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Carter's (CRI) is pulling back following news that its Chairman/CEO Michael Casey will retire. This baby/toddler apparel company has enlisted a search firm to find a permanent replacement. Carter's also reaffirmed full year guidance.

• Despite its large size with its #1 market share in the US (brands include Carter's and OshKosh B'gosh), the company has been struggling, especially in its US Retail segment. The main problem here is that Millennials and Gen Z consumers, CRI's target demographic, have shifted to value apparel retailers beginning mid-year 2022 as they deal with inflation.
• Carter's is a value apparel retailer with average prices per piece in the $6 range. And despite apparel prices being up only modestly from 2019, significant increases in grocery prices has driven them to value apparel retailers. CRI's goal is to reengage and attract these consumers who shifted over to the mass channel and off-price retailers.
• Its US Wholesale segment (38% of YTD sales) is not quite as large as its US Retail segment (48% of YTD sales) but still very important. The strength of its wholesale business is in its exclusive brands sold to mass channel retailers. Carter's has a huge competitive advantage as the largest supplier of children's apparel to Target, Walmart, and Amazon. US Wholesale unit volumes are up 15% YTD while US Retail segment units was down 4%.
• A key decision for the new CEO will be whether it makes sense to pare back its store footprint and focus more on the wholesale side and online. CRI has a large retail presence with 1,000+ company-operated stores in the US, Canada, and Mexico. Also, without having to pay for physical stores, its wholesale operating margins are higher than retail.
• On its Q3 call, Mr. Casey sounded like a big believer in physical stores. He explained that nearly 70% of children's apparel is purchased in stores and CRI's stores are the number one source for new customer acquisition. He also argued that its stores drive its online sales. When CRI opens stores, it sees a lift in online sales and when it closes stores, online sales in the related market decrease. Also, consumers enjoy the convenience of shopping online and picking up same day in its stores. About 38% of its digital orders were supported by physical stores, up from 35% last year. These are margin accretive transactions and reduce the need for shipping online purchases to consumers.

Overall, whomever Carter's hires as its next CEO will have some big decisions to make, especially with regard to whether it makes sense to focus so much on physical stores. Another issue is how to lure back those shoppers who have migrated to value apparel retailers due to inflation. Carter's price points are also in the value realm, but shoppers like the convenience of also grabbing groceries and diapers all in one trip. So, fixing this may not be easy. Regardless, we think Carter's needs a shake-up. The current CEO has been in place for 15 years, perhaps a new perspective would be beneficial. We will be watching closely to see who they choose as the next CEO and maybe see if they can get the stock moving again.