J.P. Morgan Comments on Carter's Sourcing Inflation

In a report published by J.P. Morgan, Carter’s (NYSE: CRI) sourcing inflation offsets robust top line growth.

J.P. Morgan said that Carter’s was flat on the day yesterday (SPX flat) despite much worse than expected 2011 commentary (1Q gross margins guided down by 700 bps and continued uncertainty around full year earnings with no formal guidance provided) and likely still pressure in store for 2012 (as spring buys are placed in the next few months with cotton still at record highs). “We think higher prices will be tough to pass through in this value spectrum of the kids/baby space, and the focus is more on market share gains. Momentum has improved in retail (positive comps at Oshkosh after being down 6% in 4Q), and wholesale continues to be strong across both businesses, although the positives are being offset by gross margin pressure which we think could be longer lived. While the bad news is out and the Berkshire ownership still provides support to the shares, we reiterate our Neutral rating with a $27 price target. On near term earnings, the stock is expensive, trading at 17x, and could have more downside without private equity support.”

Carter’s closed yesterday at $27.56.