Carter's Q1 Earnings Call Highlights

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Q1 results beat expectations as Carter’s reported $681 million in net sales, up 8%, with stronger demand across retail, wholesale and international channels. However, profitability was pressured, with adjusted EPS down to $0.39 from $0.66 a year ago and gross margin falling more than 300 basis points.

Tariffs remain the biggest headwind, with management saying incremental tariff costs hurt gross margin and wholesale profitability. Carter’s has filed for about $130 million in tariff refunds, but it is not recognizing them yet because cash has not been received and the outlook remains uncertain.

U.S. retail and international sales stayed strong, with U.S. retail comparable sales up more than 10% for the fourth straight quarter and international sales rising 14% reported, led by Canada and especially Mexico. The company reaffirmed full-year guidance and expects low- to mid-single-digit sales growth for fiscal 2026.

Carter's (NYSE:CRI) reported stronger-than-expected first-quarter fiscal 2026 sales and earnings, with growth across its retail, wholesale and international businesses, but management said tariffs, higher spending and interest costs continued to weigh on profitability.

Interim Chief Executive Officer and President, Chief Financial Officer and Chief Operating Officer Richard Westenberger said the year was “off to a good start,” with first-quarter sales and earnings exceeding the expectations the company had provided on its prior earnings call. He also addressed a leadership transition, noting that Doug Palladini had departed as CEO and that Carter’s expects to welcome Sharon Price John as its new CEO next month.

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“We saw higher year-over-year demand for our brands across all of our channels in the first quarter,” Westenberger said, adding that an earlier Easter holiday benefited demand and that consumers appeared to be shopping broadly during the period.

Carter’s reported first-quarter net sales of $681 million, up 8% from the prior year. Reported operating income was $28 million, compared with $26 million a year earlier. Reported earnings per share were $0.39, down from $0.43 in the prior-year quarter.

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On an adjusted basis, Carter’s said it had no adjustments to first-quarter 2026 results, while the prior-year period included adjustments tied to operating model improvement costs and leadership transition costs. Adjusted earnings per share were $0.39, compared with $0.66 a year earlier.

Gross margin was 43.1%, down slightly more than 300 basis points from the prior year. Westenberger said the decline was expected and was pressured by tariffs, including a gross incremental impact of roughly $50 million in the quarter. That pressure was partially offset by improved pricing, supply chain mitigation efforts, a higher mix of U.S. retail sales and productivity initiatives.

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Adjusted SG&A expense increased 3% to $270 million, driven by investments in demand creation and inflationary pressure in wages and rent, partly offset by productivity savings. Westenberger said productivity initiatives delivered about $6 million in cost reductions during the quarter across cost of goods sold and SG&A.

Allison Peterson, Chief Retail and Digital Officer, said the company’s U.S. retail business delivered “strong performance” in the quarter, continuing momentum from recent periods. Total U.S. retail net sales increased nearly 13%, while comparable retail sales rose more than 10% from the prior year and nearly 5% on a two-year basis.

Peterson said it was the fourth consecutive quarter of comparable sales growth for the U.S. retail business, with strength across both stores and e-commerce. The baby assortment remained the primary driver, though toddler and kid categories also grew. She estimated that the earlier and stronger Easter selling period contributed about 2 percentage points to the quarter’s comparable sales.

Comps were supported by higher traffic and higher average transaction values. Peterson said Carter’s saw increased penetration of opening price point products and higher clearance sales, which she said likely reflected a more price-focused consumer.

“This makes sense to us in the context of higher gas prices and volatile consumer confidence, likely in part due to continued persistent inflation across the economy and the unsettled global situation,” Peterson said.

Despite the value focus, Carter’s increased U.S. retail average unit retail prices by low single digits while units rose double digits. Peterson also said Carter’s continued to grow its active customer file and added new Gen Z consumers, including through collaborations such as the OshKosh and Disney Winnie the Pooh product launch. She said that collaboration was not a material contributor to sales but brought new consumers to the brand portfolio and skewed toward Gen Z.

