On Tuesday, Citi made an adjustment to its stance on Carter's (NYSE:CRI) stock, changing the rating from Sell to Neutral while maintaining a price target of $50.00. The shift in rating comes as the market begins to reflect the anticipated sales and margin pressures the company is expected to face in fiscal year 2025 (F25).
According to Citi, Carter's has seen a notable loss in market share within its US direct-to-consumer (DTC) channel, ceding ground to lower-priced competitors in mass and online retail spaces.
The management team at Carter's has initiated a strategy to reinvest in pricing to stimulate growth in the DTC segment. However, this move is projected to impact gross margins in F25. The company's comparable sales are still trending negatively, and the potential for a turnaround in the DTC sector remains uncertain. Additionally, prospects for the wholesale segment appear subdued, given a tepid spring order book.
Despite these challenges, the market's valuation of Carter's has adjusted, with the stock price declining 20% since the third quarter earnings report on October 25, and 30% year-to-date. The current share price is now within 5% of Citi's target, which combined with a 5.8% dividend yield, offers a total positive return.
Citi believes that the market expectations are now more in line with their forecast for F25, with an estimated $4.86 per share compared to the consensus of $5.09, indicating a more balanced risk/reward scenario for investors.
In other recent news, Carter's, Inc. reported third-quarter fiscal 2024 earnings that surpassed its prior guidance, despite a challenging retail environment. The company reported net sales of $758 million, a 4% decline from the previous year, and an operating income of $77 million, reflecting a 10.2% margin.
Carter's has made strategic investments in pricing and marketing to bolster sales trends, which have shown recent improvement in U.S. retail, especially in the baby segment.
The company also forecasts total sales for the year to reach approximately $2.8 billion, with U.S. retail expected to contribute around 50%. According to recent developments, Carter's has invested $40 million in price reductions and $10 million in brand marketing. The company has paused share repurchases, returning $138 million to shareholders through dividends and repurchases this year.
Despite a decline in order demand and an increase in cancellations, particularly among department store customers, Carter's remains optimistic about their growth strategies. The company's focus on product innovation, brand reach, and customer marketing is expected to drive future performance. These are the latest developments in Carter's recent business operations.
InvestingPro Insights
Recent InvestingPro data provides additional context to Citi's rating change for Carter's (NYSE:CRI). The company's P/E ratio of 8.29 and PEG ratio of 0.52 suggest that the stock may be undervalued relative to its earnings potential, aligning with Citi's view that market expectations have adjusted. This is further supported by an InvestingPro Tip indicating that Carter's is trading at a low P/E ratio relative to near-term earnings growth.
The company's dividend yield stands at a robust 6.07%, slightly higher than the 5.8% mentioned in the article, reinforcing the attractiveness for income-focused investors. An InvestingPro Tip highlights that Carter's has maintained dividend payments for 12 consecutive years, demonstrating a commitment to shareholder returns despite current challenges.
Carter's recent stock performance, with a one-month price total return of -14.8%, reflects the market's concerns about the company's prospects, as discussed in the article. However, an InvestingPro Tip suggests that the stock's RSI indicates it may be in oversold territory, potentially supporting Citi's shift to a Neutral rating.
For investors seeking a more comprehensive analysis, InvestingPro offers 7 additional tips for Carter's, providing a deeper understanding of the company's financial health and market position.
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