Carter's Q2 2025 Earnings: Tariff Headwind Affects Bottom Line Amid Store Optimization Plans

Carter's targets price increases and store optimization to mitigate the annual $125M-$150M tariff headwind. CEO Douglas C. Palladini aims to return the company's brands to growth after 100 days in the role.

Carter’s Inc. (NYSE:CRI), a leading retailer of children’s apparel, reported its second quarter 2025 results, which revealed a stark contrast between modest sales growth and severely declining profitability. The company experienced a 4% increase in quarterly sales to $585 million, yet adjusted earnings per share collapsed by 78% year-over-year [1].

The company’s U.S. Retail segment delivered 3% net sales growth, with the Baby category (0-24 months) showing 10% growth. However, operating margin in this segment declined dramatically to 1.3%, a 490 basis point drop from the prior year [1]. International sales, particularly in Canada and Mexico, showed strong growth at 14% and 19% respectively, but the overall impact was offset by tariff concerns [1].

CEO Douglas C. Palladini, who has been in the role for over 100 days, aims to return the company to sustainable growth by focusing on core brands and implementing operational improvements. The company estimates that the additional proposed tariffs could impact pre-tax earnings by approximately $125-150 million on an annualized basis, with a net impact of approximately $35 million in the second half of fiscal 2025 [1].

To mitigate these tariff impacts, Carter’s plans to implement changes to its product assortment, share costs with vendors, shift its country of origin mix, and implement price increases. The company currently sources less than 4% of its finished goods from China, with Vietnam, Cambodia, Bangladesh, and India representing its top four sourcing countries [1].

Carter’s is also focusing on store optimization and enhancing its operational model. The company plans to shorten the product development process by approximately three months, enhance chase capabilities, leverage AI technology, and strengthen consumer insights to improve assortment performance. Additionally, a comprehensive assessment of its retail store portfolio and development of a new fleet segmentation strategy are underway [1].

The stock reacted negatively to the earnings release, falling 19.69% on the day of the announcement and further declining in after-market trading to $26.15, a 20.15% drop from the previous close [1]. This decline reflects investor concerns about the company’s profitability trajectory and its ability to mitigate tariff impacts.

In summary, Carter’s Inc. is facing significant challenges due to tariffs and margin compression. The company is implementing strategic initiatives to improve its operating model and mitigate tariff impacts, with a focus on price increases and store optimization. The success of these initiatives will be crucial in returning the company to long-term, sustainable growth.

References:
[1] https://www.investing.com/news/company-news/carters-q2-2025-slides-sales-up-4-but-profits-plunge-amid-tariff-concerns-93CH-4153895
[2] https://www.businesswire.com/news/home/20250724773926/en/Carters-Inc.-Reports-Second-Quarter-Fiscal-2025-Results