Carter’s Bets Big on Store Growth as The Children’s Place Goes Digital
Carter’s Inc. plans to open 250 U.S. stores by 2027 that should help grow sales by $250 million.
Carter’s chairman and CEO Michael D. Casey told investors last month that the children’s specialty retailer “plans to continue opening stores in the years ahead.”
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Carter’s is a “highly desirable tenant in shopping centers,” with brands that attract families with young children, Casey said. Carter’s plans to open nearly 50 new U.S. doors this year, while closing 12. He said recently opened stores are achieving “over 20 percent EBITDA” (earnings before interest, taxes, depreciation and amortization) margins, and they’re out-comping the rest of the fleet.
Carter’s is mostly looking at open-air centers, where consumers can take advantage of curbside pickup. The retailer has had “good success” with mall stores in recent years, Casey noted.
“We’ve been highly selective on mall store openings. We currently have 90 of our 800 U.S. stores in malls and see an opportunity to double that store court in the years ahead,” Casey said. “Carter’s has grown over the years to be the largest and most profitable specialty retailer focused on young children’s apparel.”
Stores are Carter’s top acquisition vehicle. Direct-to-consumer investments such as in-store pickup and RFID for inventory monitoring enhance the store experience. Casey noted that 28 percent of kids apparel in the U.S. is purchased online, and Carter’s penetration is a few points higher than the average. E-commerce continues to be one of the retailer’s highest-margin businesses. It has less than a 5 percent return rate, contributing to a high margin performance which Casey said is “one of the best in online retailing.”
For the third quarter ended Sept. 30, net income rose 2 percent to $66.1 million, or $1.78 a diluted share, from $65 million, or $1.67, a year ago. Net sales fell 3 percent to $791.6 million from $818.6 million. For the nine months, net income dropped 26 percent to $126 million, a a net sales decline of 9 percent to $2.09 billion.
U.S. wholesale demand offset weaker retail sales in the third quarter. “For the fourth consecutive quarter, we saw a higher than planned demand in our U.S. Wholesale segment. That higher demand drove our best quarterly growth in earnings since 2021,” Casey said. He noted that September’s warmer weather didn’t help retail sales.
Carter’s is carrying less inventory, which left it more than $400 million in additional cash flow through September. This means Carter’s could reduce its seasonal borrowings and related interest expense. “We believe we have ample capacity to fully fund our growth strategies and plan to continue returning excess capital to our shareholders,” Casey said.
He added that 80 percent of third-quarter sales were in baby and toddler products. “Those age ranges have the best quarterly performance this year with sales down only 2 percent,” Casey said. “We continue to see a good response to our new Little Planet brand. It’s our most elevated premium priced product offering. We’re forecasting sales of our new Little Planet brand to be about $70 million this year, up over 50 percent to last year.” Growth of Little Planet is expected to come from expanded wholesale distribution with partners including Target, Amazon and Macy’s, as well as through company-owned retail stores in the U.S., Canada and Mexico, he said.
When Carter’s brands are priced within $1 or $2 or private labels, “we are competitive,” Casey said. “It’s a time-tested pricing strategy, which we plan to continue in the years ahead.”
Carter’s second half sales are planned down 4 percent, with sales for the year projected at down 8 percent. The company guided U.S. retail sales to be down 6 percent in the second half, and down 9 percent for the year.
Casey said that the forecast for the year reflects an improving trend in second half sales and earnings “relative to first half performance.” U.S. wholesale sales reflected earlier-than-planned shipments of fall and holiday offerings, necessitating an adjustment to fourth quarter wholesale estimates. In addition, current wholesale orders support growth in spring and summer 2024 product offerings, which will begin shipping to major retailers later this year, Casey said. Some 70 percent of its products now flow through East Coast ports.
Carter’s owns the Carter’s and OshKosh B’gosh brands, sold through over 1,000 company-operated doors in the U.S., Canada and Mexico and online at company websites. It also owns Little Planet and Skip Hop. Walmart carries the Child of Mine brand, while Target stocks Just One You and Simple Joys is found on Amazon. Carter’s most recent Corporate Social Responsibility report said the retailer has achieved its goal of extending cotton traceability to its fabric mills ahead of schedule.
As Carter’s goes big on brick-and-mortar, The Children’s Place is focused on digital-first.
The Children’s Place cut inventories by 16 percent to $462 million from a year ago by liquidating seasonal goods, purchasing less and cutting average unit costs. It also trimmed its store base by 9 percent versus a year ago, ending the quarter with 591 doors. It plans to close about 64 stores by the end of the fourth quarter and start 2024 with 530, it said.
Sit traffic rose by double-digits while sales were up in the low-single digits for the quarter, thanks to strong back-to-school sales in August. And the wholesale channel, led by Amazon, also “delivered another outstanding quarter,” Jane Elfers, The Children’s Place president and CEO, said in a statement.
“Our e-commerce channel represented an industry-leading 57 percent of our retail sales in the third quarter versus 50 percent last year and 37 percent in 2019,” Elfers said. “Our core millennial customer clearly prefers the ease and convenience of shopping online for her kids and we are pleased with the significant progress we have made with respect to driving digital sales and traffic, despite the difficult consumer environment.”
But the focus on digital wasn’t without cost pressures. The quarter reflected higher distribution and fulfillment expenses, “stemming from incremental shipping and processing costs, partially offset by decreases in supply chain and cotton costs,” the company said. The rise in distribution costs were driven by higher-than-expected e-commerce volumes, which resulted in overtime costs required to fulfill orders. The Children’s Place said it also used a more expensive third-party fulfillment partner more frequently. It shipped more packages shipped with a smaller average order, which illustrates a consumer under financial pressure, the retailer said.
Elfers said the costs were driven by largely unplanned “but addressable” factors. Top-line third-quarter momentum has “accelerated” into the fourth quarter, with customers responding to the retailer’s assortments and marketing tacics.
“Our accelerated digital transformation and fleet optimization strategies have positioned us to operate the company with less resources, including less stores, less inventory, less people, and less expense, allowing us to better service our customer on-line, where she prefers to shop, resulting in what we believe will translate into more consistent and sustainable results over time,” Elfers said.
Net income for the third quarter ended Oct. 28 fell 10.2 percent to $38.5 million, or $3.05 a diluted share, from $42.9 million, or $3.26, a year ago. Net sales were down 5.7 percent to $480.2 million from $509.1 million, while comparable retail sales fell 7.3 percent. The company attributed the decline to a slowdown in consumer demand due to “unprecedented inflation,” other domestic and geopolitical concerns, an increase in promotional activity and the impact of store closures. For the nine months, the children’s retailer posted a net loss of $25.7 million, or $2.06 a diluted share, against net income of $49.4 million. Net sales fell 8.4 percent to $1.15 billion from $1.25 billion.
The company expects fourth quarter adjusted diluted earnings per share in the range of 25 cents to 45 cents, with a low single digit increase in net sales to between $460 million to $465 million. For the full year, the retailer expects an adjusted diluted loss per share between 39 cents to 59 cents, with sales between $1.605 billion to $1.610 billion.
