Why Carter’s (CRI) Dividend Cut Signals a Strategic Shift and Buying Opportunity

Carter’s, Inc. (NYSE:CRI), the leading baby and children’s apparel retailer, recently announced a dividend cut from $0.80 to $0.25 per share. While this move may initially raise eyebrows, it represents a strategic reallocation of capital to prioritize liquidity and growth initiatives. Combined with GuruFocus’ $66.65 1-year valuation estimate and improving Q4 sales trends, the dividend reduction signals a turning point for investors to capitalize on an undervalued stock primed for recovery.

The Dividend Cut: A Necessary Trade-Off for Long-Term Growth

The decision to reduce the dividend is not a sign of weakness but a prudent step to safeguard liquidity amid rising headwinds. Carter’s highlighted two critical factors in its announcement:
1. Anticipated cost pressures: New tariffs on imported goods threaten margins, necessitating a stronger cash buffer.
2. Strategic reinvestment: The company aims to fund initiatives like improved inventory management, expanded product assortments, and enhanced customer targeting—key to capturing new segments and reversing declining sales.

With over $1 billion in total liquidity, including $413 million in cash, Carter’s is financially equipped to navigate near-term challenges while positioning itself for sustained growth. The dividend reduction also ensures flexibility to capitalize on opportunities like share buybacks or acquisitions if market conditions improve.

Q4 Sales: A Glimmer of Hope Amid Headwinds

While fiscal 2024 sales declined 3.4% to $2.84 billion, the fourth quarter showed encouraging signs of stabilization:
- U.S. Wholesale segment growth: Sales rose 7.3%, driven by strategic shipment timing and retailer partnerships.
- Retail segment improvement: Comparable sales fell only 3.4% in Q4—narrowing from a 6.9% annual decline—thanks to targeted pricing and marketing efforts.

The company’s outlook for fiscal 2025 emphasizes a second-half recovery, with improved product assortments and inventory management expected to drive sales. Even conservative projections of $2.78–2.855 billion in revenue align with GuruFocus’ valuation, suggesting the stock is priced for pessimism but poised to rebound.

GuruFocus’ $66.65 Valuation: A Bullish Signal Ignored by the Market

GuruFocus’ intrinsic valuation model assigns Carter’s a $66.65 target for 2026, implying an 81% upside from its current price of $42.02. This estimate factors in:
- A 7.01% net margin (exceeding industry averages).
- Strong balance sheet flexibility to weather macroeconomic pressures.
- Brand equity: Carter’s dominance in North American children’s apparel, with iconic brands like OshKosh B’gosh and Skip Hop.

Despite this compelling valuation, the stock trades at just 1.3x forward EV/EBITDA, a stark contrast to its historical average of 2.5x. The disconnect between fundamentals and valuation creates a high-risk/reward asymmetry for investors.

Risks, but Manageable Ones

Bearish arguments center on structural challenges like declining birth rates and intense competition. However, Carter’s is addressing these through:
- Product innovation: Focusing on trendy, high-margin items to attract price-sensitive parents.
- Inventory optimization: Reducing excess stock to improve turnover and cash flow.
- Multi-channel resilience: A robust online presence (Walmart, Target, Amazon) buffers against physical store declines.

The Bottom Line: A Buying Opportunity at $42

Carter’s dividend cut is a strategic pivot to prioritize growth over short-term payouts, aligning with its $1 billion liquidity cushion and GuruFocus’ bullish valuation. With Q4 sales showing resilience and 2025 initiatives targeting operational efficiency, the stock represents a high-conviction buy at current levels.

Investors should act now: the combination of undervaluation, improving fundamentals, and a dividend yield of 7.62% (despite the cut) creates a rare opportunity to profit from both price appreciation and income.

The time to position in Carter’s is now—before the market catches up.