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CI

CARTERS INC (CRI)·Q2 2026 Earnings Summary

Executive Summary

  • Q2 results showed stabilizing top-line with net sales $585.3M (+3.7% YoY) and a revenue beat vs S&P Global consensus, but profitability materially compressed: GAAP EPS $0.01 and adjusted EPS $0.17, both down sharply YoY and adjusted EPS missing consensus; adjusted operating margin fell to 2.0% from 7.0% a year ago .
  • Management suspended FY25 guidance given leadership transition and significant tariff uncertainty; H2 FY25 net baseline tariffs are expected to reduce pre-tax earnings by ~$35M, with a plan to offset fully in 2026 through pricing, vendor cost-sharing, and mix shifts .
  • Direct-to-consumer momentum continued: U.S. Retail comps +2.2%, with strong Baby category growth and improving traffic and conversion; International strength (Canada comp +8%, Mexico comp +19%) partially offset wholesale mix pressure .
  • Capital allocation shifted: dividend paid in Q2 was $0.25 per share vs $0.80 in Q1; no buybacks in H1 .

What Went Well and What Went Wrong

What Went Well

  • Direct-to-consumer comps improved: U.S. Retail comparable net sales +2.2%; management cited momentum in store traffic, conversion, and demand for core Baby apparel .
  • International segment outperformed: net sales +14.1% YoY; Canada comp +8%, Mexico comp +19%; Brazil wholesale demand strong .
  • Baby category strength: Carter’s Baby sales grew +10% YoY in Q2 in owned channels; higher-AUR “best” products (e.g., PurelySoft, Little Planet) resonated, underpinning strategy to lean into premium assortments .
  • CEO tone: “We are encouraged by improving business trends… Returning Carter’s to long-term, sustainable, and profitable growth is our highest imperative,” reinforcing brand-led product and pricing strategy .

What Went Wrong

  • Profitability collapsed: GAAP operating income fell to $4.0M (0.7% margin); adjusted operating income $11.8M (2.0% margin), reflecting pricing investments, new/remodeled stores, operating model improvement and leadership transition costs, and higher performance-based comp .
  • Gross margin pressure and SG&A deleverage: CFO flagged gross margin down ~200 bps YoY (pricing investments, off-price clearance mix, higher inbound freight, FX); adjusted SG&A +10% due to store-related costs, higher comp, maintenance .
  • Tariff headwinds: incremental baseline tariffs impacted Q2 modestly (~$2M GM headwind), but expected ~$35M net pre-tax hit in H2; management suspended FY25 guidance due to tariff uncertainty .
  • Elevated tax rate: Q2 effective tax rate ~74% due to stock option expirations and Hong Kong global minimum tax implementation, further depressing EPS .

Financial Results

Headline Metrics (Oldest → Newest)

MetricQ4 2024Q1 2025Q2 2025
Revenue ($USD Millions)$859.7 $629.8 $585.3
GAAP Diluted EPS ($)$1.71 $0.43 $0.01
Adjusted Diluted EPS ($)$2.39 $0.66 $0.17
Operating Margin % (GAAP)9.7% 4.1% 0.7%
Adjusted Operating Margin %13.4% 5.6% 2.0%
Net Income ($USD Millions)$61.5 $15.5 $0.4

Actual vs S&P Global Consensus

MetricQ4 2024Q1 2025Q2 2025
Revenue Actual ($USD Millions)$859.7 $629.8 $585.3
Revenue Consensus Mean ($USD Millions)*835.8623.4567.1
Beat/Miss vs ConsensusBeatBeatBeat
Adjusted EPS Actual ($)$2.39 $0.66 $0.17
Primary EPS Consensus Mean ($)*1.91810.51580.3742
Beat/Miss vs ConsensusBeatBeatMiss
EBITDA Actual ($USD Millions)$95.8 (GAAP) $39.3 (GAAP) $18.8 (GAAP)
EBITDA Consensus Mean ($USD Millions)*108.447.740.0
Beat/Miss vs ConsensusMissMissMiss

Values retrieved from S&P Global.*

Segment Breakdown (Q2 2024 → Q2 2025)

SegmentQ2 2024 Net Sales ($000s)Q2 2025 Net Sales ($000s)Q2 2024 Segment Op Income ($000s)Q2 2025 Segment Op Income ($000s)Q2 2024 Segment Margin %Q2 2025 Segment Margin %
U.S. Retail$290,249 $299,549 $18,078 $3,768 6.2% 1.3%
U.S. Wholesale$192,911 $192,998 $36,207 $27,062 18.8% 14.0%
International$81,274 $92,766 $5,557 $3,607 6.8% 3.9%
Total$564,434 $585,313 $59,842 $34,437 10.6% 5.9%

KPIs and Operational Metrics (Oldest → Newest)

KPIQ4 2024Q1 2025Q2 2025
U.S. Retail Comparable Sales (%)-3.4% -5.2% +2.2%
Canada Retail Comp (%)——+8%
Mexico Retail Comp (%)——+19%
Baby Category Sales (Owned channels)—+5% YoY +10% YoY
Dividend per Share ($)$0.80 $0.80 $0.25
Effective Tax Rate (%)——~74%
Inventory Units YoY Change——-1%

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Net Sales ($USD Billions)FY 2025$2.780–$2.855 Guidance suspended Withdrawn
Adjusted Operating Income ($USD Millions)FY 2025$180–$210 Guidance suspended Withdrawn
Adjusted Diluted EPS ($)FY 2025$3.20–$3.80 Guidance suspended Withdrawn
Operating Cash Flow ($USD Millions)FY 2025~$200 No update; guidance suspended Withdrawn
Capital Expenditures ($USD Millions)FY 2025~$65 No update; guidance suspended Withdrawn
H2 Tariff Impact (Pre-tax)H2 FY 2025N/A~$35M net baseline impact New
Quarterly Dividend ($)Q1 vs Q2 FY 2025$0.80 (Q1) $0.25 (Q2) Lowered

