Carter's, Inc. (CRI) Q2 2025 Earnings Conference Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call summary and Q&A reveal several concerns: sales decline, suspended guidance, and tariff-related uncertainties. Despite some positive elements like product development and strategic focus, the lack of guidance and continued market challenges overshadow these. The market cap suggests a moderate reaction, leading to a negative sentiment prediction.
Key Financial Performance
Second Quarter Sales $585 million, representing growth of 4% over last year. Growth driven by U.S. Retail and International segments.
Second Quarter Reported Operating Income $4 million, included $8 million in charges.
First Half Sales $1.2 billion, with reported operating income of $30 million. Included $17 million in charges.
Second Quarter Adjusted Operating Income $12 million, representing an adjusted operating margin of 2%. Decline due to year-over-year investment in pricing in retail and higher spending in specific areas.
Gross Margin in Second Quarter 48.1%, a decrease of 200 basis points from last year. Decline driven by investment in pricing in U.S. retail, higher mix of excess inventory sales, higher inbound freight rates, and foreign currency impact.
Adjusted SG&A in Second Quarter $273 million, an increase of about 10%. Driven by higher store-related expenses, including volume-related costs, 40 more stores, and deferred maintenance projects.
Adjusted Earnings Per Share in Second Quarter $0.17 compared to $0.76 last year. Decline due to lower profitability and higher tax rate.
U.S. Retail Sales Growth $9 million increase, with a 2% total retail comp. Baby category sales grew by double digits.
International Sales Growth $11 million increase, driven by strong performance in Canada (+8% comp), Mexico (+19% comp), and Brazil.
Wholesale Sales Comparable to last year, with higher sales in the off-price channel and growth in exclusive brand customers.
Inventory Up 3% year-over-year at the end of the second quarter. $17 million of inventory balance due to higher costs from tariffs.
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Operating Highlights
New Product Launches: Carter's launched Otter Avenue, its first brand specifically for toddlers, crafted through insights on how kids begin to dress themselves. Early results are highly encouraging.
Emerging Brands: Little Planet, Skip Hop, and Otter Avenue are showing promise. Little Planet has grown its consumer base by 50% this year, with a lifetime value 1.5x higher than the average consumer.
Product Development: Carter's has removed 3 months from its product development calendar, increasing agility and ability to react to consumer preferences.
International Expansion: Carter's has built a high-performing partnership in Brazil, operating 81 stores and over 200 shop-in-shops. This informs future geographic expansion strategies.
Wholesale Growth: Carter's remapped its North America wholesale model, emphasizing exclusive brands and expanding presence in Walmart, Target, and Amazon.
Store Optimization: Carter's identified approximately 100 stores for closure as leases expire, while focusing on increasing productivity in existing stores.
Marketing Investments: Invested 15% less in promotions than planned, focusing on demand creation to drive store traffic and consumer loyalty.
Leadership Changes: New leadership appointments include a Head of Strategy from Boston Consulting Group and a Chief Marketing Officer from Designer Shoe Warehouse.
Consumer Insights: Completed the most significant consumer research study in Carter's history, forming the basis for data-driven decisions.
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Risk or Challenges
Tariffs: Significant uncertainty and challenges due to higher tariffs, which are expected to have a more substantial impact on the business going forward. Additional reciprocal tariffs could further exacerbate the situation.
Gross Margin Pressure: Decline in gross margin due to pricing investments, higher inbound freight rates, and the impact of foreign currency. Incremental tariffs are expected to further pressure gross margins.
SG&A Expenses: Higher store-related expenses, including maintenance and performance-based compensation, have increased SG&A costs, impacting profitability.
Consumer Sentiment: Potential risks from consumer response to higher prices and overall consumer sentiment trends, which could affect sales and profitability.
Inventory Management: Higher inventory costs due to tariffs and the need to manage excess inventory effectively to avoid further financial strain.
Store Closures: Plan to close approximately 100 stores as leases expire, which could impact revenue and operational efficiency in the short term.
Leadership Transition Costs: $7 million in costs related to leadership transition earlier in the year, with additional charges expected in the second half.
