This Baby Apparel Stock is Growing By Leaps and Bounds

Carter's , the branded marketer of baby and children's wear, is facing the headwinds of declining birthrates in the US and Canada. In the US, the crude birth rate (births per 1,000 people) has declined to levels not seen since the Great Depression: down 7% plus since 2007.Worldwide, the crude birth rate is expected to decline from the early 1950's 37.2 births to 13.4.

What's a company to do when its market shrinks year after year? You do what so many other apparel retailers have done and look to Asia. That's exactly what Carter's has done, with the company establishing a presence in Japan. However, according to the CIA Factbook, at a crude birth rate of 7.6, Japan has the lowest birth rate globally. That said, Japan is still a small operation for Carter's, and only contributed $3.5 million to first quarter sales.

Standing on big shoulders
That's the bad news. But just as you'd hoist a little one on your shoulders to get a better perspective, so too have Wal-Mart and Target lifted Carter's. These big-box retailers are important partners to Carter's, especially Target. Target reported that of all apparel, children's was its strongest seller in the second quarter.

More promising for Carter's is Target's new personalized service for expecting and new parents. Testing in 10 Chicago stores, Target offers lounges where parents can relax, check out merchandise with touchable displays and mannequins, work with a dedicated Baby Advisor associate, and access the baby registry with iPads.

Target's opening of more than 100 stores in Canada by year-end should also boost little Carter's. Canada is Carter's second biggest market, and the company is opening 20 stores there annually until 2016.

Carter's has three brands dedicated to Target and one to Wal-Mart in addition to its main Carter's and OshKosh B'gosh brands. The company operates in three segments: wholesale to stores like big boxes and department stores, its own 600 retail stores, and two e-commerce sites -- one for Carter's and one for OshKosh B'gosh.

E-commerce has been a particularly bright spot for Carter's, with sales up 45.9% on the OshKosh B'gosh site and 59.3% for the Carter's site.

Baby steps for growth
Competitor Children's Place Retail Stores also saw a 33.2% rise in e-commerce year-over-year. E-commerce contributed 58.3% to total sales growth for the company's most recent quarter, totaling $50.5 million in e-sales.

As primarily a specialty retailer and e-tailer, Children's Place doesn't have the wholesale segment to boost it up like Carter's. Its retail segment is struggling, and the company is shuttering 100 under-performing retail stores within three years. This adds up to closing slightly less than 10% of its existing 1,111 retail stores.

Children's Place is also looking for growth by developing a global footprint, although it's just baby steps for now. The company has 20 franchise locations in the Middle East, which opened in 2012, and just announced a 10-year franchise agreement for stores in Israel starting in 2014.

Children's Place isn't nearly as good a business as Carter's with its recent release of a $0.42 a share loss for the second quarter, although that was better than the $0.54 loss the Street expected. And as fellow Fool Jeremy Bowman noted, the company inexplicably raised guidance while guiding for lower same-store sales, following on the current same-store sales decline of 0.4%. Bowman also noted the company has been aggressively buying back shares, which has artificially boosted earnings per share.

Margins across the board have been contracting over the last five years for Children's Place with the trailing net profit margin now at 2.9%; that's lower than its historical average of 4.7%, and less than half Carter's at 6.9%.

It looks like the company won't meet 2012 EPS estimates of $2.63 with only $0.75 booked year-to-date. Meeting 2012 total revenue of approximately $1.8 billion is possible with $1.3 billion for three quarters so far, if its historically strongest quarter, the holiday quarter, performs as usual.

Carter's, on the other hand, looks on track to easily exceed 2012 revenue of $2.3 billion, with the first half coming in at $1.1 billion and the company's much stronger back half of the year ahead.

The big kid on the block
Both Carter's and Children's Place have to contend with retail giant Gap and its BabyGAP and KidsGAP clothing lines. Gap is a truly formidable competitor with 3,400 stores in 90 countries, and many of those countries have higher birth rates than North America.

At 14.9, Gap trades at almost half the trailing multiples of Carter's and Children's Place, at 27.0 and 26.2, respectively. And Gap's yield of 1.9% is twice that of Carter's 0.8%. Gap's trailing net profit margin of 8% is also higher than Carter's.

Of course, Gap is insulated from a baby bust with its adult apparel lines: Banana Republic, Piperlime, Athleta, Gap, and Old Navy. In addition, Gap's strong e-commerce segment should serve the company well.

The Foolish takeaway
You may be tempted to buy Gap, but don't count out Carter's. With the help of big buddies Wal-Mart and Target, and another boost from e-commerce, Carter's has a clear view of profits ahead. Its one-year EPS growth rate at 41.3% is higher than Gap's 36.3%. And longer term it has a beachhead in Asia Pacific now that it is in Japan.

As for Children's Place, its performance may be improving, but with margins contracting and no yield there's little to recommend it. 

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