Hedge Funds Go Crazy for Carter’s, Inc. (CRI)

Carter’s, Inc. (NYSE:CRIwas a popular stock during the fourth quarter of 2013, with many hedge fund managers scooping up shares, including Chase Coleman of Tiger Global Management (who owns 5.7 million shares and is the second largest shareholder), Alan Fournier of Pennant Capital Management (2.9 million shares) and Panayotis Takis Sparaggis of Alkeon Capital Management (1.7 million shares). Other investors bullish on the children’s apparel retailer include Jonathan Auerbach of Hound Partners (who owns 2.4 million shares), Harris Associates (1.5 million shares) and John Lykouretzos of Hoplite Capital Management (1.1 million shares).

Carter's, Inc. (NYSE:CRI)

The $4.1 billion company, Carter’s, Inc. (NYSE:CRI), is providing apparel and related products exclusively for babies and young children. It owns two brands, Carter’s (for sizes newborn to seven) and OshKosh B’gosh (for newborn to 12), which are sold in department stores, national chains, specialty stores, and off-price sales channels as well as through more than 700 of the company’s own branded retail stores and online via its websites, carters.com and oshkosh.com.

Following the issuance of disappointing guidance during its third quarter earnings release in late October, the stock dropped 9% the following day, but ended the year roughly 6% higher versus its earlier trough. More importantly, the stock recovered all of its prior losses and then some after reporting stronger-than-consensus fourth quarter earnings and forward guidance in late February 2014.

The company’s results have benefited from strong growth in its Direct-to-Consumer (DTC) businesses, which includes sales from both its own branded retail stores and e-commerce. Combined with the launch of its e-commerce business in Canada and 106 new store openings in the U.S. and Canada planned for the year, the company should be able to meet net sales goal of 8% to 10% growth in 2014.

The retailer also has some margin improvement opportunities as it realizes efficiencies from its multi-channel distribution center, optimizes its retail expenses, review its non-merchandising spending and implements new technology systems firm-wide. In addition, the company’s decision to exit its loss-generating retail operations in Japan should aid profitability going forward. Combined with an ongoing share repurchase program, of which $267 million, or approximately 7% of its market cap, remains under its current authorization (after $454 million of buybacks in 2013), these initiatives should enable management to deliver on its 12% to 15% EPS growth target for this year.

Relative to its peer group of apparel, accessories and luxury goods retailers, Carter’s, Inc. (NYSE:CRI)’s valuation is not demanding, trading at a discount on a forward EV/EBITDA basis (10.2X versus 11.5X for peers) but a slight premium on a forward P/E basis (19.6X versus 19.0X for peers). Fundamentally, the company’s metrics are better than average, with higher margins (in terms of EBITDA, operating income and net income), returns on invested capital and growth (on the top and bottom lines). Its balance sheet also looks sound, with interest coverage of 27.9X (versus 14.5X for peers) and net debt / EBITDA of 0.8X (versus 2.4X for peers). While free cash flow was only $27.2 million in 2013 (due to heavy investments in its retail stores, a new distribution center, technology initiatives and a new headquarters facility), this is expected to increase to $115 to $150 million in 2014 as capital expenditures decline.

In short, the outlook for Carter’s, Inc. (NYSE:CRI) is positive, as continued growth from its retail and e-commerce operations and improving profitability (which is already above the levels of peers) combine to deliver improving cash flows to shareholders, in the form of both dividends and share repurchases (the stock’s dividend yield is only 0.8% but still above the peer group median of 0.0%).

Disclosure: none

Recommended Reading:

Hound Partners & Arrow Capital Management Are Buying the Same Stocks

Tiger Global Ups Position in Carter’s to 10.4%

Park West Asset Management Boosts Passive Stake In Move Inc. (MOVE)

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

10 Top Reasons For Getting Fired

The 3 Best States to Start an LLC

10 Jobs That Allow You to Travel

7 High-Paying Jobs You Can Do From Home

12 Best Cities to Shop in USA

10 Best States To Practice Medicine

The 10 Best States to Have a Business

The 12 Most Expensive Apple (AAPL) Apps in the Market

The 10 Richest Billionaires in the World

10 Biggest Kickstarter Failures

The 10 Best Places to Work At

The Top 10 of Google Inc (GOOGL)’s Most Expensive Acquisitions

13 Best Cities to Visit in South America

10 Most Expensive Works of Art of All Time

The 10 Richest Banks in the World

The 10 Best-Paying Jobs in America (2014)

7 Most Expensive Foods in the World

The World’s Top 10 Earning Authors

Five Wicked and Very Expensive Items (and Other “Stuff”) Sold on eBay

10 Biggest Celebrity Bankruptcies

The Top 10 Highest Paid CEOs in 2014

The 10 Most Expensive Real Estate Cities in America

10 Most Expensive States To Live In America

The 10 Best Airlines in the World

The 10 Best-Selling Cars in 2014

The 10 Best Industries to Invest In

The 10 Most Expensive States to Own a Car In

Top 10 Business Schools in US: 2014 Rankings

Top 20 Female Billionaires in 2014

6 Movies That You Should Watch to Better Understand The Cold War

Top 15 Best Paying Jobs for Women in 2014

Top 6 Things Rich People Do Differently Every Day

5 Retirement Mistakes To Avoid (and Einstein’s Famous Quote)

11 Smartest People in the World

6 Films About the Financial World You Need To Watch (While “The Wolf” is Not Around)

Warren Buffett and Billionaires Are Crazy About These 7 Stocks

The Top 10 States With Fastest Internet Speeds

10 Best Places to Visit in USA in August

Top 10 Cities to Visit Before You Die

Top 10 Genetically Modified Food In the US

15 Highest Grossing Movies Opening Weekend

5 Best Poker Books For Beginners

10 Strategies Hedge Funds Use to Make Huge Returns

Top 10 Fast Food Franchises to Buy

10 Best Places to Visit in Canada

Best Summer Jobs for Teachers

10 Youngest Hedge Fund Billionaires

Top 10 One Hit Wonders of the 90s

Fastest Growing Cities In America

Top 10 U.S. Cities for Freelancers

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!