Wells Fargo Downgrades Carter's (CRI) to Market Perform

September 27, 2016 6:30 AM EDT
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Price: $85.08 +0.63%

Rating Summary:
    6 Buy, 8 Hold, 1 Sell

Rating Trend: Up Up

Today's Overall Ratings:
    Up: 19 | Down: 19 | New: 13
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Wells Fargo downgraded Carter's (NYSE: CRI) from Outperform to Market Perform and lowered its valuation range to $92-$94 (from $110-$112), saying the 2nd-half inflection is note materializing as planned.

Analyst Ike Boruchow commented, "As 2H was set to be a key positive catalyst for CRI (lapping pricing pressures and international comp headwinds from last year), we don't believe the inflection is necessarily materializing as planned. Specifically, our store work points to choppy QTD retail traffic trends and we have also witnessed deeper pricing/promotional pressure that has built throughout the quarter (deeper/earlier Friends & Family event, incremental offers). The potential softening of comps would be coming at a tough time, as CRI recently talked down their Spring 2017 order book (while 2016 is shaping up to be the slowest wholesale growth in 10+ years). The headwinds within their wholesale business are a surprising new development, as CRI has had one of the most consistent wholesale performances in our coverage (roughly 3-4% annual growth the past 5 years). Specifically, new issues around 1) dept store door closures (Macy's/Sears), 2) dept store inventory reductions (Kohl's) and 3) bigger pushes into private label (Target) all add small layers of risk onto CRI's historically resilient wholesale channel (40% of sales). Our primary concern is essentially that the stock's multiple (currently 17-18x) could be negatively impacted if the investment community begins to believe that cannibalization fears could be coming to fruition (store comps could be negative at Carter's for the 3rd year while wholesale is no longer growing). Bottom line, while CRI is one of the stronger brands in a consistent space, we feel it's time to step to the sidelines and look for a better entry point later."

The firm lowered estimate to $5.04/$5.48 (from $5.10/$6.00).

For an analyst ratings summary and ratings history on Carter's click here. For more ratings news on Carter's click here.

Shares of Carter's closed at $93.37 yesterday.

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