Shareholders of Carter's would probably like to forget the past six months even happened. The stock dropped 40.3% and now trades at $40.01. This might have investors contemplating their next move.

Is there a buying opportunity in Carter's, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.

Even with the cheaper entry price, we're sitting this one out for now. Here are three reasons why you should be careful with CRI and a stock we'd rather own.

Why Do We Think Carter's Will Underperform?

Rumored to sell more than 10 products for every child born in the United States, Carter's (NYSE:CRI) is an American designer and marketer of children's apparel.

1. Shrinking Same-Store Sales Indicate Waning Demand

Investors interested in Apparel and Accessories companies should track same-store sales in addition to reported revenue. This metric measures the change in sales at brick-and-mortar locations that have existed for at least a year, giving visibility into Carter’s underlying demand characteristics.

Over the last two years, Carter’s same-store sales averaged 9.8% year-on-year declines. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests Carter's might have to close some locations or change its strategy and pricing, which can disrupt operations.

2. Revenue Projections Show Stormy Skies Ahead

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect Carter’s revenue to drop by 1.1%. Although this projection is better than its two-year trend, it's hard to get excited about a company that is struggling with demand.

3. New Investments Fail to Bear Fruit as ROIC Declines

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

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Carter’s ROIC has unfortunately decreased. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Final Judgment

Carter's falls short of our quality standards. After the recent drawdown, the stock trades at 7.9× forward price-to-earnings (or $40.01 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are superior stocks to buy right now. We’d recommend looking at the most entrenched endpoint security platform on the market.

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