Deutsche Bank

Research

Rating Company Date

16 April 2019
Hold Carter's, Inc.
Initiation of Coverage
North America
United States Reuters Bloomberg Exchange Ticker Price at 15 Apr 2019 (USD) 105.11
CRI.N CRI US NYS CRI
Price Target 99.00
Consumer
52-week range 117.47 - 75.76
Apparel, Footwear &
Textiles
Earnings Growth Slowing to a Crawl;
Initiate at Hold Valuation & Risks

Tiffany Kanaga
Carter's is the undisputed leader in baby and young children's apparel, and the Research Analyst
favorite brand in our dbDIG childrenswear survey (see our industry deep dive pub- +1-212-250-1724
lished separately today). However, CRI has seen market share loss and stalled top-
Paul Trussell
line growth in recent years. In particular, U.S. Wholesale trends have dipped nega-
Research Analyst
tive (and we fear may stay in decline) in a challenging industry backdrop with ongo-
+1-212-250-8343
ing door closures/bankruptcies at retail partners, falling birth rates, and private label
threats. Negative customer mix, rising e-commerce costs, and expense deleverage Gabriella Carbone
Research Associate
could keep EBIT constrained to flattish levels over the next few years, resulting in
+1-212-250-8274
only mid-single-digit EPS growth in our model (vs. 7% CAGR to the 2023 target,
already reduced from the prior double-digit five-year CAGR goal with 4Q results). Damon Polistina
We believe slowing bottom-line growth warrants a discounted multiple vs. histori- Research Associate
cal levels and better-positioned brands, driving our $99 PT. Initiate at Hold. +1-904-645-1624

Krisztina Katai
Stabilizing Organic Sales Growth: Better Than Fading, But Not Enough to Achieve Research Associate
Targets +1-212-250-0590
Constant currency organic sales growth has consistently faded over the past sever-
al years, from double-digit levels in 2013 to 1.2% in 2018. The root cause is stagnant Stock option liquidity data
overall U.S. Wholesale segment trends (with negative organic trends since 2017 Market Cap (USD) 4,649.5
offsetting prior years' growth and Skip Hop contribution) compared to robust Volume (15 Apr 2019) 57,064
increases at U.S. Retail and International. We optimistically believe CRI has reached Shares outstanding (m) 44.2
the bottom of the hill, with stabilization at ~2-2.5% annual constant currency Option volume (und. shrs., 1M avg.) 8,668
growth modeled for 2019-2021 – but below the 3% CAGR required to achieve CRI's Free float (%) 100
$4.0B sales objective in 2023 (which was already reduced from the prior 5% five- Source: Deutsche Bank
year CAGR target with 4Q results), due to headwinds from ongoing door closures/
bankruptcies at retail partners, challenging industry dynamics (U.S. birth rate is at
a 30-year low), private label disintermediation, international macro turbulence, and
unfavorable FX.

Challenging U.S. Wholesale Backdrop

Organic U.S. Wholesale trends have fallen nearly every year since 2013, reaching
-3.0% in 2018 (-2.4% reported, including Skip Hop). The company has guided to a
rebound to positive low-single-digit growth in 2019, a level not seen since 2016,
with sales to its top five customers expected to be up 5%. We remain more skepti-
cal, forecasting extended declines (albeit at a sequentially improved rate, down
-1.1% in 2019 vs. a -3.0% organic decrease in 2018 and -2.0% in 2017) given the
challenging brick & mortar landscape, while still acknowledging good momentum

Deutsche Bank Securities Inc.

Distributed on: 16/04/2019 20:33:20 GMT
Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware
that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report
as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED
IN APPENDIX 1. MCI (P) 066/04/2019.

7T2se3r0Ot6kwoPa
16 April 2019
Apparel, Footwear & Textiles
Carter's, Inc.

with exclusives at Walmart, Target, and Amazon.

Past Peak Margins: Pressure Is Building from Industry Headwinds

While we acknowledge modest benefits ahead from optimizing the store footprint
away from outlets, we expect the EBIT margin to continue to slide (albeit at a much
less severe pace) as: 1) negative customer mix and rising e-commerce costs are
structural, long-term industry headwinds; and 2) SG&A could continue to delever-
age with a slowing birth rate and elevated promotional activity impacting UPT and
AUR. We take a more conservative stance than the Street, which assumes 20 bps
of improvement in 2020 to 12.0% vs. our more bearish 11.4%.

Slowing EPS Growth Merits a Discounted Multiple

Our $99 PT is based on 14x our 2020 EPS estimate of $7.06 (1% below the Street's
$7.16, per Bloomberg). Our target multiple is below the 10-year average of 15.5x,
the five-year average of 16.3x, and the three-year average of 15.4x as we incorpo-
rate slowing EPS growth: our model's mid-single-digit levels are modestly below
management's recently reduced algorithm from double digits to 7%, and below the
high-single-digit rate achieved in 2018 and double digits in each of the five years
prior. We see an 83% correlation between CRI's forward P/E multiple and EPS
growth (annually since 2013), and an 85% correlation between its multiple and con-
stant currency organic sales growth. On an EV/EBITDA basis, CRI's elevated multi-
ple vs. peers is also apparent. CRI trades two turns above the index (consisting of
GIII, HBI, PVH, RL, and TPR), representing the high end of the three-year range and
above the historical average premium of only 0.6x. Considering CRI's slowing
growth profile (in contrast to many peers), we don't think a premium multiple is war-
ranted. We also note that CRI's stock is up 39% since its trough on 12/24 vs. the S&P
500 up 24%.

Modeling 1Q In Line with Consensus; Expecting In-Line 2Q Guidance

We expect CRI to report 1Q EPS (likely around 4/25) of $0.72, in line with the Street
and two pennies above guidance of $0.65-0.70 as provided on 2/25. We are mindful
that CRI has beaten 1Q consensus in each of the past five years, by an average of
11c, suggesting potential upside to our numbers vs. management's track record of
conservative planning.

We believe CRI could guide to positive 5% sales growth in 2Q (DB 4.8%; Street
4.7%) based on the Easter calendar shift and improving weather. Management not-
ed on the 4Q call that the shift "pushes about two points" of comp into 2Q. As we
look back to years with a similar holiday cadence, 2017 saw a 950 bp sequential
acceleration in 2Q SSS, and 2014 saw ~615 bps of acceleration (based on 670 bps
at Carter's and 390 bps at OshKosh). We are modeling 2Q comp up 5.0% vs. 1Q
down -2.5% (-LSD guidance and running slightly behind that as of 2/25) for 750 bps
of acceleration, only slightly below the average of the prior two examples.

We also expect management to provide 2Q EPS guidance of ~$0.95 (in line with our
forecast; Street $0.97) with a YOY GPM decline sequentially less severe than in 1Q.
For the full year, we anticipate a reiterated plan of 4-6% EPS growth as it remains
early in the year (DB 4.8%; Street 5.1%).

Page 2 Deutsche Bank Securities Inc.

16 April 2019
Apparel, Footwear & Textiles
Carter's, Inc.

Table Of Contents

Executive Summary............................................................4

Stabilizing Organic Sales Growth ....................................... 8

Stable Is Better Than Fading...But Not Enough to Achieve Targets ................... 8
Top-Line Tailwinds...........................................................................................10
Continued Challenges......................................................................................15

Past Peak Margins............................................................24

Pressure Is Building from Industry Headwinds................................................24
Falling GPM ..................................................................................................... 26
Rising SG&A....................................................................................................28
Modest Benefit from Shifting Away from Outlets............................................29

Initiate at Hold..................................................................31
Slowing EPS Growth Merits a Discounted Multiple.........................................31
Risks to Our Hold Rating..................................................................................34

1Q Preview.......................................................................36
We Are Modeling 1Q EPS Above Guidance, In Line with Consensus..............36
We Expect In-Line 2Q Guidance with Easter Benefit.......................................38

Deutsche Bank Securities Inc. Page 3

16 April 2019
Apparel, Footwear & Textiles
Carter's, Inc.

Executive Summary
We think stalled top-line growth and flattish EBIT could result in only MSD EPS
growth ahead, warranting a discounted multiple vs. historical levels and better-po-
sitioned brands.

Stabilizing Organic Sales Growth: Better Than Fading, But Not Enough to
Achieve Targets
Constant currency organic sales growth has consistently faded over the past sever-
al years, from double-digit levels in 2013, to HSD in 2014-2015, to MSD in 2016, to
2.6% in 2017 and finally 1.2% in 2018. The root cause is stagnant overall U.S.
Wholesale segment trends (with negative organic trends since 2017 offsetting pri-
or years' growth and Skip Hop contribution) compared to robust increases at U.S.
Retail and International.

We optimistically believe CRI has reached the bottom of the hill, breaking the pat-
tern of sales deceleration this year, with stabilization at ~2%-2.5% annual constant
currency growth modeled for 2019-2021. This compares to 1%-2% sales growth
guidance for 2019 (which includes ~20 bps of FX impact, by our math), and the 3%
CAGR required to achieve CRI's $4.0B sales objective in 2023 (which was already
reduced from the prior 5% five-year CAGR target with 4Q results).

n On the positive side, we see CRI reaping rewards from rebalancing the
footprint, ongoing robust online gains, the age up launch, Gymboree
market share capture, Skip Hop, Mexico, and the new business model in
China. These initiatives add up to healthy positive growth at U.S. Retail
(~2.5-4% annual growth in 2019-2021 in our model, excluding the extra
week) and International (~3.5% annual organic constant currency growth).
n However, we think these tailwinds are offset by ongoing door closures and
bankruptcies at retail partners, challenging industry dynamics (U.S. birth
rate is at a 30-year low), private label disintermediation, and international
macro turbulence and unfavorable FX. Our U.S. Wholesale sales forecast,
which bears the impact of many of these challenges, calls for a decline of
-1.1% in 2019 followed by 0.4% growth in 2020 and 2021 each. Our below-
plan 2019 estimate (guidance is positive LSD), while acknowledging good
momentum with exclusives at Walmart, Target, and Amazon, extends the
negative organic growth streak from the past two years (2017 -2.0%, 2018
-3.0%), albeit at a smaller decline as we move past the Toys "R" Us and Bon-
Ton bankruptcies.

Page 4 Deutsche Bank Securities Inc.

16 April 2019
Apparel, Footwear & Textiles
Carter's, Inc.

Figure 1: Organic Sales Growth Has Decelerated Meaning- Figure 2: We Are Bearish Around U.S. Wholesale, Which
fully Over the Past Five Years Has Seen Negative Organic Growth Trends Since 2017
12.0% 5.0%
4.0%
10.0%
3.0%
8.0% 2.0%
1.0%
6.0%
0.0%
4.0% (1.0%)
(2.0%)
2.0%
(3.0%)
0.0% (4.0%)
2013 2014 2015 2016 2017 2018 2019E 2020E 2021E 2012 2013 2014 2015 2016 2017 2018 2019E

Constant Currency Organic Sales Growth Total Sales Growth U.S. Wholesale Growth Organic Growth Guidance

Source : Deutsche Bank, Company Filings. Note: We exclude the 53rd week in 2014 and 2020 Source : Deutsche Bank, Company Filings. Note: Adjusted to exclude 2014's extra week; guidance line
depicts the midpoint of the LSD range provided by management

Figure 3: High-Margin Wholesale Has Come Down Signifi- Figure 4: Bankruptcies/Door Closures Are a Sales and
cantly as a Portion of the Mix Margin Headwind (Estimated Breakdown of CRI's 2018
U.S. Wholesale Mix ($M))

Walmart, $179,
11% 11% 11% 11% 12% 12% 15%

Other, $345, 29%

42% 40% 39% 37% 36% 34%

Kohl's, $162, 14%

53% Toys "R" Us & Bon-

47% 49% 50% 52% 52%
Ton, $13, 1%
Amazon, $55, 5%
JCPenney, $58, 5% Target, $158, 13%
2013 2014 2015 2016 2017 2018
Macy's, $100, 9% Costco, $111, 9%
U.S. Retail U.S. Wholesale International

Source : Deutsche Bank, Company Filings Source : Deutsche Bank, Company Filings

Past Peak Margins: Pressure Is Building from Industry Headwinds

While we acknowledge modest benefits ahead from optimizing the store footprint
away from outlets, we expect EBIT margin to continue to slide (albeit at a much less
severe pace) as: 1) negative customer mix and rising e-commerce costs are struc-
tural, long-term industry headwinds; and 2) SG&A could continue to deleverage
with a slowing birth rate and elevated promotional activity impacting UPT and AUR.
We take a more conservative stance than the Street, which assumes 20 bps of
improvement in 2020 to 12.0% vs. our more bearish 11.4%.

