Carter’s 14.2% return over the past six months has outpaced the S&P 500 by 6.4%, and its stock price has climbed to $38.23 per share. This performance may have investors wondering how to approach the situation.

Is now the time to buy Carter's, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.

Why Do We Think Carter's Will Underperform?

We’re happy investors have made money, but we're sitting this one out for now. Here are three reasons we avoid CRI and a stock we'd rather own.

1. Shrinking Same-Store Sales Indicate Waning Demand

In addition to reported revenue, same-store sales are a useful data point for analyzing Apparel and Accessories companies. 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 5.1% year-on-year declines. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests Carter's might have to close some locations or change its strategy and 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 over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 6.5%, lousy for a consumer discretionary business.

3. New Investments Fail to Bear Fruit as ROIC Declines

A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. 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

We cheer for all companies serving everyday consumers, but in the case of Carter's, we’ll be cheering from the sidelines. With its shares beating the market recently, the stock trades at 13.6× forward P/E (or $38.23 per share). While this valuation is reasonable, we don’t see a big opportunity at the moment. There are superior stocks to buy right now. We’d recommend looking at one of our top digital advertising picks.

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