Carter’s Q3 2025: Contradictions Emerge on Tariff Mitigation, Pricing Strategies, Simple Joys Brand Shifts, and Store Closure Plans

Date of Call: None provided

Financials Results

• Revenue: $758.0M in Q3, comparable to a year ago (YTD nearly $2.0B)
• EPS: Adjusted EPS $0.74 in Q3, down from $1.64 a year ago (Reported EPS $0.32 vs $1.62 prior year); YTD EPS $0.75
• Gross Margin: 45.1% in Q3, down 180 bps vs prior year; gross tariff impact ~$20M in Q3
• Operating Margin: Adjusted operating income $39M (≈5.2% operating margin) in Q3, down vs $77M a year ago; YTD operating income $59M (3% margin)

Business Commentary:

* Revenue and Profitability Challenges: - Carter's reported third quarter net sales of $758 million, resulting in operating income of $29 million and reported earnings per share of $0.32. - The decline in profitability was driven by significant one-time charges totaling $13 million, including pension plan termination and organizational restructuring costs.

• Tariff Impact and Pricing Strategy:
• The company estimated that higher tariffs have resulted in an annualized incremental impact of $200 to $250 million on gross costs.

• Carter's is mitigating the tariff impact through pricing increases across its assortments, with low single-digit increases in AURs for U.S. retail in Q3.

• Store Closures and Cost Management:

• Carter's plans to close 150 North America doors, expecting this to be accretive to profitability due to a 20% transfer rate of sales to nearby stores and e-commerce.

• The company aims to reduce office-based roles by approximately 15% by year-end 2025, saving roughly $35 million annually beginning in 2026.

• Wholesale and Retail Performance:

• U.S. wholesale sales were down due to lower demand for the Simple Joys brand, while U.S. retail sales grew by 3%, with a positive 2% total retail comp.
• The retail growth was driven by increased average order values (up low single digits) and strong performance in baby and toddler categories.

Sentiment Analysis:

Overall Tone: Neutral

• Management highlights improving retail comps, rising AURs and progress on product/marketing, but also cites large tariff headwinds (annualized $200–$250M, Q4 net impact $25–35M), one‑time charges and materially lower EPS versus prior year, yielding a cautious, balanced tone.

Q&A:

• Question from Paul Lejuez (Citi): Can you elaborate on what's happening with the Simple Joys brand and the go‑forward plan; how will it be replaced and what are you seeing on wholesale pricing/AURs heading into spring?
  Response: Management will reduce Simple Joys and pivot to building Carter’s/OshKosh and other core brands on Amazon; wholesale pricing was roughly flat in Q3 while retail has more pricing flexibility, and sell‑in suggests higher wholesale prices should be accepted starting January.

• Question from Paul Lejuez (Citi): On the 150 store closures, what sales transfer are you assuming and how should we think about profitability impact?
  Response: Plan to close ~150 North America doors (mostly at lease expiration); those stores did ~$110M LTM sales and historical data shows ~20% transfers to nearby stores/e‑commerce—closures expected to be accretive to operating income.

• Question from Jay Sole (UBS): You said 2026 sales growth will be higher than a typical year — can you give a general number or range and explain the algorithm to get there?
  Response: No specific range provided; management expects next‑year revenue to be driven more by AUR/pricing (to offset tariffs) than unit growth, assuming industry‑wide price increases are broadly accepted.

• Question from Jay Sole (UBS): On right‑sizing and SG&A cuts, how do you ensure you remove cost/complexity without undermining operational execution and ability to serve consumers?
  Response: The plan couples cost reduction with simplification—fewer office roles with clearer ownership and accountability to preserve agility and execution while delivering ~$45M gross savings for 2026.

• Question from Ike Boruchow (Wells Fargo): Clarify the 53rd week impact, store counts next year, Simple Joys sizing/headwind, and what gives you confidence in calling out earnings growth into next year?
  Response: The 53rd week is ~$30M total (about $5M wholesale); year‑end U.S. store count will be ~700 then ~650 thereafter; Simple Joys is the smallest part of exclusive brands and will be a modest drag into next year but replaced by larger core brand opportunity; confidence rests on consumer acceptance of price increases, productivity savings and marketing ROI.

• Question from Christopher Nardone (Bank of America): How is today’s pricing environment different from past price‑inflation periods; what are you seeing from competitors and how are you planning for holiday promotions?
  Response: Management cites momentum in higher‑AUR 'better/best' categories and new Gen‑Z customers as reasons pricing can stick; they expect to lead pricing actions and plan promotional cadence for holiday while preserving product/brand focus.

• Question from Christopher Nardone (Bank of America): On margins into next year — will tariff pressure ease as mitigation ramps and any directional color on other cost items like cotton or freight?
  Response: Cotton is stable/down year‑over‑year; intent is to cover the vast majority of tariff impact via pricing, vendor/supply‑chain actions and productivity, though tariffs remain a material headwind.

