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Being the father of twin baby girls has certainly been an adjustment! While I have been comfortable with children all my life, and have no problem with bottles, rattles, or even diapers; the double dose has certainly put some bags under my eyes and added a few gray hairs to boot. Still, I wouldn’t trade the world for this chance to be a Dad to my growing family…

From a financial side, children can bring similar joys and challenges. There are certainly no shortage of miscellaneous expenses associated with raising a family but my wife tells me it is totally worth the expense to dress the twins up in all manner of matching clothes, hats, shoes, and on and on. The grandparents think its a lot of fun too. So do our friends - many of whom brought us great outfits at the hospital six months ago (some of which are already grown out of - hint hint…)

The bottom line is that while not completely recession proof, children’s clothiers can often be somewhat resistant to a decline in the overall economy. My father-in-law who is a Merrill Lynch representative may roll his eyes when he gets the bill from the latest shopping spree, but the mother-in-law will still pick out her favorite pink sundresses (and will probably throw in something for the big kids too so they don’t feel left out).

Carter’s, Inc. (NYSE:CRI) is one of the better known children’s apparel companies, especially after its merger with OshKosh a few years ago. The stock has been trading in a relatively healthy pattern compared to many consumer names, and recently hit a 52 week high. Investors have been impressed with the ability of the company to maintain sales and earnings growth even during what has turned out to be a consumer led recessionary environment.

In a recent conference call, management stated that they are seeing positive trends despite the difficult retail market. In the first quarter the company reported sales 8.1% higher than the same quarter last year. Breaking out the statistics by brand, Carter’s saw 6.1% growth and the OshKosh brand actually grew by 16.6%. Comparable store sales (an important metric for any traditional retail operation) were up 5.2% for the quarter, and I was fairly impressed to see that the company opened 7 new carters stores in the first quarter.

While growth is still the key goal for this healthy company, management is not unaware of the difficulty in today’s business environment. A restructuring designed to cut costs has been initiated and is expected to save roughly $10 million annually once it is fully implemented. As part of this measure, Carter’s is expected to cut 10% of their corporate workforce and consolidate some facilities that have been duplicated with the OshKosh merger.

While the earnings report was certainly encouraging, investors took profits last week and were likely a bit disappointed with the guidance given by management. The second quarter is actually expected to see sales flat to slightly down. This is due to a bit of weakness in the wholesale division. In actuality, the wholesale business line had an excellent first quarter and there is some concern that first quarter orders could cut into some of the sales that would normally come in the second quarter.

Looking to the second half, management is guiding cautiously due to tough comparables, and an economy that is difficult to predict. The guidance is likely a bit conservative as most leaders prefer to make low promises and then over-deliver with the results. The stock is still trading at a relatively attractive multiple due to investor concerns over the retail environment. I expect this multiple to grow over time. After all, this particular corner of the retail market (cute clothes for young children) should continue to draw consumer dollars providing the company offers attractive deals. I would recommend picking up shares of this strong growth company on the weakness after the announcement. Any economic recovery will likely have a strong effect on the stock price.

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Disclosure: Author does not have a position in CRI

Source: Carter's: Kids' Apparel Is a Good Business