Regulatory and Tax Changes: Higher effective tax rate due to global minimum tax implementation in Hong Kong and stock option expirations, which could impact net profitability.
Supply Chain Challenges: Need to diversify sourcing and manage production shifts due to tariffs, which could disrupt supply chain operations and increase costs.
Promotional Strategy: Aggressive promotional cadence needs rebalancing to support sustainable profitability, with risks tied to reduced promotional investments.
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Guidance & Outlook
Revenue Expectations: Carter's expects positive operating and free cash flow for the full year 2025. Third quarter sales are off to a good start, with July month-to-date comp sales in the U.S. running up about 2%, and back-to-school selling is off to a good and earlier start than last year.
Margin Projections: Gross margin in the second quarter was 48.1%, a decrease of 200 basis points from last year. The company expects near-term pressure on gross margin from higher tariffs but plans to offset these costs in 2026 and beyond.
Capital Expenditures: Carter's plans to reinvest SG&A savings into its brands and capital expenditures that service its brands, focusing on areas with the greatest return on capital.
Market Trends: The company is monitoring the impact of higher tariffs, consumer response to higher prices, and overall consumer sentiment. It has observed competitors beginning to raise prices and expects AURs to increase in the low single digits in the second half of 2025.
Business Segment Performance: U.S. retail sales are expected to improve in the second half, supported by new product and marketing strategies and an improved inventory position. International markets, such as Brazil, are showing strong performance, and the company plans to leverage these insights for future geographic expansion.
Strategic Plans: Carter's is implementing a fleet segmentation strategy for its stores, expected to roll out in 2026, to drive growth. It plans to close approximately 100 stores as leases expire and focus on increasing productivity in existing stores. The company is also launching new brands like Otter Avenue and expanding its emerging brands, such as Little Planet and Skip Hop, to drive growth.
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Shareholder Return Plan
The selected topic was not discussed during the call.
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Key Q&A
Q:What kind of sales growth opportunity does the company see going forward, and what are the expectations for annual sales growth rate, EBIT margin, and earnings over a 3- to 5-year period?
A:The management did not share specific numbers but emphasized their belief in returning to profitable and sustained growth that benefits their brands and consumers.
Q:Can you provide more details on the $125 million to $150 million gross tariff impact and the biggest potential offsets?
A:The management highlighted price increases as the most meaningful offset, along with vendor partnerships and sharing tariff costs with wholesale partners. They aim to fully mitigate the tariff impact by 2026, though near-term mitigation is challenging due to pre-ticketed goods.
Q:What are the plans for the U.S. retail business, including store closures and the U.S. DTC strategy?
A:The company is using a new analytical algorithm to evaluate its store fleet. Plans include closing 100 stores over several years as leases expire, relocating, remodeling, and testing new strategies. They aim to improve productivity and deepen consumer connectivity through fleet segmentation and tailored assortments.
Q:What is the timeline for closing the 100 stores?
A:The closures will occur over the next several years as leases expire, with some kickouts possible in a handful of locations.
Q:How are pricing investments in the U.S. DTC and wholesale channels performing, and what is the flexibility on pricing?
A:Price increases have begun, and the response from wholesale partners has been constructive. The company is dynamically adjusting prices in its retail channel and seeing competitors raise prices. High-performing products with added features are driving consumer willingness to pay higher prices.
Q:Can you quantify the investments needed to drive sustainable profitable growth, and are they near-term dilutive to margins?
A:Management did not quantify the investments but emphasized high returns on investments in demand creation, store traffic, and consumer loyalty. They believe these investments will drive profitable growth.
Q:What changes are being made to the product assortment in the second half compared to the first half?
A:The company is expanding its best-performing product assortments, increasing inventory, and introducing more newness more frequently.
Q:Why has the category been relatively weak over the last several years, and how has the competitive landscape changed?
A:The market is down approximately 2%, with increased competition from private labels. However, key accounts expect the company to grow as their primary baby and toddler national brand. International markets also show bright prospects.
Q:What is the opportunity to expand shelf space with Little Planet, Purely Soft, and the newly launched brand Otter Avenue?
A:There is an opportunity to broaden the availability of the brand portfolio in the wholesale channel, including Little Planet and Otter Avenue. The company is optimistic about demand for these differentiated products.
