Carter's Q3 2025 Earnings Call: Contradictions in Sales Growth, Pricing, Tariffs, and Wholesale Strategy

Date of Call: October 27, 2025

Financials Results

• Revenue: $758M, comparable to year-ago (flat YOY)
• EPS: $0.74 (adjusted), down from $1.64 a year ago; reported EPS $0.32 vs $1.62 last year
• Gross Margin: 45.1%, down 180 basis points YOY; gross impact of tariffs $20M in Q3
• Operating Margin: Adjusted operating income $39M (Q3) vs $77M a year ago; year-to-date operating margin 3%

Business Commentary:

• Financial Performance and Tariff Impact:
• Carter's reported third-quarter net sales of $758 million, comparable to the previous year, but faced a significant increase in gross margin pressure due to higher product costs and higher tariffs, which had $20 million impact.
• The company's adjusted operating income declined to $39 million, with a 45.1% gross margin, down 180 basis points year-over-year.

• The financial impact of tariffs is escalating, with an estimated annualized incremental impact of $200 million to $250 million for 2025.

• Strategic Transformation and Retail Performance:

• Carter's Q3 Retail net sales increased by 3%, with a positive total Retail comp, driven by comparable growth in both channels.
• The company's focus on enhancing productivity, reducing costs, and improving product competitiveness contributed to this growth.

• Key strategic actions include streamlining operations, reducing offices-based roles, and optimizing inventory, which are expected to deliver $45 million in gross savings by 2026.

• Wholesale and E-commerce Challenges:

• U.S. Wholesale segment faced decline due to lower sales in Simple Joys and reduced demand from department stores.
• The company is shifting its focus to core brands like Carter's and OshKosh B'gosh on the Amazon platform, aiming to grow prominence over Simple Joys.

• E-commerce sales continued to grow, with Q3 comp results indicating improvement.

• Marketing and Inventory Strategy:

• Carter's increased marketing investment in Q3, contributing to improved inventory quality and better sales performance for new seasonal products.
• Despite an increase in AURs by mid-single digits in Retail, the company expects continued moderate promotional intensity during the holiday season.
• The company plans a 150-store closure across North America, primarily at lease expiration, aiming for long-term revenue transfer benefits.

Sentiment Analysis:

Overall Tone: Neutral

• Management cited stable Q3 sales ($758M) and improving retail comps/AURs but emphasized large tariff headwinds (annualized $200–250M; Q4 gross impact ~$40M; Q4 earnings hit $25–35M), one-time charges, and a $45M productivity plan — signaling cautious optimism balanced with material risk.

Q&A:

• Question from Kelly Crago (Citigroup): Can you explain the go-forward plan for Simple Joys on Amazon, wholesale pricing vs. retail, and provide color on the planned store closures and assumed sales transfer?
  Response: They will de-emphasize Simple Joys and pivot to core Carter's/OshKosh brands on Amazon; wholesale sell‑in shows pricing acceptance, and the ~150 store closures (last 12 months ~$110M revenue) are marginally profitable with ~20% sales transfer expected and ultimately accretive to operating income.

• Question from Jay Sole (UBS): You said preliminary 2026 sales growth will be higher than a typical year — can you quantify or explain the algorithm to get there given store closures and wholesale pressures?
  Response: No numeric range provided; they expect 2026 sales growth to be driven primarily by AUR/pricing increases (with some unit growth) and assume industry-wide price increases will limit competitive displacement.

• Question from Irwin Boruchow (Wells Fargo): Is the Wholesale down low-single in Q4 including the 53rd week ($30M)? Will U.S. store counts end next year ~700 then ~650 thereafter? Any sizing and ongoing headwind from Simple Joys? And how confident are you in calling out earnings growth next year given tariff pressure?
  Response: 53rd week ≈ $30M total (~$5M Wholesale); directional store counts ~700 then ~650; Simple Joys is a small but material drag being replaced by core brands; confidence in 2026 earnings hinges on consumer price acceptance, realization of $45M productivity savings and marketing ROI.

• Question from Christopher Nardone (BofA): What's different this time versus prior price shocks that gives confidence you can grow sales (AUR and units)? What are you seeing from competitors on pricing and how will you handle holiday promotions?
  Response: Confidence stems from stronger mix in higher AUR 'better/best' categories, new Gen Z customers and market-share gains; competitors face the same tariff-driven pressure, and they plan to raise prices industry-wide while moderating promotions.

• Question from Christopher Nardone (BofA): Regarding gross margin into next year, will tariff impact improve as mitigation ramps or worsen as new rates hit inventory; any other gross-margin drivers to watch?
  Response: Cotton is stable; they intend to cover the majority of tariff impact via pricing, supply‑chain mitigation and productivity, but tariffs remain the primary gross‑margin pressure and pricing is the main mitigation tool.

