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Carter’s to Source 15% of Product in China This Year, Virus Hits Production

Stock in Carter’s Inc. plunged 12 percent after the children’s apparel retailer spooked investors Monday with reports of production delays stemming from the deadly coronoavirus outbreak casting global supply chains into disarray.

In a Nutshell: Carter’s plans to source “approximately 15 percent” of its products from China this year, noting that suppliers in Asia still source a “significant amount” of their fabric from the country, the company said in a statement.

“Travel restrictions delayed the return of factory workers following the recent conclusion of the Chinese New Year holiday,” Carter’s said. “The company’s suppliers have not yet determined, with certainty, the impact of production delays” stemming from the outbreak of COVID-19, as the virus is officially known.

Carter’s declined to incorporate this impact into its financial outlook for FY20, a move that could potentially account for the hit on stock prices.

Sales: Net sales for the children’s wear retailer grew by 1.3 percent to $1.1 billion for the fourth quarter, in line with Wall Street expectations. Michael D. Casey, chairman and CEO of the Carter’s Inc., said the retailer experienced good holiday demand. Comparable retail sales were up by 2 percent while profitability was impacted by investment and inventory-related expenses.

Over the full fiscal year, Carter’s pulled in $3.5 billion in net sales, reflecting growth of 1.6 percent. This came in just below the average Wall Street expectation of $3.52 billion. Adjusted operating margin fell by 40 basis points to 11.4 percent as a result of “changes in customer and product mix in the U.S. wholesale market.”

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Carter’s expects net sales growth to fall in the range of 2 percent to 3 percent in FY20.

Earnings: Net income of $125.1 million in Q4 left Carter’s Inc. with an adjusted diluted EPS of $2.81, down 1.1 percent and below the $2.89 expected by Wall Street. Over the full year, Carter’s adjusted diluted EPS of $6.46 was 2.7 percent better than the mark recorded in 2018 but still below the $6.56 expected by Wall Street analysts. Net income in FY19 was down 6.5 percent to $263.8 million,

In fiscal 2020, Carter’s Inc. forecasts adjusted diluted EPS to increase by 4 percent to 6 percent year over year.

CEO’s Take: Despite the uncertainty surrounding the coronavirus epidemic, Casey pointed to the brand’s consistent record of growth and its strong positioning in the North American market.

“For the year, Carter’s is reporting a record level of sales, earnings and cash flow, and its 31st consecutive year of sales growth. In 2019, Carter’s strengthened its leading share of the $27 billion U.S. young children’s apparel market,” Casey said. “Our growth was driven by the success of our exclusive brands designed for the largest retailers of young children’s apparel in North America, and stronger omnichannel capabilities in our direct-to-consumer business.

“In 2020, we are forecasting good growth in sales and profitability enabled by the strength of our brands and extensive market distribution capabilities throughout the world,” he added.