Carter's Faces Leadership Change Amid Retail Challenges

GuruFocus
01-08

Carter's (CRI, Financial) is experiencing a decline following the announcement that Chairman/CEO Michael Casey will retire. The company, known for baby and toddler apparel, has initiated a search for a permanent successor and reaffirmed its full-year guidance.

Despite holding the largest market share in the U.S. with brands like Carter's and OshKosh B'gosh, the company faces challenges, particularly in its U.S. Retail segment. Millennials and Gen Z, Carter's target demographic, have shifted towards value apparel retailers due to inflation since mid-2022.

Carter's offers value apparel, with average prices around $6 per piece. Although apparel prices have only slightly increased since 2019, the significant rise in grocery prices has driven consumers to value apparel retailers. Carter's aims to reengage these consumers who have moved to mass channels and off-price retailers.

The U.S. Wholesale segment, accounting for 38% of YTD sales, is crucial despite being smaller than the U.S. Retail segment, which represents 48% of YTD sales. Carter's holds a competitive edge as the largest supplier of children's apparel to major retailers like Target, Walmart, and Amazon. While U.S. Wholesale unit volumes have risen 15% YTD, the U.S. Retail segment saw a 4% decline.

A significant decision for the incoming CEO will be evaluating the store footprint versus focusing on wholesale and online channels. Carter's operates over 1,000 stores in the U.S., Canada, and Mexico. Wholesale margins are higher without the cost of physical stores.

During the Q3 call, Mr. Casey emphasized the importance of physical stores, noting that nearly 70% of children's apparel is purchased in-store. Carter's stores are a primary source of new customer acquisition and drive online sales. Opening stores boosts online sales, while closing them decreases online sales in the affected market. Consumers also appreciate the convenience of online shopping with same-day in-store pickup. About 38% of digital orders were supported by physical stores, up from 35% last year, enhancing margins and reducing shipping needs.

The new CEO will face critical decisions, particularly regarding the focus on physical stores. Another challenge is attracting shoppers who have switched to value apparel retailers due to inflation. Despite Carter's competitive pricing, shoppers often prefer the convenience of buying groceries and diapers alongside clothing. A fresh leadership perspective may be beneficial, and the choice of the next CEO could potentially revitalize the stock.

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