Moody’s changes Carter’s outlook to negative, affirms Ba2 rating

Moody’s Ratings has revised The William Carter Company’s outlook to negative from stable, while affirming its Ba2 corporate family rating, citing persistent pressure on operating income and free cash flow. This pressure is driven by a challenging consumer environment, significant annual tariff costs of $200-250 million necessitating price increases, and secular declines in birth rates. Despite Carter's leading market position in baby and toddler apparel and balanced financial strategies, Moody's projects a weakening EBITA/Interest ratio to 2.0x-2.8x over the next 12-18 months, even as the company implements restructuring, including closing 150 stores and reducing its annual dividend.

Analysis

Moody's Ratings has revised The William Carter Company's (CRI) outlook to negative from stable, while affirming its Ba2 corporate family rating. This change reflects ongoing pressure on Carter's operating income and free cash flow, primarily due to a challenging consumer environment and significant annual tariff costs estimated at $200-250 million, which necessitate price increases.

The company also contends with secular pressure from declining birth rates, which impacts its core market. Moody's projects Carter's EBITA/Interest ratio to weaken to between 2.0x-2.8x over the next 12-18 months, approaching the 3.0x threshold for a potential downgrade. Despite a leading 11% market share in baby and toddler apparel and a current debt-to-EBITDA of 2.9x, these headwinds are substantial.

To mitigate these challenges, Carter's is implementing operational restructuring, including plans to close approximately 150 stores and a reduction in its annual dividend to $36 million. The Ba2 rating affirmation depends on maintaining lease-adjusted debt/EBITDA below 3.75x and EBITA/interest expense above 4.0x, while sustained debt/EBITDA above 4.5x or EBITA/Interest below 3.0x could trigger a downgrade.

Key Decisions for Investors

• Investors should closely monitor Carter's (CRI) execution of its restructuring plan, including the impact of 150 store closures and the dividend reduction, on its free cash flow and profitability.
• The projected weakening of Carter's EBITA/Interest ratio to 2.0x-2.8x over the next 12-18 months signals increased credit risk, warranting careful assessment against Moody's downgrade trigger of 3.0x.
• Given the challenging consumer environment, persistent tariff pressures, and secular decline in birth rates, investors should adopt a cautious stance and evaluate the company's ability to stabilize its market position and credit profile.