Deutsche Bank Securities Inc. Page 5

16 April 2019
Apparel, Footwear & Textiles
Carter's, Inc.

Figure 5: We Expect Continued EBIT Margin Pressure in a Figure 6: We Also Anticipate Flattish EBIT Dollars vs. Con-
Tough Industry Backdrop sensus Modeling a Return to LSD-MSD Growth ($M)
14.0% 20%
$431 $445
13.5% $401 $407 $407 $415 $415
~13% EBIT Margin Target $359
13.5% 15%
13.0% 13.3% $320
13.1% $275
12.5% Street 2020
10%
12.0%
12.0% 12.4%
12.1%
5%
11.5% 11.8%
11.5% 11.6%
11.0% 11.4% 11.3% 0%
10.5% 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E

10.0% (5%)

9.5%
(10%)
9.0%
2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E EBIT YOY % Growth Street

Source : Deutsche Bank, Company Filings, FactSet Source : Deutsche Bank, Company Filings, FactSet

Figure 7: U.S. Wholesale Is ~1/3rd of Sales But Nearly 1/2 Figure 8: All Three Segments Are Off Their Operating Mar-
of EBIT ($M, 2018) gin Peaks
International, 23.0%
$430, 12%
21.0%

19.0%
$45, 9%
17.0%

15.0%
$224, 44% 13.0%
U.S. Retail, $1,851,
$235, 47% 11.0%
53%
U.S. Wholesale, 9.0%
$1,181, 34%
7.0%
2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E

U.S. Retail U.S. Wholesale International

Source : Deutsche Bank, Company Filings Source : Deutsche Bank, Company Filings

Slowing EPS Growth Merits a Discounted Multiple

Our $99 PT is based on 14x our 2020 EPS estimate of $7.06 (1% below the Street's
$7.16 in Bloomberg). Our target multiple is below the 10-year average of 15.5x, the
five-year average of 16.3x, and the three-year average of 15.4x as we incorporate
slowing EPS growth reflecting: 1) ongoing door closures and bankruptcies at retail-
er partners; 2) difficult industry dynamics with the U.S. birth rate at a 30-year low;
3) a disruptive promotional backdrop with Gymboree's bankruptcy and liquidation;
and 4) international macro turbulence.

We see an 83% correlation between CRI's forward P/E multiple and EPS growth
(annually since 2013, and adjusted to exclude the extra week in 2014), and an 85%
correlation between its multiple and constant currency organic sales growth (also
adjusted to strip out the extra week).

On an EV/EBITDA basis, CRI's elevated multiple vs. peers is also apparent. CRI
trades two turns above the index (consisting of GIII, HBI, PVH, RL, and TPR), repre-
senting the high-end of the three-year range and above the historical average pre-
mium of only 0.6x. Considering CRI's slowing growth profile (in contrast to many
peers), we don't think a premium multiple is warranted.

Page 6 Deutsche Bank Securities Inc.

16 April 2019
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Carter's, Inc.

We also note that CRI's stock is up 39% since its trough on 12/24 vs. the S&P 500
up 24%.

Figure 9: We Believe CRI Deserves a Discounted Multiple Figure 10: CRI's EBITDA Multiple is Over Two Turns Above
Given Slowing Growth (Adjusted to Exclude Extra Weeks Peers, a Peak Premium
in 2014 and 2020)
19.0x 20.0% 12.0x
18.0%
18.0x 11.0x
16.0%
17.0x 14.0%
10.0x
16.0x 12.0%
10.0% 9.0x
15.0x DB Target: 8.0%
14.0x 8.0x
14.0x 6.0%
4.0%
13.0x 7.0x
2.0%
12.0x 0.0% 6.0x
2013 2014 2015 2016 2017 2018 2019E 2020E Apr-16 Oct-16 Apr-17 Oct-17 Apr-18 Oct-18 Apr-19

Forward P/E Multiple EPS Growth CC Organic Sales Growth CRI Peer Index

Source : Deutsche Bank, Company Filings, FactSet Source : Deutsche Bank, FactSet. Note: Peer index consists of GIII, HBI, PVH, RL, and TPR

Modeling 1Q In Line with Consensus; Expecting In-Line 2Q Guidance

We expect CRI to report 1Q EPS at $0.72, in line with the Street and two pennies
above guidance of $0.65-0.70 as provided on 2/25. CRI has beaten 1Q consensus
in each of the past five years, by an average of 11c, suggesting potential upside to
our numbers vs. management's track record of conservative planning.

We believe CRI could guide to positive 5% sales growth in 2Q (DB 4.8%; Street
4.7%) based on the Easter calendar shift and improving weather. Management not-
ed on the 4Q call that the shift "pushes about two points" of comp into 2Q. As we
look back to years with a similar holiday cadence, 2017 saw a 950 bp sequential
acceleration in 2Q SSS, and 2014 saw ~615 bps of acceleration (based on 670 bps
at Carter's and 390 bps at OshKosh). We are modeling 2Q comp up 5.0% vs. 1Q
down -2.5% (-LSD guidance and running slightly behind that as of 2/25) for 750 bps
of acceleration, only slightly below the average of the prior two examples.

We also expect management to provide 2Q EPS guidance of ~$0.95 (in line with our
forecast; Street $0.97) with a YOY GPM decline sequentially less severe than in 1Q.
For the full year, we anticipate reiterated plan of 4-6% EPS growth as it remains early
in the year (DB 4.8%; Street 5.1%).

Deutsche Bank Securities Inc. Page 7

16 April 2019
Apparel, Footwear & Textiles
Carter's, Inc.

Stabilizing Organic Sales

Growth
Stable Is Better Than Fading...But Not Enough to Achieve
Targets
Constant currency organic sales growth has consistently faded over the past sever-
al years, from double-digit levels in 2013, to HSD in 2014-2015, to MSD in 2016, to
2.6% in 2017 and finally 1.2% in 2018. The root cause is stagnant overall U.S.
Wholesale segment trends (with negative organic trends since 2017 offsetting pri-
or years' growth and Skip Hop contribution) compared to robust increases at U.S.
Retail and International. While we assign less weight in our analysis to quarterly
growth given the impact of calendar shifts and shipment timings, we also call out
that constant currency organic growth dipped negative in 2Q-3Q18 reflecting lost
sales to Toys "R" Us and Bon-Ton. The anemic rate in the past one to two years has
fallen below the industry, as indicated in company filings, resulting in share loss for
both the Carter's and OshKosh brands.

Figure 11: Organic Sales Growth Has Decelerated Meaningfully Over the Past
Five Years

12.0%

10.0%

8.0%

6.0%

4.0%

2.0%

0.0%
2013 2014 2015 2016 2017 2018 2019E 2020E 2021E

Constant Currency Organic Sales Growth Total Sales Growth

Source : Deutsche Bank, Company Filings. Note: We exclude the 53rd week in 2014 and 2020

Figure 12: Baby & Young Children's Apparel Market Share and Size ($B)
2013 2014 2015 2016 2017 2018
Carter's 13.6% 14.3% 14.6% 14.9% 15% 14%
OshKosh 2.5% 2.2% 2.3% 2.9% 3% 2%

Market Size $18.9 $19.7 $20.5 $20.7 $20 $21

% Growth 4% 4% 1% -- --
Source : Deutsche Bank, NPD, CRI Filings. Note: % growth not calculated in 2017 and 2018 due to rounding in filings

Page 8 Deutsche Bank Securities Inc.

16 April 2019
Apparel, Footwear & Textiles
Carter's, Inc.

Figure 13: CRI's 2018 Sales by Segment ($M) Figure 14: High-Margin Wholesale Has Come Down Sig-
nificantly as a Portion of the Mix

International, $430 , 12% 11% 11% 11% 11% 12% 12%

42% 40% 39% 37% 36% 34%

U.S. Retail, $1,851 ,

54% 50% 52% 52% 53%
U.S. Wholesale, 47% 49%
$1,181 , 34%

2013 2014 2015 2016 2017 2018

U.S. Retail U.S. Wholesale International

Source : Deutsche Bank, Company Filings Source : Deutsche Bank, Company Filings

Figure 15: CRI Has Seen Robust Sales Growth at U.S. Retail (8% 5-Year CAGR)
and International (9%) While U.S. Wholesale Has Been Stagnant Overall (1%)
($M)

$2,000
$1,800
$1,600
$1,400
$1,200
$1,000
$800
$600
$400
$200
$0
2013 2014 2015 2016 2017 2018

U.S. Retail U.S. Wholesale International

Source : Deutsche Bank, Company Filings

We optimistically believe CRI has reached the bottom of the hill, breaking the pat-
tern of sales deceleration this year, with stabilization at ~2-2.5% annual constant
currency growth modeled for 2019-2021. This compares to 1-2% sales growth gui-
dance for 2019 (which includes ~20 bps of FX impact, by our math), and the 3%
CAGR required to achieve CRI's $4.0B sales objective in 2023 (which was already
reduced from the prior 5% five-year CAGR target with 4Q results).

n On the positive side, we see CRI reaping rewards from rebalancing the
footprint, ongoing robust online gains, the age-up launch, Gymboree
market share capture, Skip Hop, Mexico, and the new business model in
China. These initiatives add up to healthy positive growth at U.S. Retail
(~2.5-4% annual growth in 2019-2021 in our model, excluding the extra
week, vs. 4.3% in 2018) and International (~3.5% annual organic constant
currency growth in 2019-2021 vs. -0.9% in 2018 which included lower
demand in China).

Deutsche Bank Securities Inc. Page 9

16 April 2019
Apparel, Footwear & Textiles
Carter's, Inc.

n However, we think these tailwinds are offset by ongoing door closures &
bankruptcies at retail partners, challenging industry dynamics (U.S. birth
rate is at a 30-year low), private label disintermediation, and international
macro turbulence and unfavorable FX. Our U.S. Wholesale sales forecast,
which bears the impact of many of these challenges, calls for a decline of
-1.1% in 2019 followed by 0.4% growth in 2020 and 2021 each. Our below-
plan 2019 estimate (guidance is positive LSD), while acknowledging good
momentum with exclusives at Walmart, Target, and Amazon, extends the
negative organic growth streak from the past two years (2017 -2.0%, 2018
-3.0%), albeit at a smaller decline as we move past the Toys "R" Us and Bon-
Ton bankruptcies.

In this section, we walk through the puts and takes behind CRI's potential sales
growth, digging into both the positives and the negatives. For comparison, the
Street is modeling sales growth of 1.8% in 2019, 1.2% in 2020 (if adjusted by ~$50M
for the extra week, assuming estimates in consensus include the impact), and 2.6%
in 2021 (also adjusted) – all below the 3% CAGR, indicating broad-based skepticism
of long-term targets but also a similar expectation for LSD stabilization.