Q:Which channel (DTC or wholesale) is expected to outperform in the back half of the year, and what is the revenue growth outlook?
A:The DTC channel is expected to lead revenue growth in the second half, with higher growth planned compared to the first half. International momentum is also expected to continue.
Q:What is the outlook for AURs and the impact of planned price increases on the $35 million tariff headwind?
A:AURs are planned to increase in the second half, partially offsetting the tariff impact. However, the $35 million headwind is the net effect after considering price increases and other offsets.
Q:What is the short-term outlook for margins and profit dollars as the company stabilizes?
A:Management did not provide specific guidance but emphasized a focus on long-term sustainable, profitable growth. They aim to regain market share with profitable products.
Q:What is the expectation for promotions in the market and the impact of planned price increases relative to competition?
A:The market remains promotional, but the company plans to price competitively while leveraging the value of its brands. Competitors are also raising prices, which supports the company's pricing strategy.
Q:What are the key shifts in SG&A spend to improve store productivity in the DTC business?
A:The company is reducing SG&A by closing marginally productive stores and focusing on demand creation to drive traffic. They are also improving procurement discipline and managing organizational costs.
Q:When does the company expect to fully offset the tariff impact?
A:The company aims to fully offset the tariff impact by 2026.
Q:Review of Unclear Management Responses
A:Management avoided providing specific numbers for sales growth, EBIT margin, and earnings goals over a 3- to 5-year period. They also did not quantify the investments needed for sustainable growth or provide detailed short-term margin and profit dollar guidance.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
AURs
Baby
CEO President
Inc Research
Page sale
Research Division
Retail
SGA
Securities
amount work
area
baseline tariff
cost tariff
design
estimate baseline
improvement assortment
income PL
initiative
inventory balance
inventory position
investment pricing
legacy
margin tariff
market share
newness
page
product channel
product development
profitability charge
profitability income
project
sale income
sale price
selling
store portfolio
tariff challenge
tariff duty
CRI Transcript
Carter's, Inc. (CRI) Q1 2026 Earnings Call Transcript
Unknown5-6
The earnings call summary indicates a decline in key financial metrics, including revenue, gross margin, operating income, net income, and EPS. Despite strategic initiatives and a positive outlook for digital growth, the immediate financial performance is weak, with a 5% revenue decrease and declining margins. Additionally, the lack of discussion on risks and shareholder returns, along with unclear management responses in the Q&A, adds uncertainty. The market cap suggests a moderate reaction, leading to a 'Negative' sentiment prediction for the stock price.
Carter's, Inc. (CRI) Q4 2025 Earnings Call Transcript
Unknown2-27
The earnings call presents a mixed picture: strong growth in emerging brands and e-commerce, but challenges with tariffs and wholesale pricing. Despite optimistic guidance and strategic initiatives like cost reduction and marketing investments, the lack of clarity on tariff impacts and weak wholesale performance weigh on sentiment. The Q&A reveals cautious optimism but also uncertainty, particularly regarding tariffs. Given the market cap of $2.26 billion, the stock is likely to remain stable, with minor fluctuations, resulting in a neutral prediction (-2% to 2%).
Carter's, Inc. (CRI) Q3 2025 Earnings Call Transcript
Positive10-27
The earnings call reveals a mix of positive and cautious elements. The company is experiencing strong U.S. retail and international growth, and consumer acceptance of price increases is healthy. While gross margins are pressured, strategic initiatives like store closures are expected to improve profitability. The Q&A section highlights confidence in earnings growth and operational efficiency. Despite some uncertainties in pricing and SG&A details, the overall sentiment is positive, with market expansion and strategic brand initiatives supporting a favorable outlook.
Carter's, Inc. (CRI) Q2 2025 Earnings Conference Call Transcript
Unknown7-26
The earnings call summary and Q&A reveal several concerns: sales decline, suspended guidance, and tariff-related uncertainties. Despite some positive elements like product development and strategic focus, the lack of guidance and continued market challenges overshadow these. The market cap suggests a moderate reaction, leading to a negative sentiment prediction.
CRI Slides
CRI Report
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