Carter's, Inc. (CRI) Q3 2025 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
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.
Key Financial Performance
Third Quarter Net Sales $758 million, comparable to a year ago. Reasons for no change include net sales growth in U.S. Retail and International segments offset by lower sales in U.S. Wholesale.
Third Quarter Operating Income $29 million (GAAP basis), adjusted operating income was $39 million compared to $77 million a year ago. Reasons for decline include higher product costs, higher tariffs, and increased SG&A expenses.
Third Quarter Earnings Per Share (EPS) Reported EPS was $0.32 compared to $1.62 last year. Adjusted EPS was $0.74 compared to $1.64 last year. Reasons for decline include higher product costs, tariffs, and increased SG&A expenses.
Gross Margin 45.1%, a decrease of 180 basis points versus last year. Reasons for decline include higher product costs, higher tariffs, and additional investments in product make.
U.S. Retail Net Sales Grew by 3% in the third quarter with a positive 2% total Retail comp. Reasons for growth include higher prices, improved inventory position, and strong back-to-school selling season.
U.S. Wholesale Sales Declined due to lower sales in the Simple Joys brand on Amazon and lower sales with department store customers. Reasons include changes in Amazon's brand management approach and department store trends.
International Sales Increased by 5%. Reasons for growth include strong performance in Mexico (+16% comp) and growth in International partners business (+10%).
Net Inventories $656 million, up 8% versus last year. Reasons include higher tariffs impacting inventory value and improved inventory quality with less excess inventory.
Cash on Hand $184 million, with virtually all borrowing capacity under the credit facility available. Reasons for decline in cash flow include lower reported earnings and higher inventories.
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Operating Highlights
Consumer response to new products: Strong engagement levels, especially among young Gen Z families. Baby and Toddler categories showed growth, with Baby being a key driver for the fifth consecutive quarter.
Product development process: Improved processes, reducing product development calendar by 3 months. Regular price sell-throughs improved, indicating better product resonance with consumers.
New store type testing: Investing in differentiated consumer experiences and real estate strategy development for greater fleet productivity.
International sales growth: Total international sales up 5%, with strong performance in Mexico (+16% comp) and Brazil. International partners' sales grew by 10%.
U.S. Retail growth: Net sales in U.S. Retail grew by 3% in Q3, with positive comps in both stores and e-commerce. Baby and Toddler categories gained market share.
Amazon strategy shift: Transitioning from Simple Joys brand to focus on core brands like Carter's, OshKosh, Little Planet, and Otter Avenue.
Cost reduction initiatives: Identified $45 million in gross savings for 2026, including $35 million from reducing office-based roles by 15% and $10 million from lower SG&A.
Tariff mitigation: Realized $40 million in duty reductions and raised prices to offset higher tariffs. Tariffs impacted gross margin by $20 million in Q3.
Inventory management: Improved inventory position with less carryover of prior season goods, aiding new seasonal product performance.
Store closures: Targeting closure of 150 North America stores by 2026 to optimize fleet productivity and reduce SG&A.
Marketing investment: Increased Q4 media spend by 11% YoY and planning a 20% increase in demand creation spend for 2026 to drive traffic and consumer loyalty.
Digital transformation: Investing in IT for growth and productivity, including AI models, cloud migration, and digitization of product design.
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Risk or Challenges
Tariffs: Significantly higher tariffs have been implemented, affecting imports from most countries, increasing the effective duty rate to the high 30% range from about 13% historically. This has led to an estimated annualized incremental impact of $200 million to $250 million, with a net impact on 2025 operating income estimated at $25 million to $35 million.
Higher Product Costs: Increased product costs, including higher tariffs and investments in product make, have negatively impacted gross margins. The gross impact of tariffs on gross margin was $20 million in Q3.
Organizational Restructuring: The company is undergoing restructuring, including reducing office-based roles by 15% and closing 150 North America stores by 2026. This will result in short-term revenue loss and severance costs, with $45 million in gross savings expected by 2026.