• Question from Jim Chartier (Monness, Crespi & Hardt): What is the gross impact from tariffs in Q4, what have you seen in October on pricing/AUR, and is the 24% tax rate a good planning assumption beyond 2025?
  Response: Gross Q4 tariff impact estimated ~ $40M; October pricing/AURs were up in the high single digits but holiday promotions will likely give back some AUR gains; ~24% is a reasonable planning tax rate.

• Question from Paul Lejuez (Barclays): Can you quantify incremental retail price increases for the first half and clarify timing of SG&A savings and reinvestment/media spend?
  Response: Too early to quantify H1 pricing; SG&A run‑rate savings begin Jan 1 with reductions largely complete by year‑end; $16M demand‑creation is a 2026 full‑year target and will be phased in while carefully measuring ROI, focused on traffic and loyalty.

• Question from Janet Kloppenberg (JJK Research Associates): Are comps up driven mainly by price vs last year's higher promotions; are wholesale partners accepting price increases; how are clearance inventories and are merchandising changes behind consumer acceptance?
  Response: Yes—Q3 comps benefited from higher AURs versus elevated promotions last year; wholesale discussions have been constructive though raising wholesale price is tougher; clearance levels improved and inventory quality is good; better product/newness and mix are driving higher AURs and new customer acquisition.

Contradiction Point 1

Impact of Tariffs on Revenue and Mitigation Strategies

It involves the company's approach to mitigating the impact of tariffs, which directly affects revenue projections and profitability.

Can you outline your 2026 sales growth outlook, which is higher than usual, despite external challenges like tariffs and declining wholesale business? - Jay Sole (UBS)

2025Q3: Tariffs represent a $200-250 million gross annualized impact. - Richard Westenberger(CFO and COO)

How will you offset the impact of tariffs, such as changes in product assortment and vendor relationships? - Jay Daniel Sole (UBS Investment Bank)

2025Q2: The most meaningful opportunity is price, but we're also sharing tariff costs with wholesale partners, raising prices, and moving production to more advantageous geographies. We expect to mitigate the impact of tariffs as a permanent increase to our cost structure. - Richard Westenberger(CFO and COO)

Contradiction Point 2

Pricing Strategy and Flexibility

It highlights changes in the company's pricing strategy, which impacts revenue projections and profitability.

What's the status of the Simple Joys brand in the wholesale channel and its pricing strategy? How do wholesale pricing dynamics correlate with the spring season? - Kelly (Citi)

2025Q3: The wholesale channel pricing was comparable to retail, with more room for improvement in the own retail channel. - Richard Westenberger(CFO and COO)

How do you plan to balance pricing strategies given the planned price increases? - Kelly Crago (Citigroup Inc.)

2025Q2: We have begun to raise prices, especially in the wholesale channel. Pricing flexibility is higher in our retail channel, and we're seeing competitors raising prices. Our best-performing products are seeing higher demand, supporting price increases. - Richard Westenberger(CFO and COO)

Contradiction Point 3

Simple Joys Brand and Amazon Strategy

It highlights a shift in strategy regarding the Simple Joys brand and its presence on Amazon, which could impact revenue and competitive positioning.

How is the Simple Joys brand performing in the wholesale channel, and how do current pricing dynamics relate to the spring season? - Kelly (Citi)

2025Q3: We are going to lean into that model with all brands, focusing on a positive sell-in results which indicate acceptance of higher prices. - Doug Palladini(CEO and President)

How is the Amazon Channel impacting the Simple Joys brand? Do you need to reintroduce core brands in that channel? - Michael R. Bapis (BWS Financial)

2025Q1: We are refining our strategy by reincorporating our core brands on Amazon and managing our exclusive brands as a separate business. - Michael Casey(CMO)

Contradiction Point 4

Tariff Impact

It involves the impact of tariffs on the company, which can significantly affect financial performance.

Can you outline your 2026 sales growth expectations despite external challenges such as tariffs and declining wholesale business? - Jay Sole (UBS)

2025Q3: Sales growth will be higher due to pricing increases to offset tariff impacts. More growth will be driven by pricing than units. - Richard Westenberger(CFO and COO)

Will the tariffs impact your business? - Adeline Fang (Bloomberg Intelligence)

2025Q1: We don't have any new tariffs in place, and we are not anticipating any new tariffs in the first half of the year. - Michael Casey(CMO)

Contradiction Point 5

Store Closure Strategy

It involves changes in the company's store closure strategy, which impacts the retail footprint and operational costs.

Regarding the store closure plan, are you confirming expectations of ending next year with approximately 700 stores and the following year with approximately 650 stores? - Ike Boruchow (Wells Fargo)

2025Q3: Directionally correct, with 150 store closures planned, including some in Canada and Mexico. - Richard Westenberger(CFO and COO)

What are your plans for U.S. retail store closures and openings? - Kelly Crago (Citigroup Inc.)

2025Q2: We have a proprietary algorithm for store assessment, which will lead to closing 100 stores over several years, improving productivity. - Douglas C. Palladini(CEO and President)