• Question from James Chartier (Monness, Crespi, Hardt): What is the gross impact from tariffs in Q4 and what are you seeing with pricing/AUR in October-to-date and holiday expectations?
  Response: Estimated Q4 gross tariff impact is about $40M; October AURs were up high single digits; they expect some AUR giveback during the more promotional holiday period.

• Question from Paul Kearney (Barclays): Can you speak to the incremental retail price increases expected in H1, timing of SG&A savings and reinvestment, and what proof points you have on media returns?
  Response: Too early to specify H1 price steps; RIF and run‑rate SG&A savings begin Jan 1; the $16M annual demand-creation plan will be phased and measured, prioritizing DTC traffic and loyalty where early signs show strong ROI.

• Question from Janet Kloppenburg (JJK Research): Are comps being driven by price against last year's high promotions; are wholesale partners accepting price increases; what's clearance inventory position; are merchandising changes supporting price acceptance?
  Response: Yes—comps are aided by price vs last year's elevated promotions; wholesale partners have been constructive; clearance inventory is reduced and inventory quality improved; stronger design/newness and mix shift to better/best items are helping consumers accept higher prices.

Contradiction Point 1

Sales Growth Projections

It involves differing projections for sales growth, which are crucial for investor expectations and strategic planning.

Will 2026 sales growth exceed the typical year? - Jay Sole (UBS Investment Bank)

2025Q3: We expect sales growth to accelerate in 2026, driven by stronger pricing discipline. - Richard Westenberger(CFO&COO)

What sales growth opportunities do you anticipate for the company? What annual sales growth rate do you expect to achieve? - Jay Sole (UBS)

2025Q2: We have substantial and meaningful reasons to believe that we can return to growth that is long-term, sustainable and profitable. - Douglas C. Palladini(CEO)

Contradiction Point 2

Tariff Impact and Pricing Strategy

It involves the expected impact of tariffs and the company's pricing strategy to offset these costs, which directly affects financial performance and competitive positioning.

What was the gross impact of tariffs in Q4? - James Chartier (Monness, Crespi, Hardt & Co., Inc.)

2025Q3: We are also covering the tariff impacts through price increases. We are committed to across-the-board price increases, especially in our wholesale channel, with good support from our partners. - Richard Westenberger(CFO&COO)

Which channel, DTC or wholesale, will perform better in the second half? How will pricing strategies affect revenue growth? - Irwin Boruchow (Wells Fargo Securities)

2025Q2: We are committed to proactive price increases, especially in the wholesale channel, with good support from our partners. - Richard Westenberger(CFO&COO)

Contradiction Point 3

Wholesale Strategy and Performance

It involves changes in the strategic approach to the wholesale channel, which is a significant part of the company's revenue.

How is the Simple Joys brand performing in U.S. wholesale, and what is the pricing strategy there? - Kelly Crago (Citigroup Inc.)

2025Q3: We're going to start playing offense in the wholesale channel, going back to the retailer and going back to the storefront. We're turning our back on Amazon as a retail partner, and we're turning our focus to the actual retail partners. - Richard Westenberger(CFO)

Could you discuss the performance and growth strategies of the Carter's segment, particularly in the wholesale channel? - Unidentified Participant

2025Q1: The Carter's segment saw wholesale revenue increase 18% year-over-year, driven by strong performance in the baby and boys categories, particularly with key retail partners. - Michael D. Casey(CEO)

Contradiction Point 4

Gross Margin and Pricing Strategy

It involves changes in gross margin expectations and pricing strategy, which are critical for financial forecasting and market positioning.

Will sales growth exceed typical levels in 2026? - Jay Sole (UBS Investment Bank)

2025Q3: We're going to do the pricing increases when we need to, but we're going to be very disciplined about it. And we'll be competitive. We're going to keep our head down and we're going to get our pricing in. - Richard Westenberger(CFO)

Can you explain the year-over-year decrease in gross margin and its causes? - Unidentified Participant

2025Q1: The year-over-year decrease in gross margin was primarily due to higher promotional activity and increased markdowns, particularly in the Carter's segment. - Robert G. Unterman(CFO)

Contradiction Point 5

Pricing Strategy and Impact on Unit Velocity

It involves the company's approach to pricing and its impact on unit volumes, which are critical for revenue and market share.

What does it mean that sales growth will be higher than typical in 2026? - Jay Sole (UBS Investment Bank)

2025Q3: Growth in 2026 will be driven more by pricing than units due to higher AURs. Industry-wide pricing increases are expected, and Carter's aims to maintain competitive pricing. - Richard Westenberger(CFO)

What makes this pricing strategy effective in boosting unit sales now? - Jim Chartier (Monness, Crespi, and Hardt)

2024Q4: The strategic pricing action targeted items comparable to competitors, aligning with favorable consumer conditions post-election. The industry experienced a good fourth quarter, and Carter's promotions were well-received, particularly around key market share events like Labor Day and Black Friday, driving unit velocity. - Richard Westenberger(CFO)