Carter's: A Value Investor's Look at Wholesale Drag and the Path to Intrinsic Value

The numbers tell a clear story of pressure. For the third quarter of fiscal 2025, Carter's reported flat net sales of $757.8 million, a mere 0.1% decline from the prior year. This neutrality is a mirage, masking a significant internal tug-of-war. On one side, U.S. Retail and International markets delivered modest growth. On the other, the U.S. Wholesale segment fell sharply, with sales down 5.1% year-over-year. This decline was not a broad-based slump but was driven heavily by a specific brand.

The culprit is Simple Joys, the exclusive private-label brand sold on Amazon. While it fueled rapid growth after its 2017 launch, demand has moderated throughout the year as Amazon's brand management strategy shifted. The company notes that approximately $15 million in incremental sales from U.S. Retail and International operations was offset by a comparable year-over-year decline in U.S. Wholesale revenue. In other words, the growth elsewhere was just enough to cancel out the wholesale weakness, leaving consolidated sales unchanged.

The real damage, however, is to the bottom line. That offsetting effect did nothing to stem the profit squeeze. Adjusted operating income fell $40 million year over year, a dramatic decline. The reduction was driven almost equally by weaker results in both U.S. Retail and U.S. Wholesale, underscoring balanced pressure across these segments. The strain comes from multiple fronts: higher tariffs, elevated input costs, and the need for ongoing investments. This is a classic case of a company facing headwinds on all sides, where even a slight growth in one area cannot compensate for the drag in another.

Management's Strategic Response: Cost Discipline and Brand Focus

The company's response to this pressure is a classic value investor's playbook: aggressive cost discipline to protect cash flow while the business stabilizes. Management has launched a comprehensive productivity overhaul, targeting $10 million or more in additional annual savings. This includes a significant organizational restructuring, with 300 office-based positions (15% of such roles) to be eliminated by the end of 2025. The savings from this move, estimated at about $35 million annually starting next year, are a direct shield against the margin squeeze. More broadly, the plan calls for roughly 150 store closures over the next three years, an acceleration from prior plans. These stores, which collectively generated about $110 million in sales, are considered low-margin and underperforming. Closing them removes fixed costs and should have an accretive impact as some sales shift to more profitable locations and online channels. This is a clear prioritization of quality over quantity. The company is sacrificing volume from weaker outlets to improve the profitability of its core footprint. The savings are not just for the balance sheet; some will be reinvested in "high-return, growth-driving initiatives," including marketing and new product development. This signals a strategic pivot: using the cost discipline to fund the very brand and innovation work needed to widen the moat. The suspension of 2025 guidance and the focus on near-term earnings protection underscore the seriousness of the challenge. Yet, the scale of the cuts suggests management believes the current profit erosion is unsustainable and requires decisive action.

The most forward-looking element of this strategy is the appointment of a new Chief Brand Officer, David B. Tichiaz. In a company where brand strength is paramount, this role is critical for driving the long-term transformation. His mandate will be to lead strategic initiatives that rebuild consumer loyalty and support pricing power-key levers for offsetting the persistent pressure from tariffs and input costs. The timing is notable. The CEO's recent comments highlighted that fourth-quarter comparable retail sales grew for the third consecutive quarter, driven by strong e-commerce and pricing initiatives. The new brand officer's job is to ensure this momentum is not a fleeting holiday pop but the start of a sustained recovery, turning tactical wins into a durable competitive advantage. The cost cuts provide the financial breathing room; the brand focus aims to restore the intrinsic value engine.

Forward-Looking Metrics and the Value Investor's Lens

The trajectory for Carter's is now one of cautious stabilization, with the path to intrinsic value becoming clearer. The most encouraging sign is the rebound in its core U.S. Retail segment. For the fourth quarter, U.S. Retail segment net sales grew in the high single-digits, driven by strong e-commerce demand. This marks a third consecutive quarter of comparable retail sales growth, a positive trend that management is seeking to turn into a durable recovery. The company's multi-channel model, which includes retail stores and online, provides a broad platform for this momentum.

