Carter's Shares Plunge 31.4% YTD: What's Next for Investors?

Carter's, Inc. CRI has been reeling under rough waters, thanks to several challenges it has been facing for a while. Tough macroeconomic factors with continued inflationary pressures and elevated interest rates, coupled with high inbound freight costs, have been making things difficult for the stock.

Consequently, shares of this baby and young children’s apparel retailer have lost 31.4% so far this year, underperforming its Shoes and Retail Apparel industry and broader Consumer Discretionary sector’s declines of 25.2% and 13.8%, respectively.

What’s not Working for CRI?

Inflation, high interest rates and the suspension of pandemic-related stimulus payments to child-care centers have weighed on families with children and their demand for CRI’s brands. Hence, this has been limiting the consumers’ spending on clothing and less-requisite items, and in turn, hurting the demand for the company’s products.

Higher costs have been squeezing Carter’s margins and, in turn, hitting its overall profits. The company has been struggling with increased selling, general and administrative (SG&A) expenses stemming from higher brand marketing investments, retail expansion and transportation costs for a while. Also, growth-related investments and increased distribution expenses have been adding up to costs.

In the most recent quarter, SG&A expenses jumped 5.3% year over year, with the metric, as a percentage of net sales, rising 160 basis points (bps) year over year. Adjusted operating margin decreased 250 bps, hurt by investments in pricing, marketing and stores, as well as higher inbound freight rates. The gross margin contracted 90 bps, largely due to investments in competitive pricing within the U.S. Retail segment.

Our model expects SG&A costs to rise 120 bps year over year to 41.3% for the impending quarter. We expect adjusted operating and gross margin to decline 330 bps and 210 bps, respectively, to 45.5% for the first quarter of 2025. Carter’s expects several factors to weigh on profitability in 2025, including residual lower pricing in the first half, higher product costs and the return to more typical variable compensation provisions. 

Thus, Carter’s issued a cautious outlook for the first quarter of 2025, with U.S. Wholesale sales likely to decrease high-single digits year over year, whereas international sales are projected to dip mid-single digits year over year. The announcement of major new tariffs for global trade and U.S. manufacturing is also not working in favor of the stock.

CRI Price Performance

CRI’s Downward Earnings Estimate Revisions

Given the headwinds surrounding the stock, the Zacks Consensus Estimate for 2025 and 2026 has gone south. In the past 30 days, the consensus estimate for earnings per share (EPS) has dropped 12.5% to $3.72 for 2025 and 15.4% to $3.78 for 2026. This implies a year-over-year earnings decline of about 36% for 2025 and growth of 1.6% for 2026.

Final Thoughts on CRI Stock

Although the aforesaid factors are not working in favor of CRI stock, the company is making strategies to revert to growth. Carter’s product, pricing and promotional strategies have been encouraging. The company is also boosting its omnichannel strategy by enhancing and integrating digital and physical retail experiences to resonate with the evolving consumer preferences. Its strategic investments and pricing strategy might be fruitful going forward.

As of now, we advise refraining from investing in Carter’s, as the stock currently carries a Zacks Rank #5 (Strong Sell).

Key Consumer Discretionary Picks

We have highlighted three better-ranked stocks, namely, Ralph Lauren RL, Gildan Activewear GIL and Royal Caribbean RCL.

Ralph Lauren, a designer and distributor of premium lifestyle products, including apparel, accessories and footwear, currently carries a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Ralph Lauren has a trailing four-quarter earnings surprise of 6.5%, on average. The Zacks Consensus Estimate for RL’s current financial-year sales indicates growth of 5.8% from the year-ago figure.

Gildan Activewear, a manufacturer of premium quality branded basic activewear, carries a Zacks Rank of 2 at present. GIL has a trailing four-quarter earnings surprise of 5.3%, on average. 

The consensus estimate for Gildan Activewear’s current financial-year sales indicates growth of 4.4% from the year-ago figure.

Royal Caribbean carries a Zacks Rank of 2 at present. RCL has a trailing four-quarter earnings surprise of 15.7%, on average.

The Zacks Consensus Estimate for RCL’s 2025 sales and EPS indicates an increase of 9% and 26.7%, respectively, from the year-ago levels.

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This article originally published on Zacks Investment Research (zacks.com).

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