One second-quarter bright spot for Carter’s Inc. was its wholesale business as consumers tightened their belts, but it’s looking forward to benefits from lower in-bound freight costs and lower cotton pricing.
U.S. wholesale sales saw a 3.2 percent gain in the quarter, but U.S. retail sales fell 10.3 percent and international sales were down 9.6 percent.
“In the second quarter, we saw higher and earlier demand in our U.S. wholesale segment. Our growth in wholesale was driven by our exclusive brands,” Carter’s chairman and CEO Michael D. Casey told investors during a conference call last week.
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He said the company in the current inflationary cycle has benefited from “consumers choosing the ease of one-stop shopping with mass channel retailers” where they can purchase everything from groceries, diapers, baby formula and even children’s apparel all at one location.
“Carter’s has an unparalleled competitive advantage as the largest supplier of young children’s apparel to these retailers,” Casey said
UBS softlines analyst Jay Sole said the sales growth rate at the company’s direct-to-consumer channel (DTC) was the “10th consecutive quarter of negative comp sales growth in the U.S.” The analyst believes that Carter’s has two issues. The first is that the brand’s consumers, which are families with young children, are under pressure from inflation and that this could last for some time. The second centers on prices in the DTC channel, which Sole said “are too high.” He concluded that Carter’s might be losing market share to its wholesale partners, which include Amazon, Walmart and Target.
Sole also lowered his margin forecasts for the second half due to Carter’s planned promotional activity. While he thinks that Carter’s will return to topline growth in Fiscal Years 2025 and 2026, he said that will be from a lower Fiscal Year 2024 base.
Casey pointed to Carter’s supply chain as a “source of strength in our business.” He cited on-time shipping to wholesale customers as “excellent,” and that the supply chain team had negotiated lower product costs for the balance of the year. Better product costs will flow through to lower pricing on some items for its DTC channel and in sharper prices for wholesale customers “so they get the margin benefits,” Casey said.
And while the Red Sea turmoil caused longer lead times and higher costs due to the rerouting of ships, those forecasts had been factored into the company’s prior forecast. A newly revised update on outlook reflects peak period surcharges and higher cost routes from Southeast Asia, as well as inbound freight costs that are down over 20 percent this year, Casey said.
He also noted that the company had a good update from one of the cotton experts and it appears that cotton futures are trending lower than the current prices. “Cotton is one of the key input costs for us [and] the outlook is currently favorable,” Casey said. He added that Carter’s should have more visibility in October regarding the cotton outlook for the first half of 2025.
Based on an 8 percent decline in store sales and a 16 percent drop in e-commerce sales in the second quarter, Casey said those numbers suggest a macro slowdown in consumer spending. He noted “very aggressive promotions” by competitors, with thrift store level pricing on in-season key items about 50 percent below Carter’s pricing. “We did not engage in this race to the bottom on pricing,” Casey emphasized, noting that the company kept its pricing comparable to year ago levels.
For the quarter, baby apparel remains Carter’s best performing age segment and represents more than 50 percent of total apparel sales. Casey also noted growth with the firm’s flagship Carter’s brand. “We believe we’re seeing the benefit of our strategies tailored to support the unique needs of department store and club store retailers,” he said, adding that wholesale sales have a high mix of baby apparel. He also expects that replenishment sales—high margin essential care products that include body suits, washcloths, towels, bibs, blankets and baby sleepwear—”will be a good source of growth for us in the balance of the year.”
For the second quarter ended June 29, net earnings rose 15.8 percent to $27.6 million, or 76 cents a diluted share, from $23.9 million, or 64 cents, a year ago. Net sales declined nearly 6 percent to $564.4 million from $600.2 million.
For the six months, net income was up 9.7 percent to $65.7 million, or $1.80 a diluted share, from $59.9 million, or $1.59 a year ago. Net sales were down 5.4 percent to $1.23 billion from $1.3 billion.
“We ended the quarter with lower inventories, a higher cash position. No, seasonal borrowings, lower net interest costs. In, over $1 billion in liquidity,” Casey told investors.
For the third quarter, Carter’s expects net sales between $735 million and $755 million, with adjusted diluted earnings per share (EPS) of $1.10 to $1.35.
For full year fiscal 2024, the company is forecasting net sales of $2.79 billion to $2.83 billion, with adjusted diluted EPS between $4.60 to $5.05.
