Over the past six months, Carter's has been a great trade, beating the S&P 500 by 10.2%. Its stock price has climbed to $34.80, representing a healthy 13.3% increase. This run-up might have investors contemplating their next move.
Is now the time to buy Carter's, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think Carter's Will Underperform?
Despite the momentum, we're swiping left on Carter's for now. Here are three reasons why CRI doesn't excite us and a stock we'd rather own.
1. Flat Same-Store Sales Indicate Weak Demand
We can better understand Consumer Discretionary - Apparel and Accessories companies by analyzing their same-store sales. This metric measures the change in sales at brick-and-mortar locations that have existed for at least a year, giving visibility into Carter’s underlying demand characteristics.
Over the last two years, Carter's failed to grow its same-store sales. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests Carter's might have to change its strategy and pricing, which can disrupt operations.
2. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Carter's has shown poor cash profitability relative to peers over the last two years, giving the company fewer opportunities to return capital to shareholders. Its free cash flow margin averaged 5.4%, below what we’d expect for a consumer discretionary business.
3. New Investments Fail to Bear Fruit as ROIC Declines
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Carter’s ROIC has decreased significantly over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
Carter's falls short of our quality standards. With its shares outperforming the market lately, the stock trades at 11.3× forward P/E (or $34.80 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are better stocks to buy right now. Let us point you toward the Amazon and PayPal of Latin America.
Stocks We Would Buy Instead of Carter's
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