I rarely claim the market is ‘wrong’ on a minute-by-minute duration. Keith’s good at that, I’m not. But this time I think I got it right. Stock should not be up. Not by a long shot. I’d short more CRI on the open.
- 1Q beat. 29% EPS growth. I get it.
- But guided down 1Q by 30% -- AND did what at face value is a really bad acquisition.
- Companies simply don’t do bad deals when the core business is crushing it (HBI, anyone?).
- The company appears to be including the deal in revs guidance (accounts for 4% sales growth – organic likely to be down). And of course, CRI is excluding one-time charges. Not egregious – only a penny or two…but still. This, too, is ‘HBI-ish’.
- Here’s a thought, if Carter’s is one of the best Baby brands in the world – which it probably is – why is it buying other company’s content instead of its own? Point is that why isn’t management taking $140mm and investing it in its OWN brand to perpetuate share gain instead of buying bad revenue?
- [Note: on the ‘best baby brand’ comment – Victoria’s Secret is the best brand in its category. Tiffany is one too. ‘Best’ brands are…until bad capital deployment (or lack thereof0 dictates otherwise). Great, to Very Good, to Average, to…?]
- By my math, 1Q should mark the first time in a decade where Carter’s will lose meaningful share.
My positioning on this one was and STILL is that the company will earn between $5.00 and $5.50 for 3-5 years, WITH visibility (whether it happens or not) into $4.50 in earnings. By any valuation metric, I get to a stock of about $55 if I’m right on the model and the fundamentals. That’s 30-35% downside and at best 10% upside.
I said on Tues that I’m short on TAIL duration AND I’m short this quarter due to either a miss or a big guide down. Pre-market is focused on the bear (ie I was wrong there). But it’s ignoring a) the horrible guide, and b) the really bad acquisition.
Unless I’m completely missing something – or we see now (positive) disclosure on the conf call – this looks to me like a short across all durations.
Note LINK | CRI (Short) | Big Underappreciated Risks
Video Link | Carter's, Inc. (CRI) Black Book
Here’s McLean’s quick take on what happened.
CRI Beat the Quarter EPS by 8% and a 2% revenue beat. Putting up 29% EPS growth yy. That’s pretty huge.
1Q was guided 28% below the street.
Full year Guidance was about in line with the street at 4-6% revenue growth and 8-10% EPS growth.
At the same time, however, CRI announced an acquisition of Skip Hop.
Skip hop sells diaper bags, kid’s backpacks, travel accessories, home gear, and hardlines for playtime, mealtime, and bathtime through 5000 doors globally in stores like Target and Babies R Us.
CRI is paying 140mm in cash for the deal, and though not explicitly stated it appears the guidance includes the benefit of this acquisition.
A 2015 article noted Skip Hop's revenue to be over $100mm, so depending on growth/wholesale, we're looking at around 2-3 pts of revenue growth from the deal.
More on the quarter:
- Revenue grew 7.8% accelerating from 3Q, but down 250bps on a 2 year basis.
- Total wholesale was down 1%, with Carter's up 1% and Oshkosh down 34%.
- Retail drove revenue growth, particularly ecommerce which grew 22% for Carter's and 26% for Oshkosh.
- Gross margins were up 200bps expanding at an accelerating rate on both a 1 and 2 year basis.
- SG&A growth was up 8%, but slowing on a 1 and 2 year basis.