Decline in Wholesale Sales: Sales in the U.S. Wholesale segment declined, driven by lower demand for the Simple Joys brand on Amazon and reduced sales with department store customers. This trend is expected to continue.
Economic Uncertainty: The company is monitoring inflation, consumer confidence, and employment data, which have shown some deterioration, potentially impacting consumer demand.
Higher SG&A Expenses: SG&A expenses increased by 8% in Q3 due to higher store-based expenses, marketing, and variable compensation provisions. This trend is expected to continue into Q4 and 2026.
Inventory Challenges: Net inventories increased by 8% year-over-year, partly due to higher tariffs, impacting cash flow and inventory management.
Consumer Response to Price Increases: While consumers have accepted higher prices, there is uncertainty about how this will impact demand in the long term, especially in a competitive market.
Dependence on Seasonal Sales: The company relies heavily on the holiday season for a significant portion of its revenue, making it vulnerable to any disruptions during this period.
Store Closures: The planned closure of 150 North America stores by 2026 will result in short-term revenue loss, although offsetting sales transfer benefits are expected over time.
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Guidance & Outlook
Tariff Impact Mitigation: The company is implementing strategies to mitigate the impact of higher tariffs, including supplier negotiations and price increases. The annualized incremental impact of higher tariffs is estimated at $200 million to $250 million, with a net impact on 2025 operating income of $25 million to $35 million.
Cost Reduction Initiatives: Carter's plans to reduce office-based roles by 15% by the end of 2025, saving approximately $35 million annually starting in 2026. An additional $10 million in cost reductions will come from lower SG&A expenses, totaling $45 million in gross savings for 2026.
Store Closures: The company plans to close 150 North American stores by the end of 2026, with up to 100 closures by the end of 2025. This is expected to streamline operations and reduce SG&A expenses.
Marketing and Demand Creation: Marketing spend will increase by 11% in Q4 2025 and by 20% in 2026, focusing on demand creation and consumer loyalty. This includes investments in digital platforms and brand storytelling.
E-commerce Growth: The company is prioritizing investments in U.S. e-commerce, with Q3 2025 comps and AURs showing growth. IT investments include digitization, AI models, and cloud migration.
2026 Financial Outlook: Preliminary plans for 2026 include growth in both sales and earnings, driven by price increases and productivity initiatives. Gross margin rates are expected to be lower due to tariffs and changes in customer mix.
Fourth Quarter 2025 Expectations: The company expects a low single-digit comp growth in U.S. Retail, with Wholesale sales down in the low single digits. Gross margin rate is projected to be around 43%, impacted by tariffs and product investments.
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Shareholder Return Plan
Dividends Paid: $47 million in dividends have been paid year-to-date.
Share Repurchases: No share repurchases have been made this year compared to about $50 million year-to-date last year.
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Key Q&A
Q:What is the future plan for the Simple Joys brand in the U.S. Wholesale channel?
A:The Simple Joys brand, being the smallest part of the exclusive brands portfolio, will be reduced. The company plans to focus on the core flagship brands, Carter's and OshKosh B'gosh, on the Amazon platform. This shift is expected to build a more meaningful and lasting business beyond Simple Joys.
Q:What is the pricing trend in the Wholesale channel and its impact on the spring season?
A:Wholesale pricing in the third quarter was roughly comparable to previous levels. Higher prices in Wholesale will not impact until January, but sell-in results are positive, indicating acceptance of higher prices. The company believes its value proposition remains intact despite higher prices.
Q:What is the plan for store closures and its expected impact on profitability?
A:The company plans to close 150 stores across North America, mostly at lease expiration. These stores generated $110 million in revenue over the last 12 months and were marginally profitable. A 20% sales transfer rate to nearby stores and e-commerce is expected, making the closures accretive to operating income.
