Carter's Inc.: Around The Cycle In 60 Days
Summary
- In less than 60 days Mr. Market completed a full journey through depression town to the promised land on Carter's Inc. shares.
- Q1 earnings from CRI were solid with huge revenue growth, awesome margins and a resumption of dividends.
- CRI shares are no longer stupidly undervalued, just moderately undervalued leading to a good hold, watch, and learn type investment opportunity.
Carter's Inc. (NYSE:CRI) released their latest quarterly report last week and the results really nothing short of a win for investors. Before delving into a bit of the highlights of the quarter, let us take a moment to talk about mood swings and how over the past call it 60 days CRI has been the poster child of Mr. Market's capacity to swing between emotional extremes.
Less than 60 days ago, I wrote about CRI and how the market got a bit heavy handed knocking shares from triple digits down into the low $80's based on one quarterly report which was largely based on a period where the economy was only starting to emerge from the lows. I was constructive on the name and thus I bought shares around the $83 level. I was constructive but did not have that much conviction in assessing just how depressed the market would get on CRI shares so rather than take a pretty full stake, selling 70 & 80 strike puts at a handsome premium (Mr. Market was panicky on CRI after all) would be a way to potential step into CRI at a rather greedy valuation level. But now I am left sad and crying because I should have just bought shares.
Literally not 60 days later, CRI has traded all the way back up to levels it was at prior to the knee jerk overzealous sell off and more importantly (for me) back up to my intrinsic value estimates (which was $110 to $115 per share prior to this announcement) which I shared in my follow up SA post a week or two after my first one on CRI. So literally in less than 60 days the market has swung full circle on CRI knocking shares down in excess of 20% after interpreting one quarterly report as the final nail in the coffin only to bid the shares right back up and then some as I guess the dawn of a new day has begun into the minds of many.
So anyways onto the quarterly earnings report.
Management set the tone right out of the gates in the in the press release on the quarter. "In the first quarter, we achieved a record gross profit margin and our best operating profit margin in over a decade...Given our strong start to the year, we have raised our sales and earnings forecasts for 2021. We have also amended our credit facility to enable the resumption of capital distributions, which were temporarily suspended in the early days of the pandemic. Accordingly, our Board of Directors has declared a dividend payable to shareholders commencing in the second quarter." This is clearly a beat/raise scenario and as a shareholder in a company, what in the world tops that?
In terms of revenue:
"Net sales increased $132.9 million, or 20.3%, to $787.4 million, reflecting strong growth in all business segments. The Company's U.S. Retail, U.S. Wholesale, and International segments grew 27%, 12%, and 19%, respectively. Consolidated net sales in fiscal March increased 59% compared to the prior year period."
In terms of margins:
"Operating income increased $206.0 million to $127.5 million, compared to an operating loss of $78.5 million in the first quarter of fiscal 2020. Operating margin improved to 16.2%, compared to (12.0%) in the prior year period. Adjusted operating income (a non-GAAP measure) increased $154.9 million to $128.5 million, compared to an adjusted operating loss of $26.3 million in the first quarter of fiscal 2020."
The Outlook:
"For fiscal 2021 (a 52 week fiscal year), the Company projects net sales will increase approximately 10% and adjusted diluted earnings per share will increase approximately 40% compared to adjusted diluted earnings per share of $4.16 in fiscal 2020."
So I opened talking about how Mr. Market were driven mad from one quarterly report but I have to acknowledge that the market also has the ability to process new information at a wildly crazy speed and can get it right as well. For instance when CRI's earnings release hit the shares spiked from the low $100's to over $112 per share in a moment's notice - which happens to be the low end of my updated intrinsic value estimate based on the updated guidance for 2021 revenue - think that is a coincidence? I think not.
From a relative value P/E perspective CRI got a whole heck of a lot cheaper as well dropping from a 35x TTM down to around 17x TTM earnings. Obviously if they can hold the line on that growth figure the forward view on P/E will look all the more compelling relative to where the S&P 500 is currently pricing.
Source: SeekingAlpha
In terms of a more holistic relative value metric EV/EBIT, CRI is pricing roughly in line with its midpoint over the past 10 years. So it's not rich from a relative pricing perspective but it's also not like a pound the table load up the shopping cart situation either. It warrants additional work.
Source: SeekingAlpha
So what to do now? I need to do some more work understanding operating margins and further refine my thinking about how they may evolve overtime based on recent data but in the meantime I will just sit and collect my dividend and watch my puts expire worthless while continuing to follow CRI waiting for another knee jerk overreaction to pick up more shares at a bigger discount to intrinsic value than what is currently on offer. The company seems to be a terrific franchise and I believe has a great future ahead of it particularly if the macro-baby having days of the millennial generation finally get underway.
Thanks for reading.
This article was written by
Analyst’s Disclosure: I am/we are long CRI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
Recommended For You
Comments (5)
My grandfather worked at Carter's during the depression. He was never laid off.
Carter's will keep going.
I am going back to sleep
