Carter's has followed the market’s trajectory closely, rising in tandem with the S&P 500 over the past six months. The stock has climbed by 10.3% to $39.30 per share while the index has gained 7.2%.
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Why Do We Think Carter's Will Underperform?
We’re sitting this one out for now. Here are three reasons you should be careful with CRI, plus one stock we’d rather own.
1. Same-Store Sales Falling Behind Peers
We can better understand Consumer Discretionary - Apparel and Accessories companies by analyzing their same-store sales. This metric measures the change in sales at brick-and-mortar locations that have existed for at least a year, giving visibility into Carter’s underlying demand characteristics.
Over the last two years, Carter’s same-store sales averaged 1.9% year-on-year growth. This performance was underwhelming and suggests it might have to change its strategy or pricing, which can disrupt operations. 
2. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Carter's has shown poor cash profitability relative to peers over the last two years, giving the company fewer opportunities to return capital to shareholders. Its free cash flow margin averaged 6%, below what we’d expect for a consumer discretionary business.
3. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
Unfortunately, Carter’s ROIC has decreased significantly over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
Carter's doesn’t pass our quality test. That said, the stock currently trades at 11.3× forward P/E (or $39.30 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are superior stocks to buy right now. Let us point you toward one of our top digital advertising picks.
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