The Consumer Stock Network

Carter's (NYSE: CRI) will report 1Q08 results following the market's close later today. Management will host a conference call tomorrow morning at 8:30 AM EST (Dial-in number: 913-981-5588). According to Yahoo! Finance, analyst expectations call for 1Q08 revenue of $323.7M and EPS of $0.16.

Key considerations:

• Expect a robust retail top-line... Despite increased caution among consumers, the baby and children's apparel space has held up relatively well in recent periods. Sales at competitor Gymboree (NASDAQ: GYMB) were strong in both 4Q07 and 1Q08, and despite dismal sales numbers from The Gap (NYSE: GPS), the baby segment has outperformed its other operating segments. We expect this to show up in Carter's retail sales results during 1Q08, aided by easy year-over-year comparisons. Management's earlier projection of high-single digit positive comps at Carter's and low-single digit negative comps at OshKosh will likely be somewhat consistent with actual results. Also expect Easter, a key children's apparel holiday, to help the top-line as it fell in 1Q this year while it was a 2Q event in 2007.
  
• ...but wholesale sales were almost certainly sluggish. However, wholesale sales will not likely show the same strength as the retail segment. The easiest way to decipher Carter's wholesale sales is to monitor customer traffic at its largest wholesale accounts - namely, Costco (NASDAQ: COST), Sears (NASDAQ: SHLD), JC Penney (NYSE: JCP), and Kohl's (NYSE: KSS). With the exception of Costco, 1Q08 results have been tepid at best, which does not bode well for wholesale results.
• Markdown activity and provisions for wholesale customers will weigh on margins. Management has already suggested that 1Q08 EPS would come in below last year's $0.22 per share ($0.16 per share including one-time items such as accelerated depreciation and distribution facility closure costs), and we see no reason to disagree. Our wholesale store visits in recent weeks showed similar traffic trends and more pronounced markdowns than last quarter, meaning more provisions to support wholesale customers and reduced profitability. The analyst consensus of $0.16 will probably be close to the reported EPS number.
• Are there any signs that the troubled times at OshKosh have subsided? The Carter's brand appears to have successfully turned around after a lackluster 2007, but the key question for investors is whether or not there will ever be a meaningful return on the capital used to acquire OshKosh. We admire the changes that new executives (including new retail head Jim Petty) have implemented with respect to the product assortment in just a short period time. However, the truth is that it will be difficult to gauge customer response to the simplified product assortment and reduced opening price points until there is a rebound in customer confidence. And frankly, we do not see that until late 2008, if not 2009.
• What should you do with the stock? Unfortunately, there is not a clear-cut investment strategy for this stock. We would not be buyers in advance of the quarterly announcement or conference call given our expectations for wholesale sales and margin pressures. However, shorting may not be the right answer either. The stock found support at $14 after last quarter's disappointing results, and it would take a colossal failure this quarter to fall through those levels later this week. Most analysts seem to be valuing this stock with a low double-digit forward earnings multiple (appropriate in this environment), and unless there was a reversal to substantially negative earnings this quarter, the stock will likely remain in the low-to-mid teens. This does not give short sellers enough incentive, in our opinion. Long-term value investors may want to look to buy at these depressed levels, but until there is more tangible evidence of a turnaround at OshKosh, there may be better places in baby/children's apparel for your money (like Gymboree, perhaps).