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It'll take more than a hurricane to stop this children's-clothing specialist.


Carter’s Overview

Business Overview

Carter's was established in 1865 as the William Carter Company by William Carter in Atlanta, Georgia. It has grown into the largest branded marketer of apparel for toddlers and babies in America. The Carter's brand has an apparel line for newborns to age seven and the OshKosh line that it acquired in 2005 has a line extended from newborns to age tweleve. Carter's is the leading brand in both of these segments and has sold more than 10 products for every child born in the U.S. Over the years, Carter's has innovated with features such as the Handi-Cuff mitten sleeve, and the Jiffon neck design. [1]

Carter's has 306 Carter’s brand stores and 180 OshKosh outlet and brand retail stores. It has approximately 4,600 square feet of selling space per store and using its TTM revenue, it averages $0.38 of revenue per square foot (better than its main competitor Children's Place which averages $0.34).

Current Capital Structure

CRI has a very conservative capital structure compared to most retail companies. Its Debt to Equity ratio has been decreasing for the past three years (2008-2010) and its interest coverage ratio is far above its other competitors (16.6 compared to an industry average of 8.8).

Shows CRI's conservative capital structure
Shows CRI's conservative capital structure

Key Drivers for 2011

  • Cotton Prices: CRI is very highly exposed to cotton. It makes up 40% of its COGS compared to the typical 25%-30% retailer average.
  • Sourcing: CRI also has higher weighting to China (50% vs. 30%-40% retail average). CRI's management has guided sourcing costs up to 11% for Q2 2010. This is higher than most retailers.
  • Pricing for Clothes: CRI has been testing higher prices. There is now a $1-$2 spread between Carter's and private label. The problem CRI may run into is that the market it is in may be a units intensive market where prices won't affect the amount sold if price is only changed a small amount. If it increases its market share by cutting prices, it will put its gross margins further at risk (cotton prices are already putting the price at risk).

Potential Buyout

CRI is a prime LBO candidate as it has the free cash flow to sustain leverage from an LBO. Similar to the rationale behind the Gymboree LBO, a private equity owner with knowledge of overseas markets could create value by helping CRI expand internationally. This is because domestic baby apparel sales have become sluggish. Instead of franchising, a PE owner with an international background could assist CRI in finding a jv partner, or provide financial support for CRI to open stores by itself. Further, a PE shop could also help the company diversify CRI's sourcing from China (CRI gets most of its products from China currently).

Business Segments and Product Portfolio

Retail Stores

Carter's Owned Stores

Carter’s retail segment attempts to appeal to parents of small children by highlighting a history of durability, quality, and style. Carter’s stores are bight and airy, filled with various clothing items for children from the age of newborn up to 12 years. The stores attempt to focus on core products, which is in keeping with the company’s core strategic theme of driving brand image and promoting themselves as the leader in baby and young children’s apparel. Carter’s brings all of these strategic advantages together in their products by using better fabric, new patterns, and better presentation.[1]

As of January 1 2011, Carter’s owns and operates 306 Carter's retail stores and 108 OshKosh retail stores. The stores are mainly found in strip malls and outlet centers across the U.S. Of the stores that Carter’s operates, 108 are outlet stores and 126 are brand stores. The average Carter’s store is approximately 4,600 square feet in size.[1]

In addition to the stores that Carter’s owns and operates there are several other locations at which Carter’s branded merchandise can be purchased. According to the Carter’s website the top four states with above ten Carter’s stores are California (53), Texas (41), New Jersey (26), and New York (25).[2]

Retailers That Carry Carter's

Carter’s sells products to leading retailers within the United States. These leading retailers include Kohl’s, Costco, Toys “R” Us, JCPenney, Macy’s, Sam’s Club, Target, Wal-Mart, Belk, and Ross Stores. Many of these retailers pay licensing agreements in order to carry and sell the products. Sales through these stores and similar channels amounted to over 50% of consolidated net sales for fiscal 2010.[1]