Figure 16: Street Estimates for Sales Growth Likewise Reflect Skepticism
Around the 3% CAGR Target to $4B in 2023

4.0%

3.5% 3% CAGR to 2023

Target
3.0%

2.5%

2.0%

1.5%

1.0%

0.5% 1%-2% Guidance

0.0%
2018 2019E 2020E 2021E

DB Street

Source : Deutsche Bank, Company Filings, FactSet

Top-Line Tailwinds
We see CRI reaping rewards from: 1) rebalancing the footprint with a shift toward
dual-brand formats and away from outlets (which we explore later in this report as
a positive for margins); 2) ongoing robust online gains; 3) the age up launch and
modest Gymboree market share capture; and 4) the cumulative impact of various
other strategies including Skip Hop, Mexico, providing wholesale partners with
exclusives and improved presentations, and the new business model in China.
These initiatives add to up healthy positive growth at U.S. Retail (~2.5-4% annual
growth in 2019-2021 in our model, excluding the extra week, vs. 4.3% in 2018) and
International (~3.5% annual organic constant currency growth in 2019-2021 vs.
-0.9% in 2018 which included lower demand in China).

Page 10 Deutsche Bank Securities Inc.

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Carter's, Inc.

Figure 17: U.S. Retail Comp Trends

7.5% 2.4% 1.7% 0.5% (3.5%) 3.0% (2.5%) --

7.2% 8.6% 1.6% 3.1% 6.0% 0.9% 5.0% --
8.2% 3.5% (2.9%) 2.6% 2.6% 0.5% 3.5% --
6.9% 4.3% 5.3% 5.5% 4.5% 5.7% 0.5% --
Annual 6.4% 4.5% 1.5% 3.1% 2.7% 2.8% 1.6% 2.4%

2-Year Stacked SSS

-- 9.9% 4.1% 2.2% (3.0%) (0.5%) 0.5% --

-- 15.8% 10.2% 4.7% 9.1% 6.9% 5.9% --
-- 11.6% 0.6% (0.3%) 5.2% 3.1% 4.0% --
-- 11.2% 9.6% 10.8% 10.0% 10.2% 6.2% --
Annual 10.9% 6.0% 4.6% 5.8% 5.5% 4.4% 4.0%

Source : Deutsche Bank, Company Filings. Note: Estimated through 2016 given Carter's and OshKosh brand disclosure

Figure 18: Canadian Comp Trends

(3.9%) (10.2%) 7.0% 14.9% (8.0%) 3.6% (4.0%) --

(1.2%) 3.3% 0.2% 8.0% 8.2% (1.2%) 4.0% --
(3.6%) (2.2%) 4.8% 1.6% 0.7% 2.9% 0.5% --
1.5% (4.6%) 11.9% 10.9% (0.2%) (2.0%) 2.0% --
Annual (1.8%) (3.4%) 6.4% 8.4% 0.2% 0.5% 0.6% 0.5%

2-Year Stacked SSS

-- (14.1%) (3.2%) 21.9% 6.9% (4.4%) (0.4%) --

-- 2.1% 3.5% 8.2% 16.2% 7.0% 2.8% --
-- (5.8%) 2.6% 6.4% 2.3% 3.6% 3.4% --
-- (3.1%) 7.3% 22.8% 10.7% (2.2%) 0.0% --
Annual (5.2%) 3.0% 14.8% 8.6% 0.7% 1.1% 1.1%

Source : Deutsche Bank, Company Filings

Figure 19: Store Count with the U.S. Slowly Progressing Toward 861 Target in
2023

830 844 851 854 856

792
738
657 680
581

188 198 206 213

164 179
124 147
82 102
41 42 43 44 45

2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E

U.S. Canada Mexico

Source : Deutsche Bank, Company Filings

Deutsche Bank Securities Inc. Page 11

16 April 2019
Apparel, Footwear & Textiles
Carter's, Inc.

Baby Steps Toward Rebalancing the Footprint

CRI is rebalancing its store footprint toward its more productive co-branded format,
providing a multi-year comp tailwind ahead, but a relatively modest one by our cal-
culations.

The co-branded format posted a MSD comp in 3Q (well ahead of total U.S. Retail
comp of 0.5%), and in 4Q, it produced traffic and comp gains of ~10% (also nicely
above the total U.S. comp of 5.7%). We estimate that the dual-brand comp is ~790
bps above the single-brand comp on average over the past six quarters.

Figure 20: Dual-Brand Stores Outperform Single-Brand Stores by ~790 Basis Points on Average

Implied Single- Dual vs. Single

U.S. Store Comp Dual-Brand Comp % of Base Brand Comp % of Base Spread
3Q17 (3.2%) 3.3% 26% (5.5%) 74% 880 bps
4Q17 (1.0%) 4.1% 28% (3.0%) 72% 710 bps
1Q18 Decline 4.0% 32% ~(3.4%) 68% ~740 bps
2Q18 Decline "Best Performing" 34% ~(3.6%) 66% ~760 bps
3Q18 Decline MSD 36% ~(4.4%) 64% ~940 bps
4Q18 Growth Nearly 10% 37% ~2.4% 63% ~715 bps
Source : Deutsche Bank, Company Filings. Note: Figures and percentage of base are estimated based on company commentary where not specifically disclosed

"When we'd open a Carter's store only

There are 319 dual-format stores today (consisting of 163 of the co-branded format, about 15% of those customers would then
finish that transaction, then go shop at
and 153 of the side-by-side which is essentially two regular stores with a hole cut
OshKosh. And when we put the two brands
in the wall), vs. 844 total, representing 37% of the base. This penetration has in one store, all of a sudden the consumer
evolved from only 2% in 2013, with a target of 51% by 2023 that is achievable, in our rediscovered OshKosh and OshKosh is a
view. perfectly complementary brand. Carter's
skews younger, OshKosh skews a bit
older...50% of the transactions in the store
Figure 21: CRI Is Evolving the Store Base Toward the More Productive Dual- have both brands in the basket." – CEO
Brand Format Mike Casey, September 5, 2018

100% 2%
90%
80% 37%
51%
70%
60%
50% 98%
40%
30% 63%
49%
20%
10%
0%
2013 2018 2023E

Standalone Dual-Brand

Source : Deutsche Bank, 4Q18 Company Presentation

By our math and assuming a 790 bp comp lift to a co-branded store, we believe
additional conversions from Carter's and OshKosh standalone stores to this format
should provide a combined boost to the total U.S. Retail comp of ~35 bps in 2019,
and ~14 bps in 2020 – not needle-moving amounts, but every bit helps, and we do

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flag it considering 2019 guidance for only LSD U.S. Retail growth.

Figure 22: Breaking Down the Modest Dual-Branded Comp

Lift

Assumption for Comp Lift 790 bps

# of Dual-Brand Stores Added in 2019 52
Additions as a % of Store Base 6%
Comp Lift to 2019 U.S. Store Comp 48 bps
% of Sales in Stores 73%
Comp Lift to 2019 U.S. Retail Comp 35 bps

Assumption for Comp Lift 790 bps

# of Dual-Brand Stores Added in 2020 21
Additions as a % of Store Base 2%
Comp Lift to 2020 U.S. Store Comp 19 bps
% of Sales in Stores 71%
Comp Lift to 2020 U.S. Retail Comp 14 bps
Source : Deutsche Bank

Online Still in Its Infancy

Carter's is the No. 1 young children's apparel brand online in the U.S., with over 2x
the share of the next competitor (admittedly down from management's assertion
of 3x with 4Q17 results), and 32% penetration in 4Q for the U.S. Retail segment (up
300 bps YOY). Online sales of CRI brands through the company's top wholesale cus-
tomers were up over 30% in 2018. And yet, we still see ample runway for e-com-
merce growth at CRI over the next several years. Management anticipates online
sales to exceed $1B in 2019, supported by the company's wholesale partners
(including Amazon). CRI is launching new omnichannel capabilities this year,
including same-day BOPIS (buy online, pick up in store). Almost 15% of online cus-
tomers choose free ship-to-store, and ~25% of those customers tack on additional
purchases in the store. Meanwhile, the Amazon exclusive brand Simply Joys, intro-
duced in 2017, has been growing rapidly – up 50% in 2018, the first full year. CRI has
recently introduced toddler products, and the scope of the brand has now been
extended beyond Prime, with a longer-term agreement signed in January to extend
exclusivity. Amazon is now a top-10 customer (but not yet top five).

Age Up & Gymboree Market Share Opportunity

In July, the company launched Carter's KID (boys and girls sizes 4-14, addressing
children up to age ~10), to broaden the customer base beyond the baby business.
The timing is fortuitous with respect to the Gymboree bankruptcy, positioning CRI
to capture what management believes is a $100M opportunity. CRI has 200 stores
in the same centers as Gymboree (150 in outlets, 50 in malls), with the company also
considering further mall locations as a potential growth opportunity, given the new-
ly created void in the market plus more attractive rents in recent years.

The KID collection debuted with over 700 styles in the U.S. and Canada, and contrib-
uted $14M to sales in 4Q vs. $10M in 3Q. Management feels good about the product
launch and how marketing has been received. To give an idea for the potential size
of the initiative, CRI added size 8 a few years ago, now garnering ~$80M in sales.
Each share point of the 5-10 year old market represents a ~$100M opportunity for
the company.

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If we assume a sales split in line with the company average along the U.S. Retail,
Wholesale, and International segments, we see opportunity for a comp lift of 100+
bps in 2019, and tailwinds likely in 2020 and beyond.

Figure 23: Carter's KID Comp Lift Potential ($M)

Incremental 2019 KID Sales U.S. Retail Portion Corresponding U.S. Comp Lift
$20 $11 58 bps
$40 $21 116 bps
$60 $32 173 bps
$80 $43 231 bps
$100 $53 289 bps
Source : Deutsche Bank

Other Initiatives Gaining Traction

We see a number of additional initiatives combining to help fortify sales trends at
CRI in 2019 and beyond:

n Skip Hop: This complementary brand, acquired in February 2017, is

providing a greater contribution to sales (~30% growth in 2018) and
management is pleased with demand in the wholesale channel including
an expanded Macy’s presence. Skip Hop products (young children's
essentials including diaper bags, kid's backpacks, travel accessories, home
gear, and hardlines for playtime, mealtime, and bathtime) are distributed to
over 5,000 doors in the U.S., and over 60 countries. The transaction was
accretive to earnings in 2017, and CRI anticipates 20% global growth in
2019 (applied to 2018 sales of ~$125M) with a meaningfully improved profit
contribution to the company. The team believes the business can double in
the first five years of ownership.
n Kohl's: CRI has partnered with Kohl’s to support the recent rollout of 150
new Carter’s baby shops, and early returns are encouraging. Carter's Little
Baby Basics product was featured in a special additional fixture at the front
of ~400 stores during the January Baby Sale, driving "excellent"
productivity for Kohl's, exceeding expectations.
n Walmart, Target, & Amazon: CRI believes Target, Walmart, and Amazon
were the largest beneficiaries of the Toys "R" Us store closures (company
analysis suggests 85% achievement of $40M sales recapture goal last year,
compared to over $100M in sales contribution in 2017 (combined with Bon-
Ton)). The Walmart exclusive brand Child of Mine is benefitting from a better
in-store presentation. The Amazon exclusive brand Simply Joys,
introduced in 2017, has been growing rapidly – up 50% in 2018, the first full
year. CRI has recently introduced toddler products, and the scope of the
brand has now been extended beyond Prime, with a longer-term
agreement signed in January to extend exclusivity. Amazon is now a top-10
customer (but not yet top five). The Target exclusive brand Just One You was
initially launched in 2001, and provides clothes and accessories from
preemie to toddler sizes. The Genuine Kids from OshKosh exclusive brand
for Target launched in 2003.
n China: CRI is changing its business model in China, transitioning from a
retail and wholesale one to licensing. China is a highly fragmented $24B
market, according to management, with 4x the number of annual births
relative to the U.S. While the former business was generating sales (~$12M
in 2018), it lacked profitability (in the present, and a path to get there). In
February, CRI entered into a licensing agreement with a new partner with
demonstrated retail expertise in young children's apparel in the country.
One of the principals of the new venture has been one of CRI's largest baby

