This Baby Apparel Business Will Keep Growing
Carter's could be a great candidate for long-term investors. Since the beginning of 2004 its stock price has surged from $13 per share to more than $69.50 per share, locking in an impressive annualized gain of 16.46%. Chase Coleman of Tiger Global Management has recently increased his position in Carter's to more than 5.65 million shares, accounting for 9.54% of the company's total shares outstanding.
However, Carter's share price seems a bit expensive at 11.4 times its EV/EBITDA, or enterprise value/earnings before interest, taxes, depreciation, and amortization. Its peers The Gap and American Eagle Outfitters enjoy much lower EV/EBITDA valuations at 6.9 and 5.4, respectively. Should investors follow Chase Coleman into Carter's now?
Carter's has high growth
Carter's, the owner of the Carter's and OshKosh B'gosh brands, runs both businesses for babies and young children. It currently operates more than 700 stores in different regions, which include the U.S., Canada and Japan. The high valuation of Carter's could be due to its high growth.
Quarterly rev growth
American Eagle Outfitters
Source: Yahoo! Finance
Indeed, Carter's delivered higher year-over-year quarterly revenue growth than its two peers at 14%. The Gap's revenue increased by only 8% during that time, while American Eagle Outfitters experienced a decline of 1.7% in its quarterly revenue. The high growth in Carter's third quarter was driven by a 16% rise in its wholesale business. Carter's reported that it saw higher demand in all three markets, including baby, sleepwear, and playwear.
Moreover, while the profitability of OshKosh improved the company also had a strong e-commerce business. In the third quarter, e-commerce sales were up 50% while earnings doubled. This strong growth in e-commerce proved that consumers love to shop Carter's brands online as well. Carter's expects to generate more than $200 million in e-commerce sales this year.
Carter's remains a good long-term pick with its decent return on invested capital. Currently, it pays out a 0.90% dividend yield. With a low payout ratio, I think that Carter's could increase its dividend.
The Gap could be a good choice for investors
With 8% total sales growth, The Gap reported 5% growth in comparable store sales. The company also experienced 27% growth in its online business in both the first and second quarters. The Gap acknowledges that online business is the future, and it has been investing a lot of time, effort, and energy on expanding its online segment.
Normally, customers experience the Gap brand online first, then around 80% of them come to try on the product in a store. Thus, The Gap's website is becoming an important gateway to catch customers. The Gap is also quite ambitious with its online business and expects to deliver $1 billion in online sales by 2016. The Gap compels long-term investors with a higher return on invested capital than the aforementioned peers at 24.70% and a decent dividend yield at 1.90%.
Strong balance sheet with sluggish performance
American Eagle Outfitters had the worst operating performance among the three. It reported a 7% decline in comparable sales, while its net revenue dropped by 2%. . Despite the declining overall performance, its online business actually grew by 11%. Within this year, its online segment is expected to deliver $540 million in revenue. The company said that the main efforts should be spent on getting the mainline stores back on track as the foundation. In order to deliver long-term value to shareholders, it just need to work to get some modest comparable store sales growth in the U.S. and Canadian markets.
What investors might love about American Eagle Outfitters is its strong balance sheet (no debt) and a higher dividend yield than these peers at 3.10%. However, income investors should be careful because the company pays a dividend much larger than its earnings, as it has a 178% payout ratio. If American Eagle Outfitters can not improve its profitability, its dividend payments will decline.
My Foolish take
Carter's, with a rapidly growing business, a decent return on invested capital, and potential to increase its dividend in the future, could fit well in investors' growth portfolios. Long-term investors could also buy shares of The Gap to benefit from the business' high return and good dividend yield. American Eagle Outfitters could be classified as a turnaround stock. In order to keep its dividend sustainable, American Eagle Outfitters should focus on initiatives to drive the business forward.
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