Product Portfolio

Carter’s has a vast array of clothing products for children ranging in age from newborn to twelve years. Under the heading Carter’s there are two main brands, Carter’s and Oshkosh, which both have several sub brands. These sub brands consist of Just One You, Precious Firsts, Child of Mine, Little Collections, and Carter’s Little Layette for Carter’s and Genuine Kids from OshKosh for OshKosh. Within these brands Carter’s offers clothing at all price points through department stores, national chain stores, outlet stores, off-price sale channels, wholesale channels, mass channel customers, and through Carter’s own retail stores. Carters has several divisions that make up it's main product lines. These divisions include, Baby, Playcloths, Sleepwear, and miscellaneous. Within the Baby division Carter’s offers Bodysuits, Pants, Undershirts, Towels, Washcloths, Receiving Blankets, Layette Gowns, Bibs, and Caps. Within the Playcloths division Carter’s offers knit and woven cotton apparel for everyday use, with sizes ranging from three months to seven years. Within the Sleepwear division Carter’s offers pajamas and blanket sleepers, with sizes ranging from twelve months to seven years. The final division within Carter’s offers miscellaneous goods which include Bedding, Outerwear, Swimwear, Shoes, Socks, Diaper Bags, Gift Sets, Toys, Hosiery, Furniture, and Hair Accessories.[1]

Human Resources

Corporate Governance

Listed below are key employees at Carter's.

Name Title Compensation Previous Employers Age
Michael Casey Chairman of the Board, President, Chief Executive Officer (2009) 5,114,030 Price Waterhouse LLP 50
Richard Westenberger Chief Financial Officer, Executive Vice President (2009) 1,337,080 Land's End, Sears Holdings, Kraft, Price Waterhouse LLP 42
James Petty President - Retail Stores (2007) 1,648,930 Gap Inc., Ascena Retail Group 52
Charles Whetzel Executive Vice President, Chief Supply Chain Officer (2010) 1,458,920 Health-Tex, Inc. 42
Brian Lynch Executive Vice President, Brand Leader - Carter's Brand (2008) - The Walt Disney Company 48
Lisa Fitzgerald Executive Vice President, Brand Leader - OshKosh B’gosh (2008) 2,611,490 Land's End, Gymboree 48

Sales Associate Compensation

Carter's Target Gymboree Gap Kohl's Wal-mart
Sales Associate Hourly Wage $7.75/hr $8/hr $8/hr $8/hr $8/hr $8/hr

Macroeconomic Info

GDP Growth

GDP growth forecasts for 2011 were lowered to a range of 3.1 to 3.3 percent and unemployment is forecasted to be 8.4 to 8.7 percent. For 2012, the range is 3.5 to 4.2 percent and 7.6 to 7.9, respectively. The Fed's outlook on the economy is a a slow and protracted recovery which requires rates to be stable at 0 to 1/4 percent. Ben Bernanke has mentioned that the economic recovery has been stagnated due to weak housing, credit, and high energy prices. These factors are crucial to the economy, and thus has a substantial impact on Carter's top line. [3]

Consumer Spending

Consumer revolving credit has been steadily decreasing and just recently was down $2.7 billion in February. This is a negative for Carter's as many consumers finance their purchases with revolving credit instruments; mainly credit cards. Rising inflation and weakening consumer confidence inhibit this revolving credit growth. [4]


Carters's competitors include Disney, The Gap, and Gymboree.[1] These competitor company descriptions are below.

