Carter's Starting To Show Signs Of Structural Issues

CLSA started coverage of Carter's, Inc. CRI with an Underperform rating and $95 target price, citing signs of emerging structural issues, especially cannibalization and channel conflict.

Carter's store productivity took a hit due to e-commerce, which is growing double digits and putting Carter's sizeable store targets into question.

"After wholesale decelerated in recent years, and is worsening from weak department store traffic, we struggle to see how this accelerates given the proliferation of Carter's own stores," analyst Rick Patel wrote in a note.

In addition, Patel views the company's long-term targets as optimistic while he don't see any risk to 2016 estimates.

"We view long-term plans for 865 Carter's brand doors as optimistic given the broader secular trend of consolidation, double-digit e-commerce growth and the 4-5% average annual decline of store productivity over the past four years, which we expect to continue," Patel highlighted.

However, the company justifies expansion by noting that new stores have greater than 20 percent ROI and are accretive to earnings. The analyst sees elevated risk of store comps worsening, which would pressure the multiple on lower-quality earnings.

"If sales productivity continues to decline, we think it puts Carter's impressive margins at risk and also sours sentiment. With lower targets than the company's, we estimate new stores will add about US$0.75-0.80 to EPS over the next five years," Patel continued.

In this scenario, the analyst urges Carter's to be more aggressive in tackling white-space global opportunities as its brand has been validated abroad by tourists.