U.S. wholesale net sales were up slightly from the prior year. Westenberger said Carter’s improved pricing in response to tariffs, but that was offset by lower unit volume. Exclusive brand sales grew, led by Child of Mine and Just One You, while Simple Joys sales were comparable to the prior year, which he described as an improvement from recent trends.

Wholesale profitability declined from a year earlier, which Westenberger attributed almost entirely to the net negative impact of incremental tariffs. In response to an analyst question, he said the wholesale business has been more exposed to tariff pressure because Carter’s has less direct control over pricing and other levers than it does in its direct-to-consumer business.

International net sales rose 14% on a reported basis and 8% on a constant-currency basis, driven by Canada and Mexico. Westenberger said Canada posted strong total and comparable sales growth, similar to the U.S. business, while Mexico demand was “particularly strong” around Easter. Mexico net sales grew more than 40%, including $3 million from favorable exchange rates, and comparable sales increased 21%. Carter’s plans to open 12 new stores in Mexico this year.

International operating income was about $4 million, compared with roughly breakeven performance in the prior year, helped by productivity savings and lower product costs from favorable exchange rates.

Westenberger spent significant time discussing tariffs, calling the topic complicated and citing uncertainty around court developments and potential administration actions. He said Carter’s historically paid a little over $100 million annually in import duties, representing an effective tariff rate of roughly 13%.

The additional IEEPA tariffs had been estimated to add more than $200 million to that historical baseline, taking the effective tariff rate above 35%. Westenberger said Carter’s original 2026 plan assumed those higher tariffs would remain in place all year. Following what he described as the Supreme Court’s recent decision, the company’s guidance now reflects a lower 10% incremental tariff rate on imports through the second quarter and the elimination of an India-related tariff tied to Russian oil purchases for the balance of the year.

However, Carter’s continues to assume higher IEEPA-level tariff rates return for imports in the second half of the year. Westenberger said the benefit of lower tariff rates and the eliminated India tariff would be about $30 million, all else equal, but the company is not flowing that upside through its full-year guidance because of marketplace uncertainty and potential pricing actions by competitors.

During the question-and-answer session, Westenberger also said Carter’s has filed for refunds of about $130 million in incremental IEEPA tariffs paid between last year and early this year. He said the company will not recognize the refunds until the cash is received.

Carter’s reaffirmed its full-year fiscal 2026 outlook. The company expects net sales growth in the low- to mid-single-digit range, adjusted operating income growth in the low- to mid-single-digit range and earnings per share down low double digits to down mid-teens from 2025 adjusted EPS of $3.47.

The company also maintained its operating cash flow forecast of $110 million to $120 million and capital expenditure plan of approximately $55 million, with spending focused on new stores in Mexico, distribution center upgrades and technology initiatives.

For the second quarter, Carter’s expects net sales to increase in the low single digits, adjusted operating income of $11 million to $13 million and adjusted EPS of $0.02 to $0.06. The company expects second-quarter gross margin to decline by about 100 basis points, primarily because of the net unfavorable impact of tariffs.

Westenberger said Carter’s expects U.S. retail comparable sales to rise in the mid-single digits in the second quarter, despite a nearly 4% decline in April comps following the stronger March Easter period. He said March and April combined comps rose in the high single digits, and early May trends had turned “solidly positive.”

Carter's, Inc (NYSE: CRI) is a leading designer and marketer of infant and young children's apparel in North America. Headquartered in Atlanta, Georgia, the company's core business focuses on creating clothing and accessories for babies and children, including bodysuits, sleepwear, layette, outerwear and accessories that blend comfort, safety and style. Carter's flagship brand is complemented by its OshKosh B'gosh line, which offers heritage-inspired designs and durable fabrics for toddlers and young kids.

The company distributes its products through a diversified platform that includes wholesale partnerships with major department stores and mass merchandisers, direct‐to‐consumer e-commerce sites, and an extensive network of company-operated retail stores.

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