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apparel suppliers for the past 20 years. The new business model should
provide a better consumer experience and post greater returns, and over
time could replicate the success seen in Canada and Mexico, both started
through licensing agreements.
n Mexico & Other International Opportunities: The Mexican business,
acquired in 2017, is small (~$45M in 2018, or a little over 1% of sales) but
growing rapidly (CRI disclosed a nearly 30% increase in 3Q), and the team
is making good progress in building out omnichannel capabilities in this
attractive market. Management believes it can double the business over the
next several years, and will test some new, larger retail store formats in 2019
with the goal of replicating the successful co-branded format from the U.S.
and Canada. Additionally, CRI expects to benefit this year from the addition
of several new wholesale partners in markets such as India, the U.K.,
Russia, Greece, and Ukraine. At the end of 2018, international partners
operated nearly 780 retail locations and 45 websites in ~85 markets
worldwide. Net, management anticipates good overall growth for the
International segment, up LSD in 2019 with the China transition more than
offset by growth in Canada (10 new retail stores planned vs. nine in 2018)
and Mexico (which is also seeing improving profitability). Over the next five
years, the company forecasts about 60% of International sales growth to
come from Canada and Mexico, with the balance from China and other
regions.

Continued Challenges
We think CRI's top-line tailwinds are offset by several negative factors including: 1)
ongoing door closures and bankruptcies at retail partners; 2) difficult industry
dynamics with the U.S. birth rate at a 30-year low; 3) private label disintermediation;
and 4) international macro turbulence and unfavorable FX.

Ongoing Door Closures & Bankruptcies at Retail Partners

CRI has over 17,000 wholesale locations in the U.S. including dept. stores, national
chain stores, specialty stores, and discount retailers, down from 18,000 at the end
of 2016. Most recently, the company has seen significant pressure on U.S. Whole-
sale sales from the Toys "R" Us, Bon-Ton, and Sears bankruptcies, as well as ongo-
ing challenges at other partners including JCPenney. The company anticipates fur-
ther consolidation of wholesale sales over time, with fewer, better, and stronger
retailers. In 2018, CRI's top five customers (Walmart, Kohl's, Target, Costco, and
Macy's) accounted for ~60% of the segment's sales, with ~4% YOY growth for that
group. No single customer represents 10%+ of total company sales.

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Figure 24: Estimated Breakdown of CRI's 2018 U.S. Wholesale Mix ($M)

Walmart, $179,
15%

Other, $345, 29%

Kohl's, $162, 14%

Toys "R" Us & Bon-

Ton, $13, 1%
Amazon, $55, 5%
JCPenney, $58, 5% Target, $158, 13%

Macy's, $100, 9% Costco, $111, 9%

Source : Deutsche Bank, Company Filings. Note: Dollar amounts and percentages are DB estimates based on company commentary

Organic U.S. Wholesale trends have fallen nearly every year since 2013, reaching
-3.0% in 2018 (-2.4% reported, including Skip Hop which contributed $6.9M last
year and $55.7M in 2017). The company has guided to a rebound to positive LSD
growth in 2019, a level not seen since 2016, with sales to its top five customers
expected to be up 5%. We remain more skeptical, forecasting extended declines
(albeit at a sequentially improved rate, down -1.1% in 2019 vs. -3.0% organic
decrease in 2018 and -2.0% in 2017) given the challenging brick & mortar land-
scape, while still acknowledging good momentum with exclusives at Walmart, Tar-
get, and Amazon.

Toys "R" Us and Bon-Ton sales recapture

Figure 25: U.S. Wholesale Has Seen Negative Organic Growth Trends Since fell below expectations, at only 85% of the
2017 company's $40M target

5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
(1.0%)
(2.0%)
(3.0%)
(4.0%)
2012 2013 2014 2015 2016 2017 2018 2019E

U.S. Wholesale Growth Organic Growth Guidance

Source : Deutsche Bank, Company Filings. Note: Adjusted to exclude 2014's extra week; guidance line depicts the midpoint of the LSD range
provided by management

Toys "R" Us and Bon-Ton contributed $107M in combined sales in 2017, and $13M
in 2018. In the wake of their bankruptcies, CRI launched additional targeted market-
ing with what is described as a "good" return on those investments, and a "nice" lift
in sales at its stores within a five-mile radius of closed Toys "R" Us locations. CRI's
analysis suggests that the company achieved ~85% of its $40M sales recapture
assumption last year (i.e. ~$34M). However, management believes Target, Wal-

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mart, and Amazon were the largest beneficiaries of the Toys "R" Us store closures
– a modest negative for the company's U.S. Retail segment as well as CRI's dept.
store business as those two did not seem to pick up as much share as perhaps
hoped. We think the outperformance at the discounters and Amazon is driven by
exclusive product (including CRI's which also saw a "nice" lift) and also an assort-
ment more in line with that of Toys "R" Us (i.e. inclusive of diapers, formula, strollers,
and other items that Carter's and dept. stores do not sell).

As we've moved past the store closures (1Q19 should be the last quarter impacted
by comparability to lost sales), CRI is seeing an improved trend in some of its key
replenishment product categories (which are also higher margin), with some
potential further increases in recapture ahead (but we suspect they will be minimal).

As we consider the future risk to U.S. Wholesale trends, we highlight CRI's sales to
its three largest dept. store customers (Kohl's, Macy's, JCPenney), a combined
~$320M by our estimates or ~27% of segment sales. JCPenney, while the smallest
of the three, is of most concern given its declining revenue (down -5% between
2015 and 2018, and modeled down another -1% in 2019 including 28 door clo-
sures). Children's including toys represented 9% of JCPenney's 2018 sales (vs. 9%
in 2017 and 10% in 2014-2016), or an implied $1.05B (down approximately -7% YOY
by our math on top of a -10% drop in 2017). A worst case scenario of total evapora-
tion of CRI's sales to JCPenney would represent a nearly 500 bp hit to U.S. Whole-
sale growth by our estimates, partly offset by recapture at retail and through other
partners (perhaps ~1/3rd of the loss but likely at lower margins). Additionally, we
note the mid-January bankruptcy of Shopko (~$3.3B in 2017 sales according to For-
bes), with its over 350 locations all closed by May. Meanwhile we forecast net door
closures at Macy's (8 in 2019, 5 in 2020) and flattish levels at Kohl's, Walmart, and
Target (large format). On the plus side, while we recognize ongoing closures at
Sears and Kmart (425 remaining locations), CRI has virtually no exposure.

Difficult Industry Dynamics with U.S. Birth Rate at 30-Year Low

As explored in detail in our complementary industry deep dive (also published
today), we are cautious around childrenswear unit growth ahead reflecting declin-
ing birth rates. Births have been down every year since 2008, according to the Cen-
ter of Disease Control and Prevention's National Center for Health Statistics, with
2017 seeing levels at their lowest in 30 years (3.85 million babies). This also marked
the largest one-year decline since 2010. The general fertility rate for women age 15
to 44 was 60.2 births per 1,000 women – the lowest rate since the government start-
ed tracking it over a century ago. Demographers believe the post-recession baby lull
reflects lower teen fertility (estimated at ~1/3rd of the overall decline), an increase
in women attending college, and long-acting birth control such as intrauterine devi-
ces.

We expect the unfavorable trend around the U.S. birth rate, combined with fewer
points of distribution, to place downward pressure on unit growth at CRI, with the
age up initiative as a mitigating factor.

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Figure 26: Live Births and General Fertility Rates in the U.S. (1970-2017)

Source : Deutsche Bank, National Center for Health Statistics, National Vital Statistics System, Natality

Potential Private Label Disintermediation

Private label has historically represented a relatively high percentage of children's
apparel given its value proposition, reaching 30-50% penetration at some partners,
according to management (as per March 2018 investor conference commentary).
While the disintermediation threat is by no means new, and CRI has performed well
at these retailers alongside private labels, we believe a fresh wave of compelling
own brand options is changing the branded dynamic – coinciding with Millennials
reaching parenthood, and bringing an uncompromising view on price, quality, and
convenience.

In its Spring 2018 Consumer View, the NRF found that while Millennial parents are
more brand loyal than those from any other generation, their purchasing behaviors
are driven by both price and quality in equal measures, with convenience and social/
political values also ranking very highly.

Figure 27: Millennial Parents Are More Likely to Identify as "Very Loyal" to
Brands and Retailers

Identify as "Very Loyal" to the Brands and Retailers

They Shop
60% 54%

50%
40%
40%
31%
30%

20%

10%

0%
Millennial Parents Millennial Non-Parents Other Parents

Source : Deutsche Bank, NRF Spring 2018 Consumer View

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Figure 28: Millennial Parents' Loyalty Is Equally Driven by Price and Quality,
with Customer Service Also Ranking Highly

Source : Deutsche Bank, NRF Spring 2018 Consumer View

Figure 29: Millennial Parents Care More About What a Figure 30: ...and Are More Likely to Research a Brand or
Brand Stands For... Retailer's Views

Will Shop Only at Brands and Retailers That Reflect Always Research a Brand or Retailer's Views on
Their Social or Political Values Topics That Matter to Them
50% 60%
44%
45% 50%
40% 50%
35% 40%
30%
25% 23% 30% 27%
20% 15% 19%
15% 20%
10% 10%
5%
0% 0%
Millennial Parents Millennial Non-Parents Other Parents Millennial Parents Millennial Non-Parents Other Parents

Source : Deutsche Bank, NRF Spring 2018 Consumer View Source : Deutsche Bank, NRF Spring 2018 Consumer View

We believe reinvigorated private label efforts, particularly from Target (but also Wal-
mart, Amazon, and others), are coming partly at the expense of CRI market share,
which slipped in 2018 as discussed earlier in this report (14% for Carter's and 2%
for OshKosh in the baby & young children's apparel market according to NPD and
company filings vs. 15% and 3%, respectively, in 2017) – and we worry that further
share losses could lie ahead as own brands gather momentum. We think this new
wave of private brands offers an unprecedented mix of design, quality, and value,
which combine with the convenience of Target/Walmart/Amazon's broad assort-
ment (spanning general merchandise and grocery) and speedy delivery options (as
well as Target and Walmart's expansive store footprints across the country) to pro-

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vide a compelling product and experience for Millennial moms. Target's relatively
progressive policies (e.g. $15/hour in minimum wage by 2020, the inclusive bath-
room policy instituted in 2016, lack of gender labeling for toys in stores since 2015,
exclusive Toca Boca gender neutral kids' clothing offered in 2017) may also play an
underappreciated role for this key demographic.

When Carter's last disclosed mass channel sales (2010), Target accounted for
~$142M compared to our estimated $158M in 2018. On the other hand, Walmart
accounted for ~$112M in 2010 vs. our estimated $179M in 2019. The discrepancy
in growth could at least in part reflect Target's private label programs gaining trac-
tion in recent years.

