With over 4 million potential customers born every year in the US, 30 million “consumers” under the age of 7, and 76 million baby boomers becoming grandparents, the demographic target of Carter’s. Inc., the largest branded manufacturer and marketer in the approximately $25 billion US market for babies’ and young children’s’ apparel, is no “small” market.
After acquiring Oshkosh five years ago, Carter’s had big plans to become even more dominant in the business. Although the company has grown share and fortified its position, it has found that both the value-consciousness of consumers and competitive pressures from discounters and specialty chains have made childrenswear a difficult market in which to grow.
Brands Carter’s, which dates back to 1865, is the leading US brand of baby apparel products. Oshkosh, established in 1895 as a men’s workwear company, is now marketed primarily in playclothes for children ages 1 through 7, and is sold at higher price points than the Carter’s brand. Both brands are sold in department stores, national chains, specialty stores, and off-price stores, as well as the company’s individually branded outlet and specialty retail stores. The company sells and/or licenses brand variants for the mass channel – the Carter’s division sells to Wal-Mart under the Child of Mine label and Target under the Precious Firsts, Just One Year brands. In addition, the Genuine Kids by Oshkosh brand is sold at Target through a licensing deal in which Carter’s receives royalty payments. Total Carter’s brand sales in 2009 were $1.25 billion, or 77% of sales, while OshKosh brand sales were $338 million, or 21% of total sales. Although sales of the premium OshKosh brand have been growing steadily since being acquired in 2005, its growth has no doubt been disappointing to the company. Carter’s brand share of company sales has been increasing versus OshKosh over the past three years.
Sales In fiscal 2009, the wholesale channel, which does not include sales to discounters, accounted for 37% of sales, down from 46% in 2005, and retail stores for 46%, up from 40% in 2005. As of year-end there were 276 Carter’s stores (173 outlet and 103 were full-price), and 170 OshKosh (158 outlet and 12 full-price), and plans to open a total of about 40 more stores in 2010.
Product Category Sales The biggest product segments are Carter’s Babywear, totalling $400 million in sales last year and 25% of the total business, followed by Carter’s Playwear for ages 1-7, with $350 million and 22% of sales. Carter’s mass business at Wal*Mart comprised 15% of sales, at $240 million, as did OshKosh Playwear. Carter’s Sleepwear for ages one to seven generated $187M in sales or 12% of the business.
The Mass Channel This business grew from nothing in fiscal 2000 to $178M or 16% of sales in 2005, then peaked at $254 million in 2008. In the past year, it declined 5% due to floor space and collection reductions made by Wal*Mart. In addition, the domestic licensed business, of which Target is the largest partner by far, generated royalties of $9 million and represent $184 million in retail sales. The question here is, of course, what will happen to the Wal*Mart business? Is the giant retailer reducing outside brands in favor of their more affordable and profitable private labels? If so, how will Carter’s replace the sales and earnings generated by the mass channel? And what if Target decides to shift business to its own private brands at some point?
Competition is intense and plentiful…GapKids, Children’s Place, Disney, Gerber and Gymboree all vie for a piece of the $25 billion children’s under-7 apparel market. The Carter’s and Oshkosh brands have about a 10% market share, combined, and the aforementioned companies have between three and six percent each. An estimated 40% is enjoyed by mass merchants, making them a force to be reckoned with, and the balance distributed among smaller companies.
Financial Performance has been pretty impressive, considering the challenges of the past two years. Earnings swung from a loss of $76 million in 2007 to net income of $78 million in 2008 and $116 million in 2009. Gross margin surged 330 basis points to 38% in 2009, no doubt helped by the shift toward own retail sales. In the first quarter, sales soared 14.5%, and gross margin gained an impressive 500 basis points to 40.8% from the prior year’s quarter. SG&A declined 200 basis points in the quarter.
The Stock , took a big dip when the company announced early last year a major investigation of discrepancies in pricing and sales to large customers from 2004 to 2008. However, the investigation was completed, and after absorbing a stinging $5.7 million charge, the stock and company both seem to have recovered.
Opportunities and Challenges Carter’s has successfully leveraged its brand positioning of quality and value, key attributes in these recessionary times. The growth through their own retail stores is inevitable, however, especially considering how profitable it is and how strong both brand names are. However, Carter’s must be careful to not alienate its traditional wholesale customers by expanding too rapidly into retail. Its ecommerce site, launched earlier this year, has had great initial success. The company is probably burning lots of midnight oil figuring out how to become more important to Wal*Mart. Should the discount business continue to decline, the company will have to figure out how to replace those sales.
What About OshKosh? There is certainly plenty of opportunity to expand this label, whose strength is currently in toddler’s, across the age spectrum. One concern is whether Oshkosh’s growing presence in Target and outlet stores has cheapened its image in the eyes of more upscale stores.
Styling Another question is style trends. Both Carter’s and Oshkosh cater to more traditional customers with cute, childish styling. Many newer successful entrants to the business are marketing more sophisticated clothing sized down for the very young , which Gen X parents love. Carter’s might need to venture into more fashionable areas, hopefully without helping babies grow up too fast.