Carter's Shrinks Guidance After a Strong Quarter

By Markets Fool.com

Image source: Carter's, Inc.

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Carter's Inc. (NYSE: CRI) released second-quarter 2016 results Wednesday before the market opened, and it's evident the market isn't pleased, with shares of the kid's clothing retailer down around 11.3% as of this writing.But that's not to say Carter's actual Q2 results were bad.

First, note that with the help of momentum following its11th straight quarterly earnings beatthree months ago, Carter's stock touched a fresh all-time high in the days leading up to this report. And interestingly enough, today technically marks Carter's 12th straight quarterly beat.

Quarterly revenue climbed 4.4% year over year, to $639.5 million, and translated to a 5.4% decline in adjusted net income, to $2.1 million. Adjusted net income per diluted share also fell 1.7% year over year, to $0.72, helped by repurchases over the past year, including $125.3 million spent to buy back shares in Q2. For perspective, Carter's guidance called for adjusted earnings per share to suffer a more severe 10% to 15% decline, to a range of $0.62 to $0.66, with lower growth in revenue of 3% to 4%, to a range of $631.1 million to $637.3 million.

Regarding Carter's bottom-line declines, recall last quarter CFO Richard Westernberger noted the company was making large investments in marketing, technology, and supply chain improvements to support future growth.

Digging deeper into Carter's results, Carter's retail segment sales climbed 10.9% year over year, to $273.8 million, including a solid 4.4% increase in retail comparable sales. Within that figure, e-commerce comp sales growth came in at 17.4%, while stores comps increased 1.4%.On the wholesale side, though, Carter's sales fell 2.8%, to $205.7 million, driven by a combination of lower product demand and timing of orders.

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Next, Carter's OshKosh retail segment grew sales 7.5% year over year, to $79 million. New OshKosh locations more than offset the impact of a 1.3% retail comparable sales decline, which itself was comprised of a 17.6% increase in eCommerce comps and a 5.8% decline in stores' comparable sales. Similar to Carter's wholesale, OshKosh wholesale revenue fell 34.4% year over year, albeit from a much smaller base, to $9.4 million, driven by lower seasonal bookings.

Finally, Carter's international segment increased sales 8% year over year, to $71.6 million, as strong e-commerce sales in China and continued strength in Canada -- where comps increased 8%, including stores comps growth of 6.9% and a 27.4% increase in e-commerce -- were only partially offset by continued unfavorable foreign currency exchange rates and lower sales to other non-Canadian customers. On a constant-currency basis, international sales would have climbed 11.7%.However, note this is a significant deceleration from last quarter's international growth of 13.9% year over year (20.1% at constant currencies).

Carter's CEO Michael Casey elaborated in a statement:

We achieved our sales and earnings objectives in the second quarter.Our sales growth was driven by higher demand in our retail and international businesses. We are expecting good growth in the balance of the year, and have revised our previous forecasts to reflect the current outlook for our wholesale and international businesses.

Therein lies the problem. Thanks to Carter's relative weakness in the wholesale channel and moderated growth internationally, the company now anticipates net sales for the year will increase 5% to 6% (compared to guidance of 6% to 7% previously). And that should result in 10% growth in adjusted diluted EPS (compared to expectations for 10% to 12% previously).

In the meantime, for the current (third) quarter, Carter's expects net sales to increase 6% to 7% year over year, to an approximate range of $900.8 million to $909.3 million, which should translate to 6% to 10% growth in adjusted diluted EPS, to a range of $1.61 to $1.67.

All things considered, there's no denying this quarter represented another demonstration of Carter's relative strength, even if investors have grown accustomed to the company's habit of under-promising and over-delivering. But given the under-performance and cautious outlook for its wholesale and international businesses, which in turn resulted in today's guidance reduction, it's no surprise to see shares pulling back from their all-time highs.

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Steve Symington has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Carter's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.