Disney: The Walt Disney Company was founded in 1923 and is based in Burbank, California. Disney and its subsidiaries operate a global entertainment company. Disney has domestic broadcast television networks, television production and distribution operations, domestic television stations, cable networks, domestic broadcast radio networks and stations, and publishing and digital operations. Disney’s Parks and Resorts are know around the world and are famous for their hospitality and cleanliness. Additionally Disney Parks and Resorts owns Disney Vacation Club and Disney Cruise Lines. Disney’s Consumer Products segment allows licenses to be given out for production of clothing with Disney characters and visuals.[5]

The Gap: The Gap, Inc. was founded in 1969 and is based out of San Francisco, California. Gap offers clothing and accessories to people of all ages and all sexes, its product portfolio includes pants and shorts made of denim and khaki material, T-shirts, underwear, pajamas, shoes, and many more. The Gap owns the brand names Old Navy, Banana Republic, Piperlime, and Athleta. The Gap also offers franchises agreements in order to operate Gap and Banana Republic stores worldwide.[6]

Gymboree: Gymboree Corporation was founded in 1976 and is based out of San Francisco, California. Gymboree sells clothes and accessories for kids in North America and Australia. Gymboree operates approximately 635 that carry clothing for children newborn to 12 years. Gymboree has moved a substantial portion of its business into the e-commerce sector in addition to its over 150 outlet stores and 635 Gymboree stores. In addition to these stores Gymboree also operates approximately 120 Janie and Jack stores that provide higher end newborn and toddler apparel. Gymboree also provides parent-child play programs (designed to enhance child development). Gymboree was aquired through a Leveraged Buy Out (LBO) by Bain Capital in 2010 for approximately $1.8 billion.[7]

Carter’s 10 years Historical Financial Ratios

Profitability Ratios

Liquidity Ratios

Debt Management

Asset Management

Per Share

Porter’s 5 Forces

Threat of entry of new competitors

There are relatively few barriers to entry for an apparel retailer. CRI brands compete in the $22 billion children’s apparel market, for children sizes newborn to seven. Carter’s brand has the largest market share at 10.9% and OshKosh brand has a 3.2% market share. With so many competitors already, new competitors enter and exit the market daily with little to no effect on CRI. In the baby and young children's apparel market, competition is generally based upon product quality, brand name recognition, price, selection, service, and convenience. CRI feels that they have a comfortable competitive advantage over small start-up manufacturers who do not have the quality, brand name recognition, price, selection, or convenience that CRI’s brands can provide.[1]

Intensity of competitive rivalries

CRI’s primary competitors in the wholesale and mass channels include Disney, Gerber, and private label product offerings. In the retail store channel the primary competitors include Old Navy, The Gap, The Children’s Place, Gymboree, 77kids, and Disney. Most retailers, including CRI’s customers, have significant private label product offerings that compete with the CRI products. Because of the highly fragmented nature of the industry, CRI also competes with many small manufacturers and retailers. CRI is positioned well in the industry due to their depth of product offerings and operational expertise. CRI is confident that the strength of the Carter’s, OshKosh, and related brands will position them well against their competitors going forward.[1]


CRI competes with other young children's clothing retailers in a market with no real substitutes. There are no substitutes for clothing so it is difficult to find substitutes for CRI's products. Companies compete for customers based on style, price, and brand but consumers do not have many options beyond these factors.[1]

Bargaining power of customers

The customers in the children’s apparel space do not have a considerable amount of power over demand. This is partially due to the necessity to be clothed but the issue that CRI could face is that they have a premium brand in OshKosh. The sales from OshKosh are far more elastic than less expensive products because consumers can easily convert from the premium brand to the discount brand, forcing OshKosh to reduce prices, decreasing gross margins. Consumers’ demand for young children’s apparel is also impacted by the overall level of consumer spending. Discretionary consumer spending is impacted by employment levels, gasoline and utility costs, business conditions, availability of consumer credit, tax rates, interest rates, levels of consumer debt, and overall levels of consumer confidence. These recent reductions in the level of discretionary spending may have an adverse effect on the Company’s sales and results of operations.[1]