Figure 31: Sales to Target and Walmart (Estimated Where Not Disclosed, $M)

$400

$350

$300

$250 $179
$200 $112
$150

$100
$142 $158
$50

$0
2010 2018

Target Walmart

Source : Deutsche Bank, Company Filings

Below we dig into notable private label launches in more detail, where we see a
pick-up in activity as Target, Walmart, and Amazon look harder for general mer-
chandise margin offsets vs. grocery investments. We also remind readers that Tar-
get is walking away from its C9 by Champion exclusive product, a surprise
announcement in August 2018 given the recent resurgence of the Champion brand,
and turning greater focus toward its private label activewear. While we are not sug-
gesting that Target (or Walmart and Amazon for that matter) has any near-term
intention of downsizing or abandoning its Carter's exclusive assortment, we con-
sider private brand initiatives and growth with greater caution in light of this prece-
dent.

n After letting its private brand efforts stall in the early 2000s, Target
discontinued its older lines like Merona and Mossimo, and has launched
~20 new labels since 2016. Cat & Jack apparel for kids and baby was
introduced in July 2016 (in place of former owned brands Cherokee and
Circo, ~$1B in combined sales), with sizes through 18 and prices generally
ranging from $4.50 to $39.99 with most items under $19.99. Cat & Jack
crossed the $2B mark only slightly more than one year after its launch, well
exceeding its $1B goal. We believe Cat & Jack has edged out Old Navy to
become the #2 childrenswear brand in the U.S., behind only Carter's.
Target's management stated in February 2017 that the brand has potential
to be the largest kids brand in the country.

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n According to Target (in May 2017 conference call commentary),

among shoppers who purchased kids apparel from their store in the
months leading up to the launch of Cat & Jack, spending on kids
apparel increased over 50% in the months following the launch.
This increase in spend was driven by both frequency and spend per
visit.
n As a consolation prize for Carter's, the company did additionally
note that the launch also led to an increase in spending on kids
clothes at Target even among guests who didn't buy Cat & Jack.
n Cat & Jack uses Repreve recycled polyester in the brand's
swimwear, graphic tees, newborn bodysuits, and basic tees and
tanks.
n In 2017, Cat & Jack grew to include a selection of sensory-friendly
pieces, and also added adaptive apparel made specially for kids and
toddlers with disabilities.

n Our dbDIG survey, published separately today in our Childrenswear Deep

Dive, shows opportunity for Cat & Jack to continue to grow rapidly and take
industry share given its relatively low level of awareness but good
conversion and momentum. The brand ranked No. 2 among survey takers
asked to name one favorite brand. Meanwhile, only 53% of survey takers
have purchased from Cat & Jack in the past, and 26% hadn't heard of the
brand. Interestingly, only 17% have heard of Cat & Jack but never
purchased, below the rate for every other brand in our survey but Carter's.
n Beyond Cat & Jack, Target also launched Art Class kids' clothing in January
2017 for ages 4-12, and more recently expanding into toddler sizes in
February 2019. Most of the toddler items are priced below $12.99, with a
range of $6.99-24.99. With the line extension, Target's private label efforts
have driven its kids' business growth ahead of the industry. Art Class also
features limited-edition, capsule collections on an ongoing basis.
n Additionally, Target launched its baby brand Cloud Island (nursery décor
and bedding) in May 2017, expanding into bath and layette in August 2017,
diaper bags in January 2018, and essentials like diapers and wipes in
January 2019 (filling some of the void left by Toys "R" Us). The gender
neutral Pillowfort home brand for kids launched in February 2016, and is
currently expanding to include almost 20 new sensory-friendly pieces such
as weighted blankets, a hideaway tent, and floor cushions.
n With 4Q results, Kohl's discussed strength in both Carter's and its "We've seen a great uptick in our kids
proprietary Jumping Beans brand. Jumping Beans posted a mid-teens business. And across the board, that's
comp in 3Q (while Carter's accelerated). Since relaunching Jumping Beans, coming both on the back of active and
the brand has turned from a drag on sales into a significant positive driver. national brands, but importantly, really a
Additionally in the dept. store landscape, in 1Q18 JCPenney underwent a sea change we're seeing in the
performance of our proprietary brands,
major redesign and refresh of its Okie Dokie children's private brand.
brands like Jumping Beans in kids." –
n Amazon is expanding its assortment of baby products under its Mama Kohl's CEO Michelle Gass, 2Q18
Bear, Solimo, Amazon Elements, Amazon Essentials, Silly Apples, and Conference Call
Moon and Back brands. Items include apparel under the Moon and Back,
Amazon Essentials, and Silly Apples brands, such as short-sleeve and long-
sleeve bodysuits and pull-on pants. According to Gartner L2, Amazon is
increasing its ad spend in the baby category, with Amazon’s visibility in
search results for the baby category growing from 5% in 2017 to 24% in
2018. However, we are encouraged to see Simple Joys by Carter's product
dominate the page when we sort "our brands" baby clothing on
Amazon.com by "featured" (Moon and Back baby set of three organic
cotton pants do not appear until item #40 in our search on 4/4/19).

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n Walmart's long-standing private label baby and toddler brand is

Garanimals, popular in the 1970/1980's and relaunched in February 2008.
The company also launched Wonder Nation in early 2018.
n Walmart says online traffic to its babies pages is up 30% YOY, according to
a 4/4 CNBC article, in the wake of the Toys "R" Us liquidation. Over the last
year, Walmart has expanded its baby assortment in addition to enhancing
the shopping experience, which includes a remodeled baby department in
more than 2,000 stores and a new shopping destination on Walmart.com.
In September 2017, Walmart introduced nearly 120 Parent's Choice baby
essentials in a total relaunch of the nearly 20 year old brand. The new line-up
includes Walmart's first ever Parent's Choice premium diaper (starting at
$7.24), and a 53-piece bedding assortment. In February, Walmart launched
10 Hello Bello plant-based baby products across multiple SKUs, ranging in
price from $1.88-23.94 with the majority under $8, from celebrities Kristen
Bell and Dax Shepard. Most recently, this month Walmart announced a
new baby registry experience with personalization features (including a
chatbot named Hoo the Owl), and mobile enhancements (eight in 10 moms
use their mobile phone to register according to Walmart and the 2018 Baby
Registry Trends Report, BabyCenter, Brand Labs Insights).
n Today (4/16), Walmart announced its partnership with KIDBOX to offer
online customers with an exclusive, curated stylebox for kids, with the
option to receive seasonally, without a styling fee. The box will offer items
across over 120 premium kids' brands including BCBG, Butter Super Soft,
C&C California, and Puma. Each box will include four to five fashion items
for $48 (~50% off the suggested retail price for the group of bundled items),
and is available in sizes 0-14 for girls and 0-16 for boys. In our review of the
Walmart KIDBOX website, we did not see CRI brands featured.
n The Walmart KIDBOX stylebox complements Walmart.com’s expanding
kids’ fashion assortment, which features more than 100 new brands that
have been added over the last year, including Betsey Johnson, Kapital K,
Levi’s, Limited Too, and The Children’s Place, alongside private brands
Wonder Nation and Athletic Works. Walmart has extended inclusive sizing
across its kids’ private brands online and in its stores. The retailer has also
launched new shopping destinations for dance essentials and gymnastics,
and licensed children’s clothing.

International Macro Turbulence & Unfavorable FX

CRI feels impact from international macro turbulence and unfavorable FX in two
ways: through its international operations, and through international demand at its
website:

n International sales (representing 12.4% of total sales in 2018) fell -2.4% in

4Q, reflecting lower demand in China and unfavorable movements in
currency exchange rates, which were partially offset by growth in Mexico.
For the full year, the decrease in sales in China represented a $9.0M
headwind vs. an increase of $6.7M from the Canadian business including
wholesale and retail, and $21.2M from acquired businesses (Mexico and
Skip Hop).
n CRI saw less demand than expected from international customers
shopping online in 4Q, down -HSD. In 3Q, management saw domestic
online demand up 13% vs. international demand down -10%. The
company's analysis reflects a direct correlation between unfavorable
changes in FX and international demand for its brands, particularly from
Brazil, Argentina, and Russia. In years past, as exchange rates improved,
international demand also improved. In 2019, CRI expects continued

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softness in international demand in 1H and improved trends in 2H.

Given current currency rates for the Canadian Dollar and Mexican Peso, FX could
be a $7M headwind to 2019 sales growth in terms of direct translational impact, or
21 bps, compared to $3M in 2018.

Figure 32: FX Translation Is Poised to Be a Greater Headwind to Sales Growth in

2019 ($M)

$10 $7 40
$5 20
$0
$0 0
($5) ($3) (20)
($10) ($7) ($7) ($7) (40)
($15)
(60)
($20) ($16)
(80)
($25)
($30) (100)

($35) (120)
($40) ($35) (140)
2013 2014 2015 2016 2017 2018 2019E 2020E

FX Impact Basis Point Impact to Total Sales Growth

Source : Deutsche Bank, Company Filings

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Past Peak Margins

Pressure Is Building from Industry Headwinds
Before CRI's 2018 margin challenges – down 132 bps YOY last year to pre-2013 lev-
els reflecting negative customer mix, retailer bankruptcies, e-commerce fulfillment
costs, elevated promotional activity, and marketing investments – management
had discussed a 14% long-term target; we believe the new goal is closer to 13%.
While we acknowledge modest benefits ahead from optimizing the store footprint
away from outlets, we expect EBIT margin to continue to slide (albeit at a much less
severe pace) as: 1) negative customer mix and rising e-commerce costs are struc-
tural, long-term industry headwinds; and 2) SG&A could continue to deleverage
with a slowing birth rate and elevated promotional activity impacting UPT and AUR.
We take a more conservative stance than the Street which assumes 20 bps of
improvement in 2020 to 12.0% vs. our more bearish 11.4%. Our flattish EBIT dollars
through 2021 compare to CRI's objective of $500M in 2023.

Figure 33: We Expect Continued EBIT Margin Pressure in a Tough Industry

Backdrop

14.0%
13.5% ~13% EBIT Margin Target
13.5%
13.0% 13.3%
13.1%
12.5% Street 2020
12.0%
12.0% 12.4%
12.1%
11.5% 11.8%
11.5% 11.6%
11.0% 11.4% 11.3%
10.5%
10.0%
9.5%
9.0%
2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E

Source : Deutsche Bank, Company Filings, FactSet

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Figure 34: We Also Anticipate Flattish EBIT Dollars vs. Consensus Modeling a
Return to LSD-MSD Growth ($M)

20%
$431 $445
$401 $407 $407 $415 $415
$359 15%
$320
$275
10%

5%

0%
2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E
(5%)

(10%)

EBIT YOY % Growth Street

Source : Deutsche Bank, Company Filings, FactSet

By segment, all three divisions are off their peak margin levels:

n U.S. Retail declined 91 bps YOY in 2018 to 12.1% (and 331 bps off the 2014
peak of 15.4%), with recent pressure from higher promotional activity and
increase e-commerce shipping costs as well as a decrease in performance
based compensation and higher distribution expenses.
n U.S. Wholesale fell 125 bps last year to 19.9% (224 bps off the 2016 peak
of 22.2%), most recently impacted by changes in customer mix, in part due
to customer bankruptcies, as well as a decrease in performance based
compensation and higher distribution expenses.
n International dropped 147 bps in 2018 to 10.4% (952 bps off 19.9% in
2012), with challenges in China plus increased expenses associated with
new retail stores and higher labor costs in Canada.

Figure 35: U.S. Wholesale Is ~1/3rd of Sales But Nearly Figure 36: All Three Segments Are Off Their Operating
1/2 of EBIT ($M) Margin Peaks
International, 23.0%
$430, 12%
21.0%

19.0%
$45, 9%
17.0%

15.0%
$224, 44% 13.0%
U.S. Retail, $1,851,
$235, 47% 11.0%
53%
U.S. Wholesale, 9.0%
$1,181, 34%
7.0%
2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E

U.S. Retail U.S. Wholesale International

Source : Deutsche Bank, Company Filings Source : Deutsche Bank, Company Filings

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Carter's, Inc.