Earnings Call Themes & Trends

TopicPrevious Mentions (Q4 2024)Previous Mentions (Q1 2025)Current Period (Q2 2025)Trend
Tariffs/MacroPricing investments; macro pressures persist Guidance suspended amid tariff uncertainty Baseline tariffs modest in Q2 (~$2M GM) but ~$35M net hit in H2; plan to fully offset in 2026 via pricing/vendor sharing/mix Intensifying headwind near-term; mitigation planned medium-term
Pricing StrategyLeaned into targeted retail price investments Lower AURs in H1 to drive traffic No further AUR reductions; planning AUR up low-single-digit in H2; competitors raising prices Pivot from price investment to selective price increases
DTC ExecutionRetail comps improved over holiday; traffic/conversion improved U.S. Retail met plans; March strengthened U.S. Retail comps +2%; Baby category +10%; back-to-school off to good start Improving momentum
InternationalMomentum in Canada & Mexico Strong demand ex-U.S. Canada comp +8%, Mexico +19%; Brazil wholesale partner strength Strengthening
Wholesale Mix/ClearanceWholesale growth; mix impacted margins Sales exceeded forecasts in Q1 Off-price clearance timing up in Q2; exclusive brands healthy; pricing up late June Mixed; managing clearance tightly
Fleet Optimization—Portfolio assessment underway New analytics driving segmentation; ~100 store closures over several years at lease expiry; projected OI gain from transfer of sales Active optimization
Product/NewnessProduct improvements planned for H2 Shorter dev cycles; agility focus “Best” premium assortments outperform; PurelySoft and Little Planet drive higher AURs; new Otter Avenue brand launch [25 in List]Newness fueling high-AUR growth
Tax & FX——Unusually high tax rate (~74%); FX gain helped below-line One-off elevated tax; FX supportive

Management Commentary

  • CEO Palladini: “Our second quarter sales performance showed stabilization and momentum… Returning Carter’s to long-term, sustainable, and profitable growth is our highest imperative” .
  • CFO Westenberger on margins: “Gross margin… decreased… largest driver was our investment in pricing in U.S. retail… [and] higher inbound freight rates, and the net impact of foreign currency” .
  • CFO on tariffs: “Our estimate of the additional baseline tariffs… $125M–$150M annually… we intend to raise our prices… and share [costs] with vendor and wholesale partners” .
  • CEO on product focus: “Across U.S. stores and e-commerce, Carter’s baby category sales continue to accelerate… +10% in Q2 versus last year” .
  • CFO on fleet: “~100 stores… will close as leases expire… we think there’s an operating income gain… as we transfer sales to the existing store base” .

Q&A Highlights

  • Tariff offsets: Pricing is the most meaningful offset; vendor and wholesale cost-sharing underway; full mitigation targeted in 2026, though H2 FY25 will see ~$35M net impact after assumed offsets .
  • Pricing cadence: Price increases began late June in wholesale; retail retains flexibility to “probe up”; consumers pay for added features in “best” assortments (PurelySoft, Little Planet) .
  • Fleet closures timeline: ~100 doors closing over several years at lease expiry; minimal kickouts; expected OI benefit from sales transfer to remaining fleet .
  • H2 mix and revenue trajectory: Plan for higher revenue growth led by DTC; international momentum to continue; 53rd week adds to H2 .
  • Margin framing: AURs planned up in H2; pricing offsets only partially cover tariff headwind near-term; product cost investments in H2 also weigh on margins .

Estimates Context

  • Q2 revenue beat: Actual $585.3M vs consensus $567.1M; U.S. Retail comps and International growth drove the outperformance .
  • Q2 EPS miss: Adjusted EPS $0.17 vs consensus $0.374; margin compression from pricing investments, SG&A deleverage, and an unusually high tax rate (~74%) weighed on earnings .
  • Q2 EBITDA miss: EBITDA $18.8M vs consensus $40.0M; reflects lower gross margin, mix shift to off-price clearance, higher freight .
  • Prior quarters: CRI beat revenue and EPS in Q4 and Q1; Q4 adj EPS $2.39 vs $1.918 consensus; Q1 adj EPS $0.66 vs $0.516 consensus .

Values retrieved from S&P Global.*

Key Takeaways for Investors

  • Top-line stabilization with a revenue beat is encouraging, but steep margin compression and an EPS miss shift focus to the pace and efficacy of pricing and cost offsets in H2 and into 2026 .
  • Tariffs are the dominant near-term headwind; management plans to fully offset in 2026 via price increases, vendor sharing, and geographic production shifts—watch for evidence of price realization and unit elasticity in H2 .
  • DTC momentum (comps +2.2%; Baby +10%) and international strength (Canada +8%, Mexico +19%) remain key positives that can underpin improved mix and AUR in H2 .
  • Fleet optimization (~100 store closures) and new store segmentation analytics should raise store productivity and OI over time; monitor closure cadence and sales transfer efficacy .
  • Capital allocation has turned more conservative (Q2 dividend $0.25 vs $0.80 in Q1); combined with suspended guidance, this indicates a near-term focus on liquidity amid tariff uncertainty .
  • Trading lens: Expect sensitivity to tariff headlines and evidence of price increases sticking; beats on gross margin or signs of offset progress could catalyze upside, while further margin pressure or tariff escalations pose downside risk .
  • Medium-term thesis: Brand equity in Baby and high-AUR premium assortments (PurelySoft, Little Planet) plus international growth and fleet discipline support the path to “long-term, sustainable, profitable growth” if tariff offsets materialize as planned in 2026 .