie contrary to perceived safety of the kids category, CRI has SERIOUS AMZN risk – see below).
h) is levered financially (32.4% DTC)
Ultimately, we’re looking at about $5.25 in TAIL earnings power, and the stock is trading at $83. We get to a price between $55-$60 – or 30% downside with about 10% upside topps. Some valuation callouts (that should all be earnings-driven – ie lower multiples on lower EPS/cash flow).
- At some point sooner than later, we think that people will be eyeing $4.50 in EPS (whether it happens or not). Give that a 12-13x p/e, and you’ve got $54-$58
- That suggests a 7x-8x EBITDA multiple. That sounds right.
- That equals a 6% FCF yield. i.e. not cheap. An 8% yield = $50. Why not?
- Dividend yield as low as $50 is only 1.7%. Not cheap.
- Let’s academically apply a 10% zero-growth cost of equity on the earnings annuity = $52.50
Here’s one of the biggest issues we have with this brand. There is literally no product tiering by channel. Great brands like Nike, and even ‘once great’ brands like Ralph Lauren sell different product/labels at different price points in different channels. Carter’s? Same, same, & same. The pic below says it all. Do you think that just MAYBE the consumer is smart enough to see the 21% difference in price by channels? Yep. Maybe this didn’t matter when it was filling the wholesale channel and building stores wherever. But it matters today at 3x the revenue base, no more store growth in even reasonably good MSAs, and wholesale shrinking. Let’s not even mention how it is now selling directly to AMZN at different prices even though wholesale accounts have been clearing through AMZN, COST and Marshalls for 5-years.
Again, $5-$5.50 in EPS for 3-5 years.
LINK: EVENT | Carter's, Inc. (CRI) Black Book
Here’s the setup into the quarter.
13 weeks ago CRI missed for the first time in 25 quarters. There is likely to be another. If CRI does not outright miss expectations for 19% earnings growth in 4Q when its SIGMA is sitting in a bearish gross margin position. All in, we should see tepid guidance for the year ahead when it issues FY17 guidance on Thursday’s call. It’s unlikely to be good. We wouldn’t be surprised to see the company guide to a flat year (this is far more than a cotton call – but higher costs from trough in March hit the P&L today). Sentiment has been worsening – but short interest only sits at 5.3% of the float. And, you guessed it, there’s only one sell rating on an otherwise underfollowed stock.
This is not one of those ‘I hate it long term, but I’ll couch it with a near term bullish call.’ We’re short it today, and will stay short into the print. If I’m wrong, then I short more unless the bigger thesis is proven wrong. As the research changes, so will I – including getting even more bearish.
