Recession Makes Parents Scrimp On Own Clothes, But Not Baby's

The littlest consumer is the best consumer.

While parents may scrimp on their own clothing allowances during the recession, they won't on their baby's, making basic baby apparel one of the most defensive discretionary consumer categories in the economic downturn, several industry watchers said.

Main sector players Carter's Inc. (CRI) and Gap Inc. (GPS) saw good numbers in the baby clothes business in the first three months of the year, and market watchers and retailers expect the trend to continue when second-quarter results are issued later this month and next.

Newborns bring excitement to parents and a strong incentive for them to shop for baby cloths. Additionally, the turnaround rate of baby clothes is faster than for kids and adults, giving baby-product makers better immunity to the economic downturn. Young parents are more willing to sacrifice extra little luxuries for themselves to pay for a one-piece outfit or cotton baby sleepwear.

Research firm IBISWorld Inc. says the current recession will be have a moderately negative impact on the industry, with price-conscious parents and other consumers only cutting back on their spending for children's clothing a little.

Revenue from infants' and children's apparel in the U.S. stood at $10.5 billion in 2007, falling only 1.8% in 2008, according to IBISWorld senior analyst George Van Horn. While IBISWorld projects a 0.9% drop this year, the research firm sees a 2.5% rebound in 2010. By comparison, the overall apparel market, which includes accessories and footwear, stood at $322.5 billion in 2007, and fell about 2.3% in 2008 to $315.1 billion.

"Kids' clothing is less responsive to economic conditions than men's and women's clothing...as children are growing and parents find it difficult to cut back on spending for their kids," IBISWorld said in a research report.

Carter's "Just One Year" line sold exclusively at Target Corp. (TGT) has seen strong sales, said Target spokeswoman Jana O'Leary, who declined to give specific sales numbers for baby apparel, adding only that "baby apparel sales are performing well."

Carter's is also seeing better sales in its once high-flying OshKosh B'Gosh line. The toddler apparel brand, which sustained losses for the company in 2007 and early 2008, has recently seen strong demand from parents despite the deepest recession in decades.

Scott Krasik, an analyst from C.L. King & Associates, raised Carter's fiscal 2009 estimate to $1.73 per share from $1.58 per share and reiterated his "strong buy" rating on the stock last week, increasing his price target to $30 from $26.

Carter's shares have risen nearly 67% over the past year, changing hands Wednesday at $23.11. However, Gap, which has a much broader range of clothing lines, including adult, has fallen nearly 10% over the past 12 months, trading Wednesday around $15.13.

"With the OshKosh turnaround on track and the opportunity to exceed expectations over the next few quarters, we believe a premium multiple for [the stock price] is warranted," said Krasik.

During a conference call in June, Carter's said it has seen over the past 18 months an increase in coupon use and better response to its sales. While parents are purchasing more basic clothing items, they are cutting back on the special occasion outfits. Thrift consumers are also asking for more durable clothes. Carter's has introduced more mix-and-match products that can be worn for different occasions and matched with other outfits.

Over at Gap, Evan Price, vice president of investor relations, said in a conference call in June that "on a comp basis by division, baby performed better than kids and adults" in April and May.

Adult clothes aren't really necessities in an economic crisis, said Julie Hennessy, a consumer behavior and marketing strategy professor at Kellogg School of Management at Northwestern University, adding that Carter's and OshKosh should do well during the economic downturn because they are "fairly basic brands in infant wear."

"You can wear what you've worn last year, but babies cannot," she said. "Parents, especially parents expecting their first child, are extremely emotionally involved in what they buy their children."

-By Kate Zhao, Dow Jones Newswires; 212-416-2665; [e-mail]