Falling GPM
GPM expanded 277 bps between 2014 and 2017 largely driven by: 1) lower product
costs; and 2) favorable channel mix toward e-commerce which had been accretive;
partly offset by pockets of promotional activity.

n U.S. Wholesale saw gains each year during this period, but in diminishing
quantities, as negative customer mix has become an incrementally greater
headwind.
n U.S. Retail was up in 2016 and 2017, while International has been more
volatile.

In 2018, all three segments saw GPM declines, with U.S. Retail impacted by higher
promotional activity and increased e-commerce shipping costs, U.S. Wholesale
suffering from changes in customer mix, in part due to customer bankruptcies, and
International down YOY driven by the change in business model in China and unfa-
vorable sales channel mix.

Figure 37: Last Year, GPM Slipped for the First Time Since 2014...and Not Likely
the Last

43.7%
43.4% 43.2%
43.1% 43.2% 43.1%

41.7%
41.6%
40.9%

39.4%

2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E

Source : Deutsche Bank, Company Filings. Note: CRI includes distribution costs in SG&A

Figure 38: GPM by Segment (YOY Basis Point Change)

U.S. Retail U.S. Wholesale International

2014 Lower (Carter's (90), OshKosh (20)) Lower (Carter's (100), OshKosh (120)) (400)
2015 Lower (Carter's (130), OshKosh (40)) Higher (Carter's 240, OshKosh 540) 110
2016 30 130 220
2017 80 20 (190)
2018 (40) (90) (150)
Source : Deutsche Bank, Company Filings

We believe CRI could see modest additional GPM declines in 2019 and beyond
(modeling down 12 bps in 2019, 10 bps in 2020, and 5 bps in 2021), reflecting:

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n (-) Ongoing negative customer mix shift. The company has guided to a
rebound to positive LSD growth in 2019, a level not seen since 2016, with
sales to its top five customers expected up 5%. However, these top
customers are dominated by relatively lower margin discounters (and
Amazon is likewise growing quickly), while sales to higher-margin dept.
stores and Toys "R" Us have shrunk as a part of the mix, and the group is
likely to continue to close doors and cede share. 2018 was the first year
since 2014 with a GPM decline at U.S. Wholesale, and likely not the last.
n (-) Higher e-commerce related expenses. Online has historically been
accretive for margins at CRI, as the digital channel sees fewer returns and
has a better leverage point on fixed costs. However, as the company has
ramped up efforts to expedite shipping to match elevated customer
expectations, e-commerce has more recently been cited as a drag on
margins, and we anticipate this dilutive trend to continue.
n (-) Increased promotional activity. In the near term through the Gymboree
liquidation, and also longer-term as CRI and others fight for newly available
market share (~$100M opportunity for CRI by management's estimation),
we expect disruptive pressure on GPM, especially in 1H19.

Figure 39: Carter's Email Promotion

Source : Deutsche Bank, Carter's Email Received 4/6/19

n (-) Exhausted AUC opportunities and rising input costs. At a June 2018
investor conference, management acknowledged that after lower product
costs over the past two to three years, the benefit to GPM is "perhaps
eroding a bit", with a trend toward "some modest" product cost inflation in
the marketplace. While cotton prices trended higher YOY for much of 2018,
they have seen YOY declines more recently (although the absolute price is
climbing).

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Figure 40: Cotton Prices Figure 41: YOY % Change in Cotton Prices
$0.95 40%

$0.90 30%

$0.85 20%

$0.80 10%

$0.75 0%

$0.70 (10%)

$0.65 (20%)

Source : Deutsche Bank, FactSet Source : Deutsche Bank, FactSet

n (-) FX headwinds. Given current currency rates for the Canadian Dollar and
Mexican Peso, FX could be a $7M headwind to 2019 sales growth, or 21
bps, which in turn should negatively impact GPM.
n (+) Change in Chinese business model. With CRI switching to a licensed
model in China, we expect a lift to GPM after moving past transitional costs.
n (+) Moving past Toys "R" Us and Bon-Ton bankruptcies. While negative
customer mix shift is likely to be a persistent headwind, we are hopefully
heading into a period of relatively less near-term disruption as we move past
the impact from the Toys "R" Us and Bon-Ton bankruptcies.

Rising SG&A
CRI is planning for SG&A leverage in 2019 ("it's been quite a number of years since
we set a plan like that") but we remain skeptical of this back-half weighted guidance
as we consider: 1) top-line pressures as explored earlier (ongoing door closures &
bankruptcies at retail partners, difficult industry dynamics with the U.S. birth rate
at a 30-year low, private label disintermediation; and international macro turbu-
lence and unfavorable FX); 2) higher distribution and freight costs (CRI includes this
in SG&A, not GPM); 3) rising labor costs; and 4) investments in marketing, brand
management, and digital capabilities.

CRI has a 3% retail comp leverage point, and management expects to see total com-
pany leverage vs. LSD SG&A dollar growth in 2019. We are modeling 3.0% growth
this year, moderating from 4.6% in 2018, but with 42 bps of deleverage on more
bearish top-line forecasts especially in U.S. Wholesale.

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Figure 42: The SG&A Rate Is Still Rising Figure 43: CRI Has Seen Deleverage Each Year Since 2014
200
33.3% 33.4% 16.2%
33.1%
32.7% 150

31.8% 9.9% 9.3%

100
6.1%
30.8% 31.0% 4.4% 4.6% 4.2%
3.0% 50
0.7%
29.8% 29.9%
0
29.4%

(50)

(100)

(150)
2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E

Source : Deutsche Bank, Company Filings Source : Deutsche Bank, Company Filings

Modest Benefit from Shifting Away from Outlets

"About a dozen years ago...only about 5%
CRI is partway through an extended project (over the past ~12 years) to shift away of young children's apparel was bought in
outlet centers. And there wasn't a lot of
from outlet stores (35% of the base) and toward branded ones. During the next five
growth attached to that. We decided to
years, the company plans to close over 10% of its U.S. stores as leases expire. These move that outlet model closer to where
are lower-margin stores, many in declining outlet centers. Management has dis- people lived. So we started out on a path
closed an average operating margin of less than 2% in 2017 for stores slated to close opening up stores in strip centers,
vs. over 20% for the rest. However, there's no urgent reason to accelerate these high-value strip centers." – CEO Mike
Casey, September 5, 2018
closures as the group is cash flow positive. CRI is replacing these outlet locations
by opening over 100 more profitable co-branded stores in better centers, closer to
the consumer.

Figure 44: CRI Is Shifting Away from Lower-Margin Outlet Stores

100%
90%
26%
80% 35%
51%
70%
60%
50%
40%
74%
30% 65%
49%
20%
10%
0%
2013 2018 2023E

Brand Outlet

Source : Deutsche Bank, 4Q18 Company Presentation

By our math and assuming an 1,800 bps margin differential between branded and
outlet stores, we believe additional evolution of the store base should provide a
combined boost to the total U.S. Retail margin of ~26 bps in 2019 and 2020 each
– also not necessarily material quantities, but helpful as we compare to the seg-
ment's 91 bp decline in 2018 to 12.1%.

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Carter's, Inc.

Figure 45: Breaking Down the Modest Branded Margin Lift

Assumption for Margin Differential 1,800 bps

# of Branded Stores Added in 2019 22
# of Outlet Stores Closed in 2019 15
Evolution as a % of Store Base 2%
Margin Lift to 2019 U.S. Stores 36 bps
% of Sales in Stores 73%
Margin Lift to 2019 U.S. Retail Segment 26 bps

Assumption for Margin Differential 1,800 bps

# of Branded Stores Added in 2020 19
# of Outlet Stores Closed in 2020 16
Evolution as a % of Store Base 2%
Margin Lift to 2020 U.S. Stores 36 bps
% of Sales in Stores 71%
Margin Lift to 2020 U.S. Retail Segment 26 bps
Source : Deutsche Bank

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Initiate at Hold
Slowing EPS Growth Merits a Discounted Multiple
Our $99 PT is based on 14x our 2020 EPS estimate of $7.06 (1% below the Street's
$7.16). Our target multiple is below the 10-year average of 15.5x, the five-year aver-
age of 16.3x, and the three-year average of 15.4x as we incorporate slowing EPS
growth reflecting: 1) ongoing door closures and bankruptcies at retailer partners;
2) difficult industry dynamics with the U.S. birth rate at a 30-year low; 3) a disruptive
promotional backdrop with Gymboree's bankruptcy and liquidation; and 4) interna-
tional macro turbulence. We remain well above the three- and five-year trough of
11.7x as we incorporate tailwinds from top-line initiatives gaining traction (e.g.
co-branded store conversions, Carter’s KID age up product, exclusives, Skip Hop,
Mexico).

We see an 83% correlation between CRI's forward P/E multiple and EPS growth
(annually since 2013, and adjusted to exclude the extra week in 2014), and an 85%
correlation between its multiple and constant currency organic sales growth (also
adjusted to strip out the extra week). Our modeled MSD EPS growth ahead sug-
gests a ~14x multiple through this analysis, in line with our target. CRI's 7% algo-
rithm would provide a multiple only modestly higher, at ~14.8x, assuming the rela-
tionship holds.

Figure 46: We Believe CRI Deserves a Discounted Multiple Given Slowing

Growth (Adjusted to Exclude Extra Weeks in 2014 and 2020)

19.0x 20.0%
18.0%
18.0x
16.0%
17.0x 14.0%

16.0x 12.0%
10.0%
15.0x DB Target: 8.0%
14.0x
14.0x 6.0%
4.0%
13.0x
2.0%
12.0x 0.0%
2013 2014 2015 2016 2017 2018 2019E 2020E

Forward P/E Multiple EPS Growth CC Organic Sales Growth

Source : Deutsche Bank, Company Filings, FactSet

We prefer Buy-rated apparel manufacturer peer PVH ($130.23; trading at 11.3x

2020 consensus EPS) which has a better risk/reward profile, robust constant cur-
rency top line and EPS growth (13-15% cFX algorithm exceeded in each of the past
four years, and intact going forward, in our view), and a clear path outlined for Calvin
Klein–driven margin expansion ahead.

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Carter's, Inc.

Figure 47: We Prefer PVH Which Continues to Achieve (If Not Exceed) Its EPS
Growth Algorithm
20.0x

18.0x
CRI 3-Year Average:
15.4x
16.0x

14.0x

PVH 3-Year Average:

12.0x
13.5x

10.0x

8.0x
Apr-16 Oct-16 Apr-17 Oct-17 Apr-18 Oct-18 Apr-19
CRI PVH

Source : Deutsche Bank, Company Filings

On an EV/EBITDA basis, CRI's elevated multiple vs. peers is also apparent. CRI
trades two turns above the index (consisting of GIII, HBI, PVH, RL, and TPR), at the
high end of the three-year range and above the historical average premium of only
0.6x. Considering CRI's slowing growth profile (in contrast to many peers), we don't
think a premium multiple is warranted.

Figure 48: CRI's EBITDA Multiple is Nearly Two Turns Figure 49: ...While CRI Typically Trades More In Line with
Above Peers... the Index (Premium/Discount Shown Below)
12.0x 2.5x

2.0x
11.0x
1.5x
10.0x
1.0x
9.0x 0.5x

8.0x 0.0x

-0.5x
7.0x
-1.0x
6.0x
-1.5x
Apr-16 Oct-16 Apr-17 Oct-17 Apr-18 Oct-18 Apr-19

CRI Peer Index -2.0x

Apr-16 Oct-16 Apr-17 Oct-17 Apr-18 Oct-18 Apr-19

Source : Deutsche Bank, FactSet. Note: Peer index consists of GIII, HBI, PVH, RL, and TPR Source : Deutsche Bank, FactSet

We note that CRI's stock is up 39% since its trough on 12/24 vs. the S&P 500 up 24%.