Bargaining power of suppliers

The supply of materials is something that CRI is going to keep a close watch on in the foreseeable future. Raw materials prices such as cotton and polyester have been increasing and continue to increase forcing CRI to increase prices. CRI believes that the current sourcing arrangements are sufficient to meet the current operating requirements and provide capacity for growth. CRI currently sources substantially all of their products through foreign production arrangements. CRI’s dependence on foreign supply sources could result in disruptions to operations in the event of political instability, unfavorable economic conditions, international events, or new foreign regulations. Such disruptions may increase the cost of goods sold and decrease gross profit for CRI.[1]

Marketing Strategy


Carter’s Inc. operates in the consumer space, which means that pricing is one of the most important aspects of their business given its naturally higher elasticity of demand. The prices for products under the brand OshKosh are slightly higher on average than those under the Carter’s brand. This is due to its significantly higher brand recognition. CRI plans to increase prices on some products due to increased product costs. This increase is due to inflation in key component costs such as cotton, polyester, labor, and transportation. Along with the devaluation of the U.S. dollar relative to foreign currency, CRI is having higher cost of good sold and higher inventory levels. Even with the price increase, CRI expects that their profitability will be adversely affected by the increased costs. A possible risk faced by CRI is the inability to effectively raise prices resulting in decreased consumer demand and a greater than anticipated decreased profitability. In fiscal 2010 Carter’s brand wholesale sales increase was partially driven by a 1% increase in average price per unit as compared to fiscal 2009. OshKosh brand wholesale decreased the average price per unit in fiscal 2010 by 1% driving a 3% increase in units shipped, as compared to fiscal 2009. Carter’s and OshKosh retail stores decreased their average prices by 0.6% and 2.6% respectively due to increased promotional activity in order to maintain competitive in the current environment.[1]


Retail Stores: Carter’s Inc. distributes their products to Carter’s retail stores, OshKosh retail stores, wholesale customers and mass-channel customers. The retail stores are located across the country, primarily in outlet and strip centers, with an average size of 4,600 square feet. The outlet stores are generally located within 20 to 30 minutes of densely populated areas. The brand stores are generally located in high-traffic, strip centers located in or near major cities The success of a retail store is primarily dependent on the overall ability of the retail location to attract a sufficient consumer base that provides a reasonable sales volume. CRI uses a real estate selection process analyzing demographic factors, retail adjacencies, and population density of a given area. As of January 1, 2011, CRI operated 180 OshKosh retail stores and 306 Carter’s retail stores. During fiscal 2011, CRI plans to open 55 and close 4 Carter’s retail stores. [1]

  • Wholesale:

Carter’s brand wholesale customers include major retailers, such as Kohl’s, Costco, Toys “R” Us, JCPenney, Macy’s, Sam’s Club, and Bon-Ton. Mass channel customers are Target stores, under the brand Just One You, and Walmart stores, under the brand Child of Mine. OshKosh brand is sold in department stores, national chains, specialty stores, and though off-price sales channels.[1]

  • eCommerce:

In March 2010, CRI launched its eCommerce business.[1]

  • International:

OshKosh B’gosh and Carter’s brand names are also licensed through international licensing arrangements.[1]


CRI uses in-store product presentation, increased merchandising and marketing efforts in order to position their products for success. Promotional pricing can be used to remove unwanted merchandise from store shelves in the event that consumers’ tastes and preferences are not aligned with Carter’s product offerings. This can have a negative affect on gross margins and results of operations. Carter’s and OshKosh retail stores have increased promotional spending in fiscal 2010 driving sales volumes. CRI uses a third-party advertising service to assist in advertising campaigns that include advertising with wholesale and mass-market customers.[1]



Baby: Carter’s brand baby products include bodysuits, pants, undershirts, towels, washcloths, receiving blankets, layette gowns, bibs, caps, and booties. CRI sells a complete range of baby products for newborns. They attribute their leading market position to the brand strength, distinctive print designs, artistic applications, reputation for quality, and ability to manage floor space for retail customers. [1]

