Carter's (NYSE:CRI) considers itself the largest seller of apparel for babies and young children. The firm has grown sales solidly and consistently over the past decade, but its profit growth leaves much to be desired. A recent share price run values the company as if it has reached a period of rapid, steady earnings growth.

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Full-Year Recap
Sales jumped 21% to $2.1 billion. All business units moved solidly forward and the year was highlighted by a 17.2% improvement in namesake Carter's sales to $1.6 billion, or more than 76% of total sales. For the year, the company opened 54 net new Carter's locations. Oshkosh B'gosh sales advanced 6.6% to $362.8 million to just over 17% of total sales, even though a net 10 stores were closed. The remaining 7% stemmed from international, which jumped on the purchase of Canadian children's retailer Bonnie Togs.

Higher costs, particularly for cotton used to manufacture clothing and related apparel, slowed the gross profit growth to only 2.6% and pushed operating income down nearly 23% to $187.5 million. Net income declined by a similar amount, falling 22% to $114 million, or $1.94 per diluted share. Free cash flow fell even further, declining to $35.6 million, or only about 60 cents per diluted share.

For the coming year, Carter's anticipates net sales growth between 8 and 10% and earnings in a range of $2.40 and $2.50 per diluted share.

The Bottom Line
At the current share price, Carter's trades for nearly 20 times earnings. Archrival Children's Place (Nasdaq:PLCE) has also experienced a considerable stock rally and trades at a forward earnings multiple of nearly 18. More general retailers, including Macy's (NYSE:M), Wal-Mart (NYSE:WMT) and Gap (NYSE:GPS) also sell children's apparel, with the first two being end retailers for a number of Carter's brands.

Overall, Carter's is one of the few ways to gain direct exposure to the sale of children's apparel. Unfortunately, at the current valuation, the investment story assumes a continued recovery in sales and double-digit profit growth well into future years. Yet over the past decade, sales have steadily moved forward while profits have advanced much more erratically, with major declines during the recession years around 2002 and 2008. Given the lofty multiple, it may be better to consider picking up the shares during the next economic downturn. (For related reading, see How To Use The P/E Ratio And PEG To Tell A Stock's Future.)

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At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.

Tickers in this Article: CRI, WMT, PLCE, GPS, M

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