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RPT-ANALYSIS-Birth rate, low debt favor baby clothes retailer Carter's

(Repeating to additional subscribers)

NEW YORK, Feb 21 (Reuters) - After taking a hammering during the last recession, the U.S. birth rate is expected to begin to recover in the next two years, demographers say. That should spell good news for sellers of baby products - from booties to bibs - and some investors and analysts are picking baby and children's clothing retailer Carter's Inc as the best way to play the rebound.

They cite the broad distribution of its products in the company's own stores, through department stores, and a fast-growing online business - which means it isn't dependent on one way to reach consumers.

That, and its focus on standalone stores rather than malls, means it has a better chance of avoiding discounting wars. Major rivals, such as Gap Inc and Gymboree Co., rely more on their own stores in malls.

Carter's sturdy balance sheet (with little debt), its strong cash flow, and expectations that it will continue to open new stores at a brisk pace are further attractions. And it could all make the company a possibly buyout target for private equity firms, said Morningstar analyst Jamie Katz.

A 13 percent decline in Carter's shares from their 52-week high in September - mainly because it cut its fourth-quarter outlook partly due to higher-than-expected capital expenditures - have also encouraged investors. Its forward price-to-earnings ratio, based on Wall Street expectations for the current fiscal year, is 17. That's slightly below the 19.9 ratio of the S&P 500 Specialty Retail index, a group that includes retailers such as Gap, Urban Outfitters, and Ross Stores.

Twenty-three funds added Carter's to their portfolios in the last quarter of last year, according to Morningstar data, up from 12 in the third quarter, bringing the total ownership of the stock to 366 funds.

GROWTH PLANS

Carter's already has 19 percent of the $21 billion children's clothing market in the U.S., according to Katz, and she says its 663 stores - 495 of which are under its own name and 168 are under its Oshkosh B'Gosh brand - should grow to 1,100 in the U.S. over the next decade as the company continues the build out of its own locations. Carter's own brand focuses on clothes for babies and children up to the age of 7, while the Oshkosh line targets kids aged 8-12.

If it succeeds in growing at such a pace the company will be getting a larger share of a bigger market, with the expected change in the birth rate part of the positive backdrop.

After tumbling more than 8 percent on the way to record lows after the 2008 financial crisis, the U.S. birth rate is expected to increase over the next two years for the first time since 2007 as young people gain more confidence to start families because of the stronger economy, demographers say.

Even a modest increase in the birth rate - a measure of the number of births per 1,000 women aged 15 to 44 - to 1.9 from its current rate of 1.87 would result in more than 50,000 additional babies born in the country per year, said Samuel Sturgeon, the head of Virginia-based Demographics Intelligence, a consultant firm that had worked with companies such as Disney and Procter and Gamble.

Carter's, which has a market value of $3.6 billion, sells through department stores like Macy's and discount stores like Target Corp as well as its own shops.

"In terms of their reach, from department stores to discount stores to their own outlets, their competition doesn't really exist," said Steven Marotta, an analyst at CL King & Associates who covers the company.

And the birth rate change isn't the only demographic help Carter's is getting, according to Katz, who says that the 79 million Baby Boomers are pouring plenty of consumer buying power into the infant product market as they become grandparents.

HIGHER MARGINS

Investors will be hoping that last October's earnings warning - which saw the stock drop 8.5 percent in a day - was just a blip. Before that, Carter's had topped expectations for more than 10 straight quarters.

One great thing about the infant market is that there is less danger of marketing missteps. "Toddlers don't tend to be fickle about their fashions," said Stephen Dodson, portfolio manager of the $8.1 million Bretton Fund. "With baby clothes you can have classic brand that grandparents buy, parents buy."

Much of Carter's expansion is coming in higher-margin locations outside of traditional shopping malls, which should help it stand out from competitors like Gap's Old Navy brand, which is found almost exclusivley in malls, said Rick Patel, an analyst at brokerage Stephens.

"Within a mall you face a lot of competitive pressure from discounts and promotions and they (Carter's) are avoiding that by setting up their own outlets and investing in their e-commerce platform," Patel said.

Revenues in the company's retail division, which includes its own stores and its online business, posted operating margins of 19 percent in the third quarter, compared with an operating margin of 17.8 percent in its wholesale division, which includes sales made through department stores and other partners. Its retail sales grew by 15.5 percent over the 12 months to September as it opened 17 new locations and saw a 53 percent increase in e-commerce revenues.

Analysts polled by Reuters expect the company to report full-year earnings per share of $3.37 when it reports its fourth-quarter results on Feb 26, slightly above the company's guidance of $3.33 per share. At approximately $67.95 per share, the company's shares are 17 percent below the median target price from Wall Street analysts of $81.50 per share, a gap larger than many of its competitors. Shares of competitor Children's Place, for example, are just 10 percent below analysts' average projections.

Some funds may also be attracted by the prospect that the company's strong finances will make it an attractive candidate for a private equity buyout, Katz noted.

That strong balance sheet and the expansion of its stores may ultimately be as strong an attraction as the increasing number of new parents in the U.S., said Patel.

"Whether the demographics play out remains to be seen. This is a company that we think has tremendous legs" in terms of its footprint alone, he said.

(Reporting by David Randall; Edited by Martin Howell)

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