Playclothes: Carter’s brand playclothes products include knit and woven cotton apparel for everyday use in sizes three months to seven. Sleepwear: Carter’s brand sleepwear products include pajamas and blanket sleepers in sizes 12 months to seven. It is the leading brand of sleepwear for babies and young children within the department store, national chain, outlet, specialty store, and off-price sales channels in the United States.[1]

Mass Channel Products: CRI’s mass channel product team focuses on baby, sleepwear, and playclothes products produced specifically for the mass channel. CRI’s Child of Mine product line, which is sold in Walmart stores, includes layette, sleepwear, and playclothes along with a range of licensed products, such as hosiery, bedding, toys, furniture, and gifts. CRI also sells the Just One You and Precious Firsts brands to Target, which include baby, sleepwear, and baby playclothes along with a range of licensed products, such as hosiery, bedding, toys, furniture, gear, and gifts.[1]

Other: Other product offerings by CRI include bedding, outerwear, swimwear, shoes, socks, diaper bags, gift sets, toys, and hair accessories.[1]

Royalty Income: CRI currently extends its Carter’s, Child of Mine, and Just One You product offerings by licensing these brands to 15 domestic marketers in the United States. These licensing partners develop and sell products through Carter’s multiple sales channels while leveraging Carter’s brand strength, customer relationships, and designs. CRI currently extends their Carter’s brand internationally with five licensees in approximately five countries.[1]


Playclothes: OshKosh is best known for its playclothes products. OshKosh brand playclothes products include denim apparel products with multiple wash treatments and coordinating garments, overalls, woven bottoms, knit tops, and playclothes products for everyday use in sizes newborn to 12.[1]

Other Products: The remainder of the OshKosh brand product offering includes baby, sleepwear, outerwear, shoes, hosiery, and accessories.[1]

Royalty Income: OshKosh’s largest licensing agreement is with Target who sells Genuine Kids from OshKosh. CRI’s licensed products provide consumers with a range of OshKosh products including outerwear, underwear, swimwear, socks, shoes, and accessories.[1]

SWOT Analysis


Carter’s has many strengths that separate it from its competitors. One of the greatest strengths Carter’s has is that it is the leading brand in the baby category (sizes newborn to twenty-four months) with an approximate market share of 29.8%, this represents greater than six times the market share of the next largest brand in the space. Carter’s has also built a strong relationship with leading and specialized sourcing agents in Asia. This allows Carter’s to source materials quickly and will help the company meet operating requirements and provide capacity for growth in the future. [1]


Carter’s has several weaknesses that if not dealt with appropriately in the future could have adverse effects on profitability. Carter’s has significant exposure to Japan and Asia. Carter’s sources many of their materials for production from Asia and Japan, with the recent natural disaster in the region it is easy to see how a shortage of supply or increase in price due to broken transportation lines or closed factories could expose Carter’s to losses. Carter’s is also exposed to currency and interest rate risks. Carter’s clearly states in their annual report that they do not hedge foreign currency exchange risk, considering that many of Carter’s materials are sourced from overseas it is not hard to see how a fluctuation in the value of exchange rates could expose Carter’s to significant down side. Finally, Carter’s is highly exposed to fluctuations in the price of cotton. During the fiscal year 2010 40% of cost of goods sold (COGS) consisted of expenses due to cotton prices, this is quite high as the industry average is between 20 and 30 percent. [1]


Carter's has been able to successfully source materials through a strong network of leading and specialized sourcing agents in Asia. With this strong network of suppliers Carter's will be able to cheaply source a vast amount of materials with short notice. This presents opportunity for Carter’s as the company plans to continue to grow both the Carter's and OshKosh brands. Another area where Carter's has potential opportunity going forward is with it's license agreements. Carter's sells licensing agreements to several retailers, with the potential growth of their clothing lines this clearly represents an opportunity where future revenue can be derived from. [1]


The main threat to Carter's is its competitors. The baby and young children's clothing market is highly competitive, based generally on product quality, price, selection, convenience, and service. Although Carter's currently leads the baby and young children sector with a market share of 29.8%, it is easy to see how a competitor with high quality products, cost leadership, and a high level of customer service could enter the market and take market share from Carter's. In addition to competition and threat of new entrance Carter's also faces the threat rising shipping costs which could significantly cut into profitability. This could adversely effect the dominance of the baby and young children's clothing market buy taking away Carter's cost leadership. [1]

Financial and Operating metrics

It should be noted that Gymboree's numbers are not included in all the information pulls since it was part of an LBO in October 2010. Information like market capitalization, beta, and valuation ratios were not relevant since it is now a private company.

