Can Carter's, Inc. Sustain Its Momentum?

Carter's continues to find success with its new side-by-side store format. IMAGE SOURCE: CARTER'S, INC.

Carter's is set to release first-quarter 2016 results this Thursday, April 28. And if its 10-quarter streak of exceeding earnings expectations is any indication, let it suffice to say the market won't be surprised if the children's clothing retailer makes it 11 straight.

Two months ago Carter's told investors to expect first-quarter revenue to increase 4% year over year, to $712.2 million, and translate to roughly flat earnings of $0.97 per diluted share. By comparison -- and with the caveat that we don't place much faith in Wall Street's near-term demands -- analysts' consensus estimates predict higher earnings of $1 per share on revenue of $716 million.

But Carter's business is about more than just the top and bottom lines. Rather, investors would be wise to dig deeper to understand what's actually driving those results. So what, exactly, should we be watching when Carter's report hits the wires?

Digging deeperFor one, last quarter Carter's board approved a massive new $500 million share-repurchase program, which at the time represented more than 10% of the company's total float. To be fair, Carter's had already returned more than $760 million to shareholders over the previous three years through dividends and repurchases, making this latest authorization an extension -- albeit a very large one -- to those efforts. But with shares up nearly 17% year to date -- with most of that pop occurring the day after Carter's fourth-quarter 2015 report in February -- it will be interesting to see to what extent (if at all) Carter's management decided to utilize its latest repurchase authorization.

Next, Carter's operates under two reporting brands, including its core group of namesake locations, and its smaller OshKosh chain. Each of these brands will be broken down into their respective retail and wholesale performance.

Last quarter, the Carter's retail segment saw revenue climb 2.9% year over year last quarter, to $351.6 million, driven by a combination of direct-to-consumer sales growth and new locations. Carter's wholesale revenue declined 5.8% over the same period, to $283.1 million.

But that growth -- or lack thereof -- was hindered by both foreign exchange rates and the fact Carter's had an extra week in the fourth quarter of 2014. Excluding that extra week, Carter's retail and wholesale segments would have increased revenue 7% and 1%, respectively. The same went for OshKosh last quarter, where revenue retail revenue rose 5% year over year, to $118.3 million, and wholesale revenue fell 21.1%, to $16.5 million. Excluding the extra week, Oshkosh retail revenue would have climbed 10%.

Another important driver of both brands is the success of Carter's new side-by-side store model, which offers the most popular products from both Carter's and Oshkosh in a single retail location. After opening the 100th side-by-side store in Atlanta last quarter, for example, Carter's management credited the new model for helping OshKosh achieve its best-ever year in 2015 in terms of revenue, earnings, and operating margin, and reiterated plans to open 250 such locations over the next five years, with projected incremental annual sales of $200 million. Assuming Carter's reveals similarly encouraging results this week, investors should listen to ensure this location expansion is still on track.

Beyond the borderCircling back to currencies, the strong dollar has effectively deterred international tourists from shopping in U.S. stores and websites over the past few quarters; according to management, international demand on Carter's U.S. websites fell around 7% year over year in 2015, while domestic demand simultaneously skyrocketed 40%. But investors also need to remember that currency headwinds are temporary; Carter's management, for its part, told investors two months ago to anticipate that currency headwinds will persist through at least the end of the first half of 2016, and then hopefully abate in the second half.

All told, International revenue climbed just 3.7% year over year last quarter, to $97 million. But even then, international revenue still managed to climb 15.7% on a constant-currency basis, and we should see global growth rates ramp up as currency headwinds fade and Carter's moves past Target Canada's bankruptcy in early 2015.

Relatedly, Carter's has a deceivingly strong business just north of the border, with around 60% of international sales coming from Canada last year. Much of the remainder comes from China, where Carter's launched its brand on Tmall last June and formed a team to "explore additional market opportunities" to bolster China sales to $100 million by 2020. Carter's also introduced merchandise with retailers in India, Brazil, Chile, and Europe last year.

"Near-term, the contributions from these initiatives will be relatively small," explained Carter's CEO Michael Dennis Casey, "but they provide an opportunity to better understand the longer-term potential of these new markets."

In the end, given Carter's track record of modest outperformance and last quarter's big share repurchase authorization, I suspect investors won't be greeted with any significant surprises later this week. But as long as Carter's continues to gain market share and steadily solidify its place as the leader in young children's apparel, patient investors should also be poised for continued market-beating returns.

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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.

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