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Wells Fargo Downgrades Carter’s to ‘Market Perform’

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Sep. 28 2016, Published 2:53 p.m. ET

Price movement

Carter’s (CRI) has a market cap of $4.5 billion. It fell 3.8% to close at $89.87 per share on September 27, 2016. The stock’s weekly, monthly, and year-to-date (or YTD) price movements were -6.4%, -7.1%, and 2.0%, respectively, on the same day.

CRI is trading 6.2% below its 20-day moving average, 9.8% below its 50-day moving average, and 9.0% below its 200-day moving average.

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Related ETF and peers

The Vanguard Small-Cap ETF (VB) invests 0.18% of its holdings in Carter’s. The ETF tracks the CRSP US Small Cap Index. The market-cap-weighted index includes the bottom 2%–15% off the investable universe. The YTD price movement of VB was 11.0% on September 27, 2016.

The market caps of Carter’s competitors are as follows:

  • Target (TGT): $39.3 billion
  • Gap (GPS): $8.9 billion
  • Kohl’s (KSS): $7.7 billion

Carter’s rating

Wells Fargo has downgraded Carter’s rating to “market perform” from “outperform.” It also reduced the stock’s price target to $93 from $110 per share.

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Performance in fiscal 2Q16

Carter’s reported fiscal 2Q16 net sales of $639.5 million, a rise of 4.4% compared to $612.8 million in fiscal 2Q15. The company’s gross profit margin and operating income rose 2.9% and 1.9%, respectively, between fiscal 2Q15 and fiscal 2Q16.

Its net income and EPS (earnings per share) rose to $36.2 million and $0.71, respectively, in fiscal 2Q16, compared to $36.1 million and $0.68, respectively, in fiscal 2Q15. It reported adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) and adjusted EPS of $81.3 million and $0.72, respectively, in fiscal 2Q16, falls of 1.8% and 1.4%, respectively, from fiscal 2Q15.

Carter’s cash and cash equivalents fell 46.2%, and its finished goods inventories rose 25.0% between fiscal 4Q15 and fiscal 2Q16. Its current ratio fell to 3.8x, and its debt-to-equity ratio rose to 1.5x in fiscal 2Q16, compared to 4.3x and 1.3x, respectively, in fiscal 4Q15.

Projections

Carter’s made the following projections for fiscal 3Q16:

  • net sales growth of 6%–7%
  • adjusted EPS growth of 6%–10%

The company made the following projections for fiscal 2016:

  • net sales growth of 5%–6%
  • adjusted EPS growth of ~10%

In the next part, we’ll take a look at JM Smucker (SJM).

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