Carter’s Q4 Earnings Call Highlights

28 Feb 2026, 03:09 by Sarita Garza · The Markets Daily

Carter’s (NYSE:CRI) executives said the company ended fiscal 2025 with improving demand trends and its first year-over-year revenue increase since 2021, while acknowledging that profitability remained pressured by tariffs and higher product costs. On the company’s fourth-quarter earnings call, CEO and President Doug Palladini and CFO/COO Richard Westenberger said results exceeded internal forecasts and management is planning for sales and adjusted operating income growth in fiscal 2026, with the year expected to be back-end weighted.

Fourth-quarter results: sales growth, but margin pressure from tariffs

Westenberger said fourth-quarter net sales were $925 million, up 8% year over year. The quarter included a 53rd week that added about $37 million in revenue; on a comparable 13-week basis, net sales increased 3%. Adjusted gross margin was 43.2%, down 460 basis points from the prior year, which management attributed primarily to tariffs and higher product costs tied to investments in “product make.”

Westenberger said tariffs had a $40 million gross impact on the quarter’s gross margin—about double the impact seen in the third quarter—while the company also continued to invest in product improvements. Despite the cost headwinds, Carter’s posted higher realized pricing: consolidated average unit retail (AUR) rose low single digits, with U.S. retail AUR up mid-single digits.

Adjusted SG&A rose 5% to $315 million, driven by 53rd-week costs, incremental demand-creation spending, and higher wage and rent expense, along with higher performance-based compensation provisions. The company delivered 90 basis points of SG&A leverage in the quarter, and adjusted operating income totaled $89 million, or an adjusted operating margin of 9.7% (down from 13.4% a year ago).

Adjusted EPS was $1.90, down from $2.39 in the prior-year quarter. Westenberger noted the fourth-quarter effective tax rate was 15.4%, lower than expected and down year over year due mainly to a higher mix of income outside the U.S. and delayed implementation of a higher minimum tax in Hong Kong.

U.S. retail comps extend gains as promotions ease

Management emphasized momentum in direct-to-consumer trends. U.S. retail net sales increased 9% in the quarter, with comparable sales up 4.7%—the third consecutive quarter of positive retail comps. Westenberger said e-commerce comps were particularly strong, helped by a double-digit increase in traffic, and growth was broad-based across baby, toddler and kid categories, as well as across all apparel brands.

Palladini said the company’s growth strategy centers on “quality growth,” including reduced promotions over time, an ability to “price up,” and a shift toward more brand and product storytelling rather than purely transactional messaging. He highlighted brands such as Little Planet and “Purely Soft” sleepwear as examples where the company is selling more product at higher AURs with less promotional cadence.

Westenberger said about half of the U.S. retail AUR improvement in the quarter was driven by reduced promotions, with the rest due to less clearance and higher penetration of higher-priced assortments. He also said Carter’s active consumer count continued to grow, while Palladini pointed to increased attraction among Gen Z and millennial families and higher-priced “better and best” product mix among new customers.

Wholesale and international: growth mixed with ongoing tariff and mix impacts

In U.S. wholesale, fourth-quarter net sales increased 3%, including $12 million from the extra week. Westenberger said exclusive brand sales rose year over year on strength in Child of Mine and Just One You, while Simple Joys declined, continuing a previously discussed trend.

Profitability in wholesale was pressured, with Westenberger repeatedly citing tariffs as the primary driver. In response to an analyst question, he said roughly $20 million of the quarter’s $40 million tariff impact sat in wholesale on a gross basis, and there was less pricing offset in that channel. He added that selling some excess inventory was “opportunistic” and accounted for about 40 to 50 basis points of wholesale margin deterioration. Clearance activity also weighed on wholesale realized pricing in the quarter.

International reported net sales growth of 10% (or 8% on a constant-currency basis), driven by Canada and Mexico. Westenberger said Canada comps were roughly flat, lapping a government tax holiday in the prior year, while Mexico net sales rose nearly 30% on contributions from new stores and another quarter of double-digit comps. International operating profit increased slightly year over year, supported by mix and pricing.

Balance sheet, inventory, and capital allocation

Westenberger said Carter’s ended the year with strong liquidity of more than $1 billion, including just under $500 million in cash plus borrowing capacity under its credit facility. During the quarter, the company refinanced its debt, issuing $575 million of new 5-year senior notes with a 7.375% coupon, and replaced its prior revolver with a new $750 million asset-based revolving credit facility with a 5-year tenor.

Year-end inventories were $545 million, up 8% in dollars but down 4% in units. Westenberger said incremental tariffs increased year-end inventory value by $50 million; excluding tariffs, inventory dollars declined 2%. Operating cash flow for 2025 was $122 million, and the company paid $56 million in dividends.

Fiscal 2026 outlook: sales and operating income growth planned, EPS pressured by interest and taxes

Management said fiscal 2026 guidance excludes potential impacts from recent tariff-related news and legal developments, noting uncertainty around how policy changes could ultimately affect the company and that any benefit would take time to flow through the P&L due to inventory accounting.

For fiscal 2026, Westenberger said Carter’s expects:

Net sales up low- to mid-single digits versus 2025, with growth in all segments
Adjusted operating income up low- to mid-single digits year over year
Adjusted EPS down low double digits to down mid-teens versus 2025 adjusted EPS of $3.47

He described the profit plan as back-end weighted, with first-half profitability down and second-half growth expected. Drivers include first-half tariff comparability issues (incremental tariffs implemented mid-2025), timing of wholesale price realization, investment spending cadence, and higher interest expense following refinancing. Net interest expense is projected at just under $40 million, with the higher interest cost expected to reduce 2026 EPS by about $0.30. The company’s effective tax rate is planned around 22%, up from 19% in 2025, reflecting Hong Kong minimum tax implementation and a greater planned mix of U.S. income.

Westenberger also discussed tariffs as a key variable in the plan. He said the gross tariff impact on the P&L was about $60 million in 2025 and is assumed to grow to over $200 million in 2026 on a gross basis, with significant offsets expected from pricing, supply chain mitigation, and productivity initiatives. In response to a question, he said pricing is the “most significant offset,” and the company assumes it will “more or less” offset tariffs on a full-year basis, while other factors such as product investments influence the gross margin rate.

For the first quarter of 2026, the company guided to mid-single-digit net sales growth and adjusted operating income of $12 million to $15 million, with EPS of $0.02 to $0.08. Westenberger said first-quarter gross margin is expected to be down about 400 basis points year over year, primarily due to tariffs, partially offset by mix and lower excess inventory sales. SG&A is planned up about 3% on demand creation, technology initiatives, and wage and rent increases.

Palladini reiterated the company’s transformation priorities around demand creation and productivity, including store fleet optimization. Management previously announced plans to close about 150 lower-margin stores in North America through 2028; it closed about 35 stores last year and intends to close roughly 60 in 2026. Westenberger said productivity savings are expected to help keep SG&A roughly flat for the year, with the company funding incremental marketing and technology investments.

The company also noted a leadership update: Treasurer and head of investor relations Sean McHugh retired following the call, and TC Robillard joined as Vice President of Investor Relations.

About Carter’s (NYSE:CRI)

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.