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Figure 50: CRI Stock Price (Last Two Years)

$130

$120

$110

$100

$90

$80

$70

$60
Jul-17

May-18

Jul-18
Apr-17

Nov-17
May-17
Jun-17

Mar-18
Apr-18

Nov-18

Mar-19
Apr-19
Aug-17

Jan-19
Jan-18
Feb-18

Jun-18

Aug-18
Sep-17

Dec-17

Sep-18

Dec-18

Feb-19
Oct-17

Oct-18
Source : Deutsche Bank, FactSet

Additionally, while we recognize CRI's 6.7% FCF yield on 2020E and net debt/EBIT-
DA of only 0.9x for a clean balance sheet, we see more attractive FCF yields at peers
(e.g. 8.3% at PVH) and expect stagnant levels of FCF ahead at CRI, reflecting slow-
ing EPS growth.

Figure 51: FCF ($M)

$303 $300
$292 $291
$281
$260

$204
$179

2014 2015 2016 2017 2018 2019E 2020E 2021E

Source : Deutsche Bank, Company Filings

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Carter's, Inc.

Figure 52: Condensed P&L ($M, Except Per Share Data)

P&L 1Q18 2Q18 3Q18 4Q18 1Q19E 2Q19E 3Q19E 4Q19E
Net sales $3,199.2 $3,400.1 $755.8 $696.2 $923.9 $1,086.4 $3,462.3 $725.2 $730.0 $959.5 $1,106.2 $3,520.9 $3,653.5 $3,673.1
Cost of goods sold 1,820.0 1,917.1 423.3 386.2 536.5 618.8 1,964.8 414.5 407.3 553.6 622.8 1,998.2 2,077.0 2,090.0
Gross profit 1,379.1 1,483.0 332.5 310.0 387.5 467.6 1,497.5 310.7 322.6 405.9 483.4 1,522.7 1,576.5 1,583.1
Royalty income, net 42.8 43.2 8.0 10.4 10.2 10.4 38.9 11.0 13.5 13.2 13.5 51.2 55.0 57.0
SG&A 995.4 1,106.9 280.2 263.3 294.1 307.4 1,145.0 273.8 273.4 305.9 316.6 1,169.6 1,216.7 1,225.3
Operating income 426.6 419.2 60.3 57.0 103.6 170.6 391.4 48.0 62.8 113.2 180.3 404.2 414.8 414.7
Interest expense 27.0 30.0 8.0 7.9 9.9 8.8 34.6 8.8 8.8 8.8 8.8 35.1 35.1 35.1
Interest income (0.6) (0.3) (0.2) (0.2) (0.1) (0.1) (0.5) (0.2) (0.2) (0.2) 0.1 (0.5) (1.0) (1.0)
Other (income) expense, net 4.0 (1.2) (0.4) 1.0 (0.1) 0.9 1.4 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Income before taxes 396.1 390.7 52.9 48.3 93.8 161.0 356.0 39.4 54.2 104.6 171.4 369.6 380.7 380.7
Tax expense 138.0 88.1 10.4 11.0 22.1 30.4 73.9 8.3 11.4 22.0 36.0 77.6 79.9 79.9
Net income 258.1 302.6 42.5 37.3 71.8 130.6 282.1 31.1 42.8 82.6 135.4 292.0 300.7 300.7
To participating securities (2.0) (2.2) (0.4) (0.3) (0.6) (1.0) (2.2) (0.4) (0.3) (0.6) (1.0) (2.3) (2.4) (2.5)
NI to common shareholders 256.1 300.4 42.1 37.0 71.2 129.6 279.8 30.7 42.5 82.0 134.4 289.7 298.3 298.2
Reported EPS $5.08 $6.24 $0.89 $0.79 $1.53 $2.83 $6.04 $0.68 $0.95 $1.85 $3.07 $6.55 $7.06 $7.41
Adjustments to EPS $0.06 ($0.48) $0.20 $0.00 $0.08 $0.01 $0.28 $0.04 $0.00 $0.00 $0.00 $0.04 $0.00 $0.00
Operating EPS (Non-GAAP) $5.14 $5.76 $1.09 $0.79 $1.61 $2.84 $6.29 $0.72 $0.95 $1.85 $3.07 $6.59 $7.06 $7.41
Diluted shares outstanding 50.4 48.1 47.4 46.9 46.5 45.8 46.6 45.3 44.8 44.3 43.8 44.2 42.2 40.2

Sales and Margin Analysis 1Q18 2Q18 3Q18 4Q18 1Q19E 2Q19E 3Q19E 4Q19E
Sales growth 6.1% 6.3% 3.1% 0.6% (2.6%) 5.8% 1.8% (4.0%) 4.8% 3.9% 1.8% 1.7% 3.8% 0.5%
U.S. Retail 9.4% 7.1% 5.5% 2.7% 1.2% 7.2% 4.3% 0.0% 7.3% 5.7% 2.6% 3.9% 4.2% 1.2%
Wholesale 0.4% 2.7% (4.0%) (3.8%) (8.3%) 6.5% (2.4%) (9.0%) 1.0% 2.5% 0.5% (1.1%) 1.8% (1.0%)
International 11.8% 13.9% 19.3% 2.6% 1.0% (2.4%) 3.6% (5.8%) 2.7% 0.6% 1.8% 0.0% 7.1% 1.6%
Organic sales growth cFX 6.4% 2.6% 0.2% (0.3%) (2.4%) 6.1% 1.2% (3.1%) 5.5% 4.4% 2.1% 2.3% 3.8% 0.5%
GPM 43.1% 43.7% 44.0% 44.5% 42.2% 43.2% 43.4% 42.9% 44.2% 42.3% 43.7% 43.2% 43.2% 43.1%
SG&A as % of sales 31.0% 31.8% 35.4% 37.8% 31.7% 28.4% 32.7% 37.4% 37.4% 31.9% 28.6% 33.1% 33.3% 33.4%
EBIT margin 13.5% 13.1% 9.6% 8.2% 11.6% 15.7% 11.8% 7.0% 8.6% 11.8% 16.3% 11.6% 11.4% 11.3%
EBIT growth 7.6% 3.1% (9.5%) (13.2%) (18.2%) 1.5% (8.4%) (30.6%) 10.2% 5.7% 5.7% (0.1%) 2.0% (0.0%)
EPS growth 11.5% 12.0% 12.2% (0.4%) (5.4%) 21.8% 9.2% (33.7%) 20.5% 15.2% 8.2% 4.8% 7.1% 4.9%
EPS growth cFX (ex. 53rd week) 11.8% 11.7% 12.0% (0.7%) (4.9%) 22.3% 9.3% (33.5%) 20.9% 15.4% 8.2% 5.1% 5.4% 6.7%

Source : Deutsche Bank, Company Filings

Risks to Our Hold Rating

To the upside, key risks include:

n U.S. Wholesale improvement with exclusives and stabilization in the

customer base. In 2018, CRI's top five customers (Walmart, Kohl's, Target,
Costco, and Macy's) accounted for ~60% of the segment's sales, with ~4%
YOY growth for that group. The company has guided to a rebound to
positive LSD growth for the segment in 2019, a level not seen since 2016,
with sales to its top five customers expected to rise 5%. We take a more
skeptical stance, modeling sales down -1.1% in 2019, but our forecast
could prove overly pessimistic should exclusives at key partners accelerate
gains. Additionally, an improved dept. store backdrop would benefit CRI.
n Margin improvement in moving past disruptive promotional activity. As
we move past the Gymboree liquidation, promotional activity may return to
a more favorable cadence, offering opportunity for margin recapture.
n Reignited growth in China. With the switch to a licensed model, CRI could
better capitalize on the large China market opportunity ($24B with 4x the
number of annual births relative to the U.S.), and over time replicate the
success seen in Canada and Mexico, both started through licensing
agreements.

To the downside, key risks include:

n Further U.S. Wholesale declines through customer bankruptcies, door

closures, or shifts toward private label. In 2018, CRI derived 34% of its total
sales from U.S. Wholesale (and nearly half of its EBIT), and ~30% of
consolidated sales were from its top 10 wholesale customers. CRI does not
enter into long-term sales contracts with its major wholesale customers,
instead relying on product performance, long-standing relationships, and
market position.
n Continued share loss in the competitive and fragmented childrenswear

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space. Both Carter's and OshKosh slipped in terms of market share in 2018,
and could see further losses as both branded and private label competitors
invest in marketing, personalization, supply chain, and price.
n Lower birth rates pressuring unit growth. With the U.S. birth rate at a 30-
year low, industry dynamics could constrain market growth, and in turn
CRI's sales and EPS growth trends.

Deutsche Bank Securities Inc. Page 35

16 April 2019
Apparel, Footwear & Textiles
Carter's, Inc.

1Q Preview
We Are Modeling 1Q EPS Above Guidance, In Line with
Consensus
We expect CRI to report 1Q EPS of $0.72, in line with the Street and two pennies
above guidance of $0.65-0.70 as provided on 2/25. CRI has beaten 1Q consensus
in each of the past five years, by an average of 11c, suggesting potential upside to
our numbers vs. management's track record of conservative planning.

March is a very significant month for CRI's

Figure 53: CRI Has Seen Only Two Quarterly EPS Misses in the Past Five Years U.S. Retail business, roughly equal in
volume to January and February combined.
Quarter Date Reported Actual Street Delta Result
Considering meaningful weather disruption
1Q14 4/28/2014 $0.73 NA $0.71 $0.02 Beat in March 2018 and directionally better
2Q14 7/24/2014 $0.61 NA $0.47 $0.14 Beat SpendTrend data in March 2019, we
3Q14 10/23/2014 $1.27 NA $1.24 $0.03 Beat believe CRI ended 1Q on a strong note
4Q14 2/26/2015 $1.32 NA $1.27 $0.05 Beat
1Q15 4/29/2015 $0.97 NA $0.74 $0.23 Beat
2Q15 7/29/2015 $0.73 NA $0.63 $0.10 Beat
3Q15 10/29/2015 $1.52 NA $1.46 $0.06 Beat
4Q15 2/25/2016 $1.40 NA $1.29 $0.11 Beat
1Q16 4/28/2016 $1.05 NA $1.00 $0.05 Beat
2Q16 7/27/2016 $0.72 NA $0.66 $0.06 Beat
3Q16 10/27/2016 $1.61 NA $1.67 ($0.06) Miss
4Q16 2/23/2017 $1.79 NA $1.67 $0.12 Beat
1Q17 4/27/2017 $0.97 NA $0.84 $0.13 Beat
2Q17 7/27/2017 $0.79 NA $0.70 $0.09 Beat
3Q17 10/26/2017 $1.70 NA $1.65 $0.05 Beat
4Q17 2/27/2018 $2.33 NA $2.20 $0.13 Beat
1Q18 4/26/2018 $1.09 NA $0.98 $0.11 Beat
2Q18 7/26/2018 $0.79 NA $0.57 $0.22 Beat
3Q18 10/25/2018 $1.61 NA $1.73 ($0.12) Miss
4Q18 2/25/2019 $2.84 NA $2.56 $0.28 Beat
1Q19E TBD TBD $0.72 $0.72 TBD TBD
Source : Deutsche Bank, Company Filings, FactSet

In more detail, we are modeling net sales down -4.0%, at the better end of guidance
of -4.0% to -5.0% (Street -4.2%), which is affected by comparisons to discontinued
sales to Toys "R" Us and Bon-Ton in 2018 and a late Easter. SpendTrend children's
and infant wear stores were up 4.3% in January, down -9.4% in February, and down
-2.1% in March (improving from -2.8% mid-month and -2.3% preliminary). CRI has
only a 46% correlation with SpendTrend data since 1Q13 (calculating a U.S. Retail
comp through 2016 based on Carter's and OshKosh brand disclosure), and was
much more closely tied from 2015 to 1H17. Over the past two years, CRI has gener-
ally outperformed SpendTrend, but the company's SSS do often still directionally
follow industry trends.

