Here are my ‘stream of consciousness’ hits on the call.
Management: At face value, this is the same solid management team as always. I always get that argument from investors. I buy into that. But, I think it’s simply ‘less solid’ on the margin. Introspectively, I think I’d pretty good (don’t we all?). But if we underinvest time and capital in growing resources, deploying capital and evolving our #process, then we’ll lose efficacy on the margin. That’s Carters.
e-commerce. Why should 24% ecomm growth be considered acceptable? It’s not. We need to see something in the 40s or 50s for me to give props.
Also, I’d challenge anyone to find a ‘great brand and great company’ that says ‘e-comm will double by 2021.’ Sorry folks, but it should double in 2.5 years tops. Not 5. Maybe it’s conservatism, but lets’ get real…guiding to 15% e-comm CAGR is weak.
Skip Hop
- About a 3-4% revs benefit INCLUDED in guidance. Public figures show that it was at $100mm+ in 2015, and CRI says $86mm last year. It’s not clear at face value if we’re talking apples to apples w wholesale vs retail.
- But either way, a brand in its infancy should be doubling – not being flat. That probably means it’s underinvested. So when management says ‘double sales and earnings’ on the deal by 2021 – again, a wimpy goal – it might actually be very realistic.
- Do the math on the company taking that $140mm and investing in its own content. If it could actually sustain its 17% return on capital, it would suggest an additional $0.50 in EPS – not the implied $0.30 (despite this year being insignificant, let’s say and 8% op margin).
- Skip Hop has $86mm (wholesale) in sales [in a $9bn market]. A young brand that just got a great distribution boost only targeted to grow around 10% Yr 1? It’s got only 2% share today, and is targeted to be at just 3.5% in 2021?
- Sometimes ‘a great opportunity’ is always a ‘great opportunity’ unless the company spends against it. i.e. will the deal end up costing $200mm+.
Bad start to year. The year ended strong, but the first two months are trending down meaningfully. The company actually blamed tax refund timing, and banked on a meaningful acceleration in the coming months. Chances are, there’s more to it than taxes. The later Easter could help 2Q – there’s your only real bull case in light of bullish inventory position.
No differentiation. I continue to note the serious lack of product differentiation. This is one of my biggest issues with the strategy. The consumer is too smart to see the same product in every channel at different prices. The retail environment is more transparent than ever. CRI appears to miss this concept.
The Stick. Banking on a hockey stick EPS growth set-up for ’17. That same setup cost Nike 7 multiple points.
‘e-comm is driving growth’ (but is it?). SO, “we’re building stores closer to consumers” (in Canada). I absolutely fail to see how this is an ROIC-enhancing move.
2017 Outlook
- Spring (including Easter) bookings down mid-single
- Fall ’17 bookings down mid-single
- US Wholesale (all three brands combined – ie addition of Skip Hop) down low-single.
Accounting change. CRI is combining Osh Kosh, Carters and Skip Hop into Wholesale and Retail. I’d ordinarily read into this with a bearish slant. But the reality is that this probably makes sense as it relates to how the businesses are rolled up internally.
Repo. CRI repo’d $300mm in stock last year at an average price of $98.53. Since the stock hasn’t been above that price since early August, it seems being more patient and prudent on repo timing would have boosted the potential return. My take is that it shouldn’t be buying stock at these prices. I usually don’t give companies credit for buying stock at all. That’s our job – but personal opinion, I guess. Added repo is where I could be wrong Short. It’ll buy stock – even if dilutive.
Mis-spoke, typo, or guidance revision? We’re nit picking a bit here but coming into this call the long term revenue guidance was for “over $4 billion by 2020”. Today CRI announced an acquisition that by 2021 should be approaching $200mm in sales according to guidance, yet said in prepared remarks that the company is looking to hit over $4bn by 2021 (a year later). Perhaps it was a simple error, but either way it seems to be a negative read on the true growth outlook for the Carter’s core.
Organic Rev. Carter’s will get about 1-2 pts of growth simply from mix shift to retail in 2017. With 3-4 points coming from Skip Hop, we’re looking at guidance that implies about 0-2% organic growth at retail for the year.
See below for our previous note on CRI:
CRI | SOLID Short Set-up Across durations.
Big beat. Horrible guide. Even worse acquisition. Great TRADE, TREND and TAIL short opportunity here. $5.25 EPS power. Street at $6.75.
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.