Looking at the full fiscal year, the story is one of modest, low-single-digit growth. Preliminary results show fiscal year 2025 consolidated net sales increased by a low single-digit percentage. This modest expansion is the net outcome of offsetting forces: growth in U.S. Retail and International is being balanced by weakness in U.S. Wholesale, particularly the Simple Joys brand. The guidance for the fourth quarter reflects this ongoing tension, with management expecting the U.S. Wholesale segment to decline in the low single-digits. The forward view is for a business that is stabilizing, not yet accelerating.

The critical next step, however, is profitability recovery. The third quarter's adjusted diluted EPS of $0.74 represents a significant year-over-year decline from $1.64, signaling that cost pressures are still overwhelming the top-line gains. For a value investor, this is the central challenge. The recent cost discipline and productivity initiatives are designed to protect cash flow and create the runway for reinvestment. The market is clearly pricing in this near-term struggle, as evidenced by the stock's forward price-to-earnings ratio of 17.04X, which trades at a steep discount to the industry average of 28.16X. This valuation gap suggests investors are discounting the current challenges in wholesale and margin pressure.

The long-term compounding potential hinges on whether management can successfully widen the company's moat. The strategic pivot-closing underperforming stores, restructuring the office base, and appointing a new Chief Brand Officer-aims to improve the quality of the earnings stream. If the U.S. Retail growth trend holds and can be sustained through better pricing power and brand loyalty, it could eventually outweigh the wholesale drag. The intrinsic value equation now depends on the speed and success of this operational turnaround. For patient capital, the current price may offer a margin of safety, but the return to consistent, profitable growth remains the essential condition for unlocking that value.

Catalysts, Risks, and What to Watch

The path to restoring intrinsic value now hinges on a few clear milestones. The first is the execution of the company's aggressive cost discipline. The planned closure of roughly 150 underperforming stores and the elimination of 300 office-based positions are designed to materially improve operating margins. The savings from these moves, estimated at about $35 million annually from the office cuts alone, must be realized to offset the persistent pressure from tariffs and input costs. If these cost cuts fail to fully absorb the inflationary headwinds, the profit recovery will be stunted, prolonging the period of low profitability that has plagued the business.

The second critical catalyst is the sustainability of growth in the U.S. Retail segment. The recent momentum is encouraging, with fourth-quarter comparable retail sales growing in the mid-single-digits for the third straight quarter. This trend, driven by strong e-commerce demand and pricing initiatives, must continue and accelerate. The company's multi-channel model provides a platform, but the real test is whether this growth can be turned into durable, high-margin earnings that can eventually outweigh the drag from wholesale. Any improvement in the trajectory of the U.S. Wholesale segment, beyond the expected low-single-digit decline, would be a welcome sign. Management expects U.S. Wholesale sales to decline in the low single-digits in the fourth quarter, largely due to continued softness in the Simple Joys brand. The key will be whether the broader wholesale portfolio can stabilize or grow, helping to mitigate the overall decline.

The primary risk, however, is that the wholesale weakness persists while the cost cuts prove insufficient. The Simple Joys brand remains a vulnerability, with demand having moderated throughout the year as Amazon's strategy shifted. If this softness continues, it could keep the consolidated sales growth muted at best. More importantly, if input cost inflation and tariffs remain elevated, the company's ability to protect its bottom line will be severely tested. The recent cost discipline is a necessary shield, but it is not a permanent solution to a widening moat. For the value investor, the setup is one of cautious optimism. The market has priced in the near-term struggle, offering a margin of safety. The coming quarters will show whether management's strategic pivot-closing weak stores, cutting costs, and rebuilding the brand-can successfully mitigate the wholesale drag and set the company on a path to sustainable, profitable growth.