Boardroom Alpha Daily Read

by | Apr 20, 2022

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News of the Day

Carter’s Has a New ESG Strategy

With the baby and children’s apparel retail announcing a new ESG strategy today, we take a closer look at the stock

Carter’s ESG Push. Baby and children’s apparel company Carter’s (CRI) announced its new ESG strategy, called “Raise the Future,” which features plans to provide sustainable product labelling, expand its sustainability-focused brand, and enable clothing recycling, along with plans to invest $50 million in early childhood education and literacy.

Category leader by a wide margin. Carter’s is the largest branded marketer of apparel and related products for babies and young children in the United States and Canada. The company has several brands, including Carter’s and OshKosh B’gosh, which are two of the most recognized in the marketplace. Carter’s products are sold in department stores, national chains and specialty retailers, as well as through more than 1,000 company-operated stores and online. The company has ~3x the market share of its next largest competitor, The Children’s Place (PLCE).

Structurally improved post-pandemic. Coming out of the pandemic, the company has made significant structural improvements– including rationalizing low growth/low margin stores, simplifying SKU count, and expanding its e-commerce/multi-channel offerings. 

More an earnings than revenue growth story. For 2022, the company has guided to revenue growth between 2-3% and EPS growth of 12-14%– driven by the strength of its brands and an extensive distribution network. Management also recently discussed longer term goals, forecasting annual sales to exceed $4 billion by 2026, with earnings in excess of $12.00 per share.

Shares trade at significant discount to historicals. CRI shares are trading at a significant discount to historical levels– a reflection of rising interest rates and negative sentiment on consumer discretionary stocks. Rising wages and higher commodity prices are also negatively impacting earnings in this sector. CRI shares have declined ~9% year-to-date, versus a 7% decline for the S&P500 over the same period.

Carter’s (CRI): A Secular Growth Leader to Buy on Dips

Source: Boardroom Alpha

CRI: Board Diversity & Inclusion Snapshot

Source: Boardroom Alpha

Red Flags. The main concern is the relative underperformance of the stock. CRI shares have underperformed the S&P over the last 1, 2 and 5 year periods. In terms of governance, it’s worth noting Michael Casey, CEO, is also Board Chair. Most investors prefer a separation of CEO and Board Chair positions as an indicator of independent leadership. Also note: a CEO who is also chair votes on their own compensation, an obvious conflict of interest.

Source: Boardroom Alpha

Other red flags include insider selling (12 sells totaling $18.5M in the last six months), including two insiders which sold a large block totaling $6.97M in November of last year.

Source: Boardroom Alpha

Capital Allocation. On its Q4 earnings call, Carter’s authorized a 25% increase to its quarterly dividend to $0.75 per share and authorized a new $1.0B share repurchase plan (~26% of current market cap).

Shares trade at a discount to EPS growth and appear priced-in for a flatter EPS growth profile over the next 6-12 months. Carter’s revenue and earrings growth is tied to population growth and household formation. While retail stocks have suffered in the current environment, it’s important to point out that the baby/young children apparel business is less discretionary than other consumer segments. Shares currently trade at 9x 2023E EPS. Applying a conservative forward EPS multiple of 11x to 2023E EPS results in a fair value estimate of $109 for the stock, or 17% upside from the current share price ($93 as of this writing). Note that the applied multiple represents a discount to CRI’s 5 year average forward earnings multiple of 15x and a discount to EPS growth of 12-14%. We think the shares are discounted for a flatter earnings growth profile and are opportunistic buyers.

Best of the Rest

Boardroom Alpha Podcast

Looking for a good ESG and sustainable technology growth story? Check out our latest podcast with Origin Materials (ORGN). We talk with co-CEOs John Bissell and Rich Riley about how Origin’s technology converts plant-based material into a wide variety of carbon negative materials– from textiles, packaging, automotive parts and more. The stock continues to trend higher following yesterday’s announcement of a strategic partnership with LVMH to develop sustainable low-carbon footprint packaging for the perfumes and cosmetics industry.

Check out our latest Boardroom Alpha podcasts here.

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<a href="https://www.boardroomalpha.com/author/joanna/" target="_self">Joanna Makris</a>

Joanna Makris

Joanna has been analyzing and investing in emerging technologies for over two decades, having led the Technology, Media, and Telecom research at several global investment banks, including Mizuho Securities and Canaccord Genuity. Navigating stock market volatility since it all began in 2000. Banjo player, artist, and frittata-maker.

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Disclaimer

The opinions and information contained herein have been obtained or derived from sources believed to be reliable, but Boardroom Alpha cannot guarantee its accuracy and completeness, and that of the opinions based thereon. 

This report contains opinions and is provided for informational purposes only – it does not constitute investment, legal or tax advice. You should not rely solely upon the research herein for purposes of transacting securities or other investments, and you are encouraged to conduct your own research and due diligence, and to seek the advice of a qualified securities professional before you make any investment.  

None of the information contained in this report constitutes, or is intended to constitute a recommendation by Boardroom Alpha of any particular security or trading strategy or a determination by BA that any security or trading strategy is suitable for any specific person. To the extent any of the information contained herein may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person.  

No representation or warranty, expressed or implied, is made on behalf of Boardroom Alpha as to the accuracy or completeness of the information contained herein. Boardroom Alpha does not accept any liability for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on all or any part of this research and any liability is expressly disclaimed.