Q:What is the preliminary view on sales growth for 2026 and the factors driving it?
A:Sales growth in 2026 is expected to be higher than a typical year, driven by meaningful price increases (AURs) across the assortment due to tariff challenges. Unit growth is also planned, but pricing will be the primary driver. The company assumes industry-wide price increases and plans to maintain competitiveness.
Q:How does the company plan to manage cost reductions and maintain operational efficiency?
A:The company is implementing a reduction-in-force of office-based roles and disciplined spending management. The focus is on reducing complexity, with fewer people having greater ownership and accountability. This approach aims to drive cost savings while maintaining operational efficiency.
Q:What is the impact of the 53rd week on Q4 Wholesale and Retail results?
A:The 53rd week is worth about $30 million in total, with approximately $5 million attributed to Wholesale. The split between Wholesale and Retail is not evenly distributed.
Q:What is the size and future of the Simple Joys brand, and its impact on revenue?
A:Simple Joys is the smallest part of the exclusive brands, which represent about half of Wholesale segment sales. It is being replaced by core branded business on Amazon. While it is a drag on revenue, the company sees a bigger opportunity with its core brands on the Amazon platform.
Q:What are the key factors contributing to earnings growth confidence for next year?
A:The company is confident in earnings growth due to consumer acceptance of price increases, productivity initiatives, and accretive marketing investments. These factors, combined with pricing strategies to cover tariff exposures, are expected to drive positive growth in operating income.
Q:What is the gross impact of tariffs in Q4 and the pricing trend in October?
A:The gross impact of tariffs in Q4 is estimated to be about $40 million. Pricing in October was up in the high single-digit range year-over-year.
Q:What are the expectations for promotional activity and AUR gains during the holiday season?
A:The holiday season is expected to be more promotional, leading to a reduction in AUR gains compared to earlier quarters. However, the company anticipates maintaining some level of AUR improvement.
Q:What is the expected tax rate beyond 2025?
A:The tax rate is expected to be around 24% beyond 2025.
Q:What are the plans for incremental price increases in the Retail channel for the first half of next year?
A:The company has not provided specific details on incremental price increases in the Retail channel for the first half of next year.
Q:What is the timing of SG&A reductions and reinvestments, and the focus of media spend?
A:SG&A reductions will be realized starting January 1, with demand creation investments of $16 million planned for the full year. Media spend will focus on driving traffic to owned platforms and enhancing consumer loyalty through storytelling and product innovation.
Q:What is the current state of clearance inventories and its impact on pricing?
A:Clearance inventories are in an improved position year-over-year, with a better balance of current and future season goods. This has positively impacted pricing and AUR gains.
Q:What is the consumer response to high single-digit price increases and the role of merchandising initiatives?
A:The consumer response to high single-digit price increases has been healthy, driven by growth in better and best categories, new consumer acquisition, and improved product design and innovation.
Q:What is the company's outlook on the moderate-to-lower consumer target market?
A:The company is aware of macroeconomic challenges but remains focused on factors within its control, such as product quality and consumer engagement, to address the moderate-to-lower consumer target market.
Q:Review of Unclear Management Responses
A:Management avoided providing specific details on the level of incremental price increases in the Retail channel for the first half of next year, as well as the exact split of the 53rd week's impact between Wholesale and Retail. Additionally, they refrained from commenting on the size of the Simple Joys brand and specific wholesale customer relationships.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
AURs digit
Baby
Gen family
Joys
Page
Profitability
SGA
Wholesale segment
brand Amazon
charge restructuring
closure
continuation
credit facility
date result
date share
department store
design development
estimate tariff
finish
fleet
flow cash
holiday season
infrastructure
interest tax
inventory tariff
investment marketing
majority
margin rate
medium
perspective holiday
place
position
price digit
product design
productivity
progress price
rate basis
saving
transformation
value
CRI Transcript
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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
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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
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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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