Carter's Q4: The 9.1% Plunge After a $1.5B Market Cap Collapse

The market's verdict was immediate and brutal. After the Q4 report, Carter's stock plunged 9.1% on the news. This violent reaction is the direct flow-based consequence of a catastrophic profit collapse, not a minor earnings miss. The numbers tell the story: for the full fiscal year, adjusted diluted EPS fell to $3.47 from $5.81, a 40% drop. Sales grew just 2% over the same period. The profit collapse is the core driver of the sell-off.

This single-day drop is part of a longer, deteriorating trend. The stock has been in a persistent downtrend for years, with shares down 36.1% over the past three years. The current valuation score of 2 out of 6 reflects deep skepticism, and the market cap sits at $1.53 billion. The price action over the last three years shows a steady erosion of value, with the recent 9.1% drop being the latest violent symptom of that underlying pressure.

The setup for the crash is clear. The company posted revenue beats and margin stability for the quarter, but the full-year profit collapse and the guidance for a low double-digit to mid-teens decline in adjusted diluted EPS for 2026 shattered confidence. The market is pricing in a future of shrinking earnings, making the current valuation look even more stretched. This is a classic flow-based response: when the profit engine sputters, the stock price follows.

The Margin Squeeze: Tariffs and Cost Inflation

The profit collapse is a direct result of a severe margin squeeze. Elevated product costs, in part due to higher tariffs, weighed meaningfully on Q3 and Q4 profits. This pressure is quantified in the Q4 adjusted operating margin, which dropped to 9.7% from 13.4% a year ago-a 3.7-point decline that directly eroded earnings.

The company is responding with a major cost-cutting push. Carter's plans to shutter approximately 150 underperforming North American stores and cut about 300 corporate jobs, or 15% of its workforce. These actions are targeted to generate over $10 million in annual spending reductions, with savings beginning in 2026. This is a classic flow-based reaction: when margins are crushed, the response is to shrink the cost base.

The setup is clear. The company is sacrificing top-line growth for bottom-line survival. While comparable sales improved in Q3, the savings from store closures and layoffs are not expected to offset the ongoing cost inflation until 2026. This creates a period of intense pressure where profitability remains under siege, explaining the market's deep skepticism and the stock's violent sell-off.

The 2026 Flow: A Guidance Trap

The forward-looking cash flow and earnings trajectory is the core of the current market trap. Carter's is guiding for a low double-digit to mid-teens decline in adjusted diluted EPS for 2026, even as it targets low- to mid-single-digit sales growth. This sets up a brutal year where profitability is expected to deteriorate further, directly contradicting the modest top-line expansion.

The first-quarter numbers are a stark preview. The company is guiding for adjusted diluted EPS of only $0.02–$0.08 for Q1 2026, a collapse from $0.66 a year ago. This implies a near-total wipeout of earnings power in the coming months, with adjusted operating income also projected to plummet. The flow-based implication is clear: the stock will face intense pressure for the next several quarters as the market prices in these shrinking earnings.

This creates a sustainability question. Despite the profit collapse, Carter's returned $56 million to shareholders via dividends last fiscal year, supported by a solid $122 million in operating cash flow. The guidance trap is that the company is committing to cash returns while guiding for a sharp decline in the earnings that fund them. This may not be sustainable if the margin pressure continues, forcing a difficult choice between shareholder returns and preserving cash for the turnaround.