Further, Disney wasn't included since it includes so many other divisions other than children's clothing. It is, however, still a competitor in the market.

General Information

General Information regarding CRI’s key competitors include market capitalization (market cap), enterprise value, beta, cost of equity, cost of debt, and WACC.

With regard to enterprise value, CRI actually has an enterprise value less than its market cap (just by a little bit). While this usually means a company has lots of cash on hand, this could also be because their debt is understated as CRI has operating leases. However, this is a common occurrence in the retail industry so CRI's numbers are still comparable across the industry.

CRI has the lowest beta out of its competitors at 0.55 which is a little more than a quarter turn compared to the industry average of 0.83.

NWY’s cost of equity, cost of debt, and WACC are all in line with the industry norm.

Financial Ratios

This section looks at financial strength ratios such as Debt / Equity (D / E), Cash / Share, Current Ratio, and Interest Coverage.

CRI has the highest cash balance per share as a percent of its share price at 14.18%. It also has a higher current ratio, quick ratio. However, CRI has a Debt/Equity ratio higher than its competitors (most likely since CRI doesn't have as many operating leases).

Growth Rates

Revenue growth was higher for CRI than its competitors. EPS growth (which is a method of looking at Net Income Growth) was about average compared to its competitors.

Profitability Ratios

Ratios looked at in this section include gross margin, operating margin, and net income margin. CRI has lower gross profit margins which suggest there is room for improvement in its supply chain. This would be something a PE shop could target. CRI also has a lower Operating Margin and Net Profit Margin than Gymboree which reflects easy ways for PE shops to improve value and makes CRI a good LBO candidate.

Valuation Ratios

Valuations ratios used to analyze CRI and its competitors include Price / Earnings (P / E), PEG Ratio, Price / Sales (P / S), and Price / Book (Price / B). CRI is in line with the industry averages. Gymboree could not be factored into industry averages as there is not enough data to pull TTM figures.

Management Effectiveness Ratios

Ratios looked at in this section include return on assets, return on investment, return on invested capital, Economic Value Added spread, and return on equity. CRI compares in line with the industry average.

Operating Metrics

CRI had same store sales growth which were higher than industry average but its selling sq footage over its revenue was on the low end at $380.27. It's store sizes on average were in line with the industry.

Public Comparables

Since there are only two true competitors, public comparables should be taken with a grain of salt. CRI is currently trading at multiples on the lower end compared to its two competitors when looking at Enterprise Value / Revenue (EV / R) for 2010 revenue and 2011 estimated revenue as well as Enterprise Value / EBITDA (EV / EBITDA) for 2010 and 2011. CRI's P/E ratio (trailing and forward) were in between GPS and PLCE.

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  1. 1.00 1.01 1.02 1.03 1.04 1.05 1.06 1.07 1.08 1.09 1.10 1.11 1.12 1.13 1.14 1.15 1.16 1.17 1.18 1.19 1.20 1.21 1.22 1.23 1.24 1.25 1.26 1.27 1.28 SEC FORM 10-K CARTER’S, INC.
  2. Carter's Store Locator
  3. Econoday Chairman Press Conference 4/27/11
  4. Econoday Consumer Credit 4/7/11
  5. Yahoo! Finance Walt Disney Company Profile
  6. Yahoo! Finance Gap Inc. Company Profile
  7. Wikipedia - Gymboree
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