Carter's and Gap: 2 Apparel Stocks Worth Watching

Carter's and Gap: 2 Apparel Stocks Worth Watching

The U.S. apparel retail industry has been weak this year. In addition, according to the Center for Disease Control and Prevention, the fertility rate in the U.S. has fallen to a record low of 63.0 in 2012 .

These two facts are headwinds for children's clothing makers Carter's and Children's Place Retail Stores . Also, both have to compete with giant Gap , a diversified player in the apparel retail market. In order to counter such headwinds, players in this space are looking at other markets. They are also focusing on the online sales channel, because the U.S. is the second-largest country in terms of digital buyers.

Carter's strategies are working
Carter's third-quarter results reflect that its strategies to counter these headwinds are working. On the back of its compelling brands, promotional strategies, and multi-channel business model, sales increased 13.7% versus the same period a year ago to $760.2 million in the previous quarter. This beat the consensus estimate of $750 million convincingly. The company saw strong performance across all segments, with the wholesale business being the star performer.

Carter's is also focusing on the e-commerce sales channel. This resulted in approximately 45% of online sales coming from international customers. Because of this, a separate e-commerce site for its Canadian operations will be launched by the end of 2014.

Most apparel retailers in the U.S. have started looking elsewhere to generate revenue, and Asia has become one of the hottest destinations. Carter's is expanding into Japan, which is not surprising because international sales grew 21% during the previous quarter. The company has lined up more markets where it can launch its business, and this should lead to better revenue.

For the full year, Carter's expects net sales to grow approximately 10%, at the higher end of previous guidance of 8% to 10%. The company also expects full year earnings-per-share growth in the range of 15% to 17%.

Children's Place is struggling, while Gap continues to do well
Children's Place is the weakest player of the three, although it witnessed a 33.2% rise in e-commerce sales year-over-year in the previous quarter. E-commerce is a key component of the company's turnaround strategy going forward .

Children's Place lacks the wholesale business segment that Carter's has. The retail segment of the company isn't performing well. Hence, Children's Place is shuttering 100 under-performing retail stores within three years, which is slightly less than 10% of its existing 1,111 retail stores .

Like Carter's, Children's Place is also trying to expand its global footprint. The company has 20 franchise locations in the Middle East that opened in 2012, and it just announced a 10-year franchise agreement with Fox Group to open stores in Israel starting next year.

However, Gap is a formidable competitor for relatively smaller players like Carter's and Children's Place through its BabyGAP and KidsGAP clothing lines. It is a behemoth in the apparel-retail industry, operating in 90 countries where many of these have birth rates higher than the U.S. In addition, it addresses a larger demographic base than the other two so it has a much larger addressable market.

In addition, Gap's e-commerce segment has also performed well. Sales from theonline channel increased by around 27% in the second quarter over the same period a year ago. During the quarter, Gap's online channel contributed about 12% to its total revenue .

In China, e-commerce is 6 % of total retail sales and this is expected to grow. More than three quarters of online sales are in the apparel segment. In order to tap into this sales channel, Gap plans to launch an e-commerce site for China in the first half of 2014.

It is evident that Carter's and Children's Place have been relying on international growth and e-commerce to grow their businesses. However, in my opinion, Carter's might prove to be a better pick because it has reported strong growth in its e-commerce business, and its outlook suggests optimism about the future. Conservative investors can opt for Gap as the company is much more diversified, pretty cheap at a trailing P/E of 13.7, and also carries a dividend yield of 2.20%.

Gap and Carter's are two players worth considering if you're looking to make a new addition to your portfolio.

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