Description

Thesis -  Good business trading at a cheap price

Business - Carter's is wholesaler and store operator for clothing for young children and babies.  The brand names and well-known and powerful in the USA.    Sales should run about 3b or so this year, 3.5 in 2019 and maybe close to 3.5b next year but hopefully by the year after.  In 2015, sales were 3.0b.  The company has a store base, sells wholesale, and also has an international division.   The most profitable division is the wholesale group followed by retail and then international.   The presentation listed below provides a breakdown for each area.

Here's the cash flow and related metrics over the past 5 years previous to 2019 - in the final year as noted the company 

As you can see from the above, the business did 387m in CFFO vs. 61.4b in PPE, or 325m in free cash flow vs a current EV of 3.655b.   Of course, those are 2019 numbers, and while TTM CFFO is substantially higher today those numbers won't mean anything given that a delayed accounts payable is responsible for the big jump and that will reverse itself.  

https://ir.carters.com/static-files/fb182147-0e50-43e2-9180-59299527fa2a

In fact, little of the numbers in 2020 will mean anything if we get an effective vaccine next year in which case the past becomes more relevant.   Prospects for growth for a normalized future are likely in the low to mid single digit range;  the store base here is effectively saturated and the company plans on opening 100 new co-branded stores in the next 5 years but also closing 25% as leases expire (more than half this year).  In theory, the newer stores should have better metrics than the tired old stores being shut down.  Wholesale is strong with WMT, TGT and Amazon but there are other weaker areas (department stores).  This is a modest grower, as you can also see below.

From the 2018 AR:

We are planning average annual growth in earnings per share of approximately 7% over the next five years driven by: - growing our retail, wholesale, and international businesses; - increasing the contribution from Skip Hop, Amazon, Mexico and China; - improving inventory management, sourcing, and pricing disciplines; - leveraging expenses; and - returning capital to shareholders through share repurchases. We believe the fundamentals of our business have never been stronger. We are the largest branded marketer of young children’s apparel in the United States and the largest supplier of young children’s apparel to the largest retailers in the country. We have built a diversified business model which has enabled 30 consecutive years of sales growth, and a cash flow model that has enabled us to return nearly $2 billion in excess capital to shareholders since 2007. Over the past 10 years, we have managed to grow through the recession, the cotton crisis, shifts to private label brands, and our wholesale customers’ de-stocking initiatives. We are now faced with the risk of new tariffs, a further decline in annual births, and wholesale customer store closures. The constant through all of these challenges over the years has been the strength of our brands, which have served the needs of multiple generations of consumers, and the quality of Carter’s employees, who are focused on providing the best value and experience in young children’s apparel. That focus has served us well over the years. In summary, the outlook for our business is good. We have built a unique multi-brand, multi-channel model, which we believe is well-positioned to grow and gain market share. We are committed to strengthening our business and providing good performance for our shareholders in the years ahead.

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I am still working on this idea ("invest as you investigate") but there are so few things to write up now I wanted to jump.  

So, a quick summary

Positives

1 - powerful brand name 

2 - wholesale and retail 

3 - BS unleveraged

4 - Cheap on any guess as to post Virus normalized cash flow and free cash flow

5 - in the past 5 years prior to 2019, straight-forward capital allocation with a emphasis on buybacks, dividends, and rare acquisition

6- average merchandise price point of $10

Negatives

1 - 2020 a mess - Q4 will be a mess with lower traffic, some delay in product flow (improving), lean on wholesale inventory

2 - dividend/buyback suspended 

3 - slow grower top line most likely

4 - per blurb in latest call, will experience lower product costs in 2021 (not quantifed)

5 - some exposure to challenged retailers (MACY - not quantified)

6 - no catalyst.   It wouldn't be trading down this level if anybody thought there was a near-term catalyst.  

I don't think there is any hurry to buy this, but the stock is much closer to the 52 wk low than high and that doesn't make sense to me.  

My evaluation

Sure, this is a Value Line/Zacks type of idea.  But I've gotten multi-baggers from those places (ROP, for one), and in a diversifed portfolio CRI is one of my holdings.  I'll go with 4th grade book report too.  I am a buyer today - stock is down with a +3% market.

https://www.valueinvestorsclub.com/idea/CARTERS_INC/6843000256

Catalyst

Normalized valuation in 2022.