Carter's has room for continued growth in children's clothing

"Children grow out of their clothes," she said. "It's more out of necessity than trendy."

Atlanta-based Carter's has benefited from that fact of life. The company saw sales grow 8 percent in the first half of 2010 and adjusted earnings per share rose 47 percent.

No one from Carter's would comment, but analysts said they see opportunities for continued growth from the retailer, including the possibility of a leveraged buyout by a private equity firm. Carter's has been owned by private equity firms in the past, BB&T Capital Markets senior research analyst Scott Krasik said, and the firm's research shows Carter's could support a higher share price than the current $27 range.

Earlier this week, children's clothing retailer Gymboree Corp. announced it had been bought by private equity firm Bain Capital LLC for $1.8 billion.

"The stock has been pretty strong since the Gymboree announcement," Krasik said of Carter's. "People view it as a potential target. We think it can work."

But Krasik said Carter's also has other opportunities for growth. It has been opening stores aggressively, he said, and expanding its e-commerce site, targeting busy shoppers. Additionally, Carter's wholesale business has been growing faster than the category.

Competitor The Children's Place is accelerating new store growth, improving its e-commerce offerings and sharpening its marketing as well, vice president of investor and public relations Jane Singer said in an e-mailed statement.

“We believe The Children’s Place has a unique and enviable position in the market place, and we are excited about the growth prospects for the company," she wrote.

Panteva said the category is a competitive one, but because Carter's is a strong brand that is well-respected in the industry, it has continued to see improvements. Carter's market share has risen to nearly 9 percent of the $9.4 billion children's clothing market, she said.

"The brand is really what's driving them," she said. "There's definitely room for growth."

Other brands are entering the children's clothing category, but NPD Group chief retail analyst Marshal Cohen said it can be a tricky one. The business has low margins, he said, and parents often seek names that have been around for some time. Price is now less of an issue than reputation, he said.

Cohen said that because children's clothing endures, it is a good category to be in if a retailer can succeed in it. Because children's clothing did not fall off in sales as much as other clothing categories did, he expects less movement in the category.

Family clothing is an $83.3 billion business, Panteva said, more than half of the $161 billion clothing sector. The children's portion is a small part of the total.

Panteva said she does not expect the purchase of Gymboree to have much of an effect on other clothing companies.

"If it doesn't change the business plan, it shouldn't change the market share," she said.

Carter's benefits by focusing on basics for younger children, who grow rapidly, Cohen said. The category is less fashion-driven, though he said growth can come from retailers that are more innovative in their offerings.

Cohen said, too, that because one of the easiest ways to grow is through acquisition, almost all companies are in a position to be bought out. But, he said, Gymboree's purchase could make more room in the market for Carter's.

"It's an opportunity for them to really dig in, take advantage of a state of transition," he said. "They should not stay [with] the status quo; they should ramp it up even more."