Page 36 Deutsche Bank Securities Inc.

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Figure 54: CRI SSS vs. SpendTrend Children's & Infant Wear Stores (Through
March)

10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
-2.0%
-4.0%
-6.0%
-8.0%
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
4Q18
1Q19
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15

CRI SpendTrend

Source : Deutsche Bank, First Data SpendTrend, Bloomberg Finance LP. Note: U.S. Retail comp through 2016 based on Carter's and OshKosh
brand disclosure

We also expect U.S. Wholesale to be down -9.0% (or -6.3% on an organic basis) as
CRI continues to lap last year's sales to Toys "R" Us and Bon-Ton (though we do
acknowledge a "particularly good" start to 1Q at wholesale, as stated on the 4Q
conference call), as well as International segment sales down -5.8% (or up 1.9% on
an organic constant currency basis) reflecting China moving into royalty income
($12M in annual sales, or ~330 bps unfavorable impact in 1Q for the International
segment) and FX headwinds (we estimate $4.1M in 1Q, or 445 bps of negative
impact to segment sales growth).

Moving down the P&L, we expect GPM down 114 bps in 1Q reflecting the slow start
to the year and higher freight expenses, and SG&A up 1.3% for 197 bps of delever-
age (SG&A has increased YOY every quarter in our model back through 1Q13), for
EBIT margin down 266 bps to 7.0%.

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Figure 55: 1Q19 Estimates vs. 1Q18 Actuals ($M, Except Per Share Data)

CRI Quarterly Results 1Q19E DB 1Q18A YOY Growth 1Q19E Street YOY Growth
Net sales $725.2 $755.8 (4.0%) $724.0 (4.2%)
Cost of goods sold 414.5 423.3 (2.1%)
Gross profit 310.7 332.5 (6.5%) 308.0 (7.4%)
Royalty income, net 11.0 8.0 37.6%
SG&A 273.8 280.2 (2.3%)
Adjusted SG&A 271.3 267.8 1.3% 266.0 (0.7%)
Operating income 48.0 60.3 (20.5%)
Adjusted operating income 50.5 72.7 (30.6%) 50.0 (31.2%)
Interest expense 8.8 8.0 9.9%
Interest income (0.2) (0.2) 28.1%
Other (income) expense, net 0.0 (0.4)
Income before taxes 39.4 52.9 (25.5%) 42.0 (20.6%)
Tax expense 8.3 10.4 (20.5%) 9.0 (13.5%)
Net income 31.1 42.5 (26.7%)
Income to participating securities (0.4) (0.4) 0.8%
NI to common shareholders $30.7 $42.1 (27.0%) $33.0 (21.6%)
Reported EPS $0.68 $0.89 (23.6%)
Adjustments to EPS $0.04 $0.20
Operating EPS (Non-GAAP) $0.72 $1.09 (33.7%) $0.72 (33.9%)
Diluted shares 45.3 47.4 (4.4%)

Margin and Growth Analysis 1Q19E DB 1Q18A YOY Growth 1Q19E Street YOY Growth
Adj. gross profit margin 42.9% 44.0% (114) bps 42.5% (145) bps
Adj. SG&A as a % of sales 37.4% 35.4% 197 bps 36.7% 131 bps
Adj. operating margin 7.0% 9.6% (266) bps 6.9% (271) bps
Tax rate 21.0% 19.7% 132 bps 21.4% 175 bps
Reported EPS growth (23.6%) (6.1%) (1746) bps
Operating EPS growth (33.7%) 12.2% (4591) bps (33.9%) (4610) bps

Segment Analysis 1Q19E DB 1Q18A YOY Growth 1Q19E Street YOY Growth
Sales
U.S. comp (2.5%) 3.0% (550) bps
U.S. Retail $383.8 $383.7 0.0% $374.0 (2.5%)
U.S. Wholesale 255.6 280.8 (9.0%) 263.0 (6.3%)
International 85.9 91.2 (5.8%) 85.0 (6.8%)
EBIT
U.S. Retail $21.5 $29.5 (27.2%) $27.0 (8.5%)
Margin 5.6% 7.7% (209) bps 7.2% (47) bps
U.S. Wholesale 49.6 50.3 (1.4%) 44.0 (12.5%)
Margin 19.4% 17.9% 150 bps 16.7% (117) bps
International 2.5 3.8 (33.5%) 4.0 6.3%
Margin 2.9% 4.1% (121) bps 4.7% 58 bps
Corporate expenses (23.6) (23.2) 0 bps

Balance Sheet and Cash Flow 1Q19E DB 1Q18A YOY Growth 1Q19E Street YOY Growth
Inventory growth 4.0% 10.3%
Source : Deutsche Bank, Company Filings, FactSet

We Expect In-Line 2Q Guidance with Easter Benefit

We believe CRI could guide to positive 5% sales growth in 2Q (DB 4.8%; Street We believe CRI could guide to positive 5%
4.7%) based on the Easter calendar shift and improving weather. Management not- sales growth in 2Q (DB 4.8%; Street 4.7%)
based on the Easter shift and improving
ed on the 4Q call that the shift "pushes about two points" of comp into 2Q. As we
weather
look back to years with a similar holiday cadence, 2017 saw a 950 bp sequential
acceleration in 2Q SSS, and 2014 saw ~615 bps of acceleration (based on 670 bps
at Carter's and 390 bps at OshKosh). We are modeling 2Q comp up 5.0% vs. 1Q
down -2.5% (-LSD guidance and running slightly behind that as of 2/25) for 750 bps
of acceleration, only slightly below the average of the prior two examples.

We also expect management to provide 2Q EPS guidance of ~$0.95 (in line with our
forecast; Street $0.97) with a YOY GPM decline sequentially less severe than in 1Q.
For the full year, we anticipate a reiterated plan of 4-6% EPS growth as it remains
early in the year (DB 4.8%; Street 5.1%).

Page 38 Deutsche Bank Securities Inc.

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Figure 56: Summary of Guidance vs. DB Forecasts

Carter's, Inc. (CRI) 1Q19 1Q19 FY19 FY19 FY19
Guidance ($M, except where noted) CRI DB Ests. CRI CRI DB Ests.
Date issued 2/25/2019 10/25/2018 2/25/2019

Down -4% to -5%, expected

to be affected by 1%-2%, expected to be
comparisons to discontinued affected by comparisons to
sales to Toys “R” Us and Bon- discontinued sales to Toys
Net sales growth (4.0%) 1.7%
Ton in the prior year and a “R” Us and Bon-Ton in the
later Easter holiday in 2019 prior year and a later Easter
than in 2018; QTD results holiday in 2019 than in 2018
below expectations

Down LSD; running slightly

behind that QTD; Easter
U.S. Retail comp (2.5%)
shifts 2 points of comp into

U.S. Retail growth Up LSD 3.9%

Up LSD, with sales to CRI's
U.S. Wholesale growth (9.0%) Up LSD (1.1%)
top 5 customers up ~5%
Good overall growth, with
growth in Canada and Up LSD, including transition
Mexico, and new wholesale of China e-commerce and
International growth (5.8%) 0.0%
partners in India, U.K., Russia, wholesale to licensed model
Greece, and Ukraine (among in early 2019
others)
Down YOY including the slow Expansion in 2H; looking for
GPM start to the year and higher Down 114 bps more comparability for the full Down 12 bps
freight expenses year
SG&A growth Up LSD 3.0%
SG&A leverage Planning for leverage 42 bps deleverage
Effective tax rate Low 20% range 21.0%

4%-6%, expected to be
affected by comparisons to
discontinued sales to Toys
Adjusted diluted EPS growth (34%)
“R” Us and Bon-Ton in the
prior year and a later Easter
holiday in 2019 than in 2018

Diluted EPS $0.65-$0.70 $0.72 Implied ~$6.52-$6.69 $6.59

Operating cash flow $86M $375-$400M
U.S. retail openings 5 ~30 30
U.S. retail closings 13 ~23 23
Canada projected store count 189 10 new stores (198 implied) 198
Capex $21M $85M $85M

Source : Deutsche Bank, Company Filings

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Appendix 1
Important Disclosures
*Other information available upon request
Disclosure checklist
Company Ticker Recent price* Disclosure
Carter's, Inc. CRI.N 105.11 (USD) 15 Apr 2019 NA
*Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors . Other
information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary
subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at https://research.db.com/Research/Disclosures/
CompanySearch. Aside from within this report, important risk and conflict disclosures can also be found at https://research.db.com/Research/Topics/Equities?topicId=RB0002. Investors
are strongly encouraged to review this information before investing.

Important Disclosures Required by U.S. Regulators

Disclosures marked with an asterisk may also be required by at least one jurisdiction in addition to the United States.See
Important Disclosures Required by Non-US Regulators and Explanatory Notes.

Important Disclosures Required by Non-U.S. Regulators

Disclosures marked with an asterisk may also be required by at least one jurisdiction in addition to the United States.See
Important Disclosures Required by Non-US Regulators and Explanatory Notes.

For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this
research, please see the most recently published company report or visit our global disclosure look-up page on our website
at https://research.db.com/Research/Disclosures/CompanySearch

Analyst Certification
The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) about the subject
issuer and the securities of the issuer. In addition, the undersigned lead analyst(s) has not and will not receive any
compensation for providing a specific recommendation or view in this report. Tiffany Kanaga.

Historical recommendations and target price: Carter's, Inc. (CRI.N)

(as of 04/15/2019)
150.00 Current Recommendations
Buy
Hold
125.00 Sell
Not Rated
Suspended Rating
100.00
Security price

** Analyst is no longer at
Deutsche Bank
75.00

50.00

25.00

0.00
Jul '16 Jan '17 Jul '17 Jan '18 Jul '18 Jan '19
Date
§§§§$$$$$§§§§§

Page 40 Deutsche Bank Securities Inc.

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Apparel, Footwear & Textiles
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Equity Rating Key Equity rating dispersion and banking relationships

Buy: Based on a current 12- month view of total share-holder

return (TSR = percentage change in share price from current
price to projected target price plus pro-jected dividend yield ) ,
we recommend that investors buy the stock.
Sell: Based on a current 12-month view of total share-holder
return, we recommend that investors sell the stock.
Hold: We take a neutral view on the stock 12-months out and,
based on this time horizon, do not recommend either a Buy or
Sell.

Newly issued research recommendations and target prices

supersede previously published research.

Deutsche Bank Securities Inc. Page 41

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issuers they cover.

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Deutsche Bank Securities Inc. Page 45

 David Folkerts-Landau
Group Chief Economist and Global Head of Research

Pam Finelli Michael Spencer Steve Pollard

Global Chief Operating Officer Head of APAC Research Head of Americas Research
Research Global Head of Equity Research

Anthony Klarman Kinner Lakhani Joe Liew

Global Head of Head of EMEA Head of APAC
Debt Research Equity Research Equity Research

Jim Reid Francis Yared George Saravelos Peter Hooper

Global Head of Global Head of Rates Research Head of FX Research Global Head of
Thematic Research Economic Research

Andreas Neubauer Spyros Mesomeris

Head of Germany Research Global Head of Quantitative
and QIS Research

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