Carter’s Inc. Balances Growth With Tariff Headwinds

Carter’s Inc ((CRI)) has held its Q4 earnings call. Read on for the main highlights of the call.

Carter’s latest earnings call painted a mixed picture, with solid top-line momentum but meaningful pressure on profitability. Management highlighted the company’s return to revenue growth, strong direct-to-consumer performance, and a healthy liquidity position. At the same time, surging tariff costs, higher interest and tax expenses, and softer margins are weighing heavily on earnings.

Return to Year-Over-Year Revenue Growth

Carter’s turned the corner on sales, delivering Q4 net sales of $925 million, up 8% from a year ago. On a comparable 13-week basis that strips out the extra week, consolidated net sales still grew 3%, marking the first year-over-year revenue increase since 2021.

U.S. Retail Momentum and Comp Strength

U.S. Retail was a standout, with Q4 net sales up 9% and comparable sales rising 4.7%, the third straight quarter of comp growth. Ecommerce led the way with double-digit traffic gains, and the baby category logged its sixth consecutive quarter of growth, underscoring resilient core demand.

Improved Realized Pricing and AUR Gains

Pricing power showed up in better realized prices, as consolidated average unit retails rose low single digits, and U.S. Retail AURs increased mid single digits. Management credited roughly half of the uplift to fewer promotions and the rest to less clearance and a richer mix of higher-priced assortments.

Direct-to-Consumer and Customer Acquisition

The company’s consumer file returned to growth in 2025, ending a decline that started after 2021. New customer acquisition was robust among Gen Z and millennial families, skewing toward higher-income shoppers who are opting for the brand’s higher-priced “better and best” product tiers.

International Outperformance

International operations outpaced the core business, with Q4 net sales up 10% as reported and 8% in constant currency. Mexico was a highlight, growing nearly 30% on new stores and double-digit comps, while Canada held comps roughly flat even against last year’s tax holiday benefit.

Profitability and Adjusted Operating Income

Despite revenue gains, earnings compressed, with Q4 adjusted operating income at $89 million and an adjusted operating margin around 9.7%. Management nonetheless expects adjusted operating income to grow at a low- to mid-single-digit rate in 2026 as productivity savings and demand investments begin to pay off.

Strong Liquidity and Balance Sheet Actions

Carter’s closed the year with over $1 billion in liquidity, including just under $500 million in cash, providing ample financial flexibility. The company refinanced its debt with $575 million of five-year senior notes at 7.375% and secured a new $750 million asset-based revolver to support ongoing operations.

Productivity, Fleet Optimization and Operating Improvements

Management is reshaping the cost structure through store rationalization, workforce rightsizing, and operating model changes. Plans call for about 60 store closures in 2026 and roughly 150 by 2028, targeting around $35 million in organizational savings this year plus additional benefits from a faster product cycle and fewer SKUs.

Cash Flow and Capital Allocation

Operating cash flow for 2025 came in at $122 million, constrained by higher inventories and lower earnings. For 2026, Carter’s plans operating cash flow of $110 million to $120 million and about $55 million in capital expenditures, while continuing shareholder returns, including dividends, within its disciplined capital framework.

Material Tariff Headwind

Tariffs were a major drag, pushing Q4 gross margin down 460 basis points year over year to 43.2%, with roughly $40 million of tariff impact just in the quarter. For 2025, tariffs cost about $60 million, and management expects that gross burden to balloon to more than $200 million in 2026, a roughly $150 million increase.

Profitability Compression and EPS Decline

The tariff surge and other pressures drove Q4 adjusted operating margin down from 13.4% to 9.7%, cutting adjusted operating income by $26 million. Adjusted EPS fell to $1.90 from $2.39, a drop of about 20.5%, and management expects 2026 adjusted EPS to decline low double digits to mid teens from 2025’s $3.47.

Wholesale Profit Pressure and Inventory Actions

Wholesale grew sales but at weaker profitability, as tariffs, higher product costs, and inventory provisions took a toll. Q4 Wholesale net sales rose 3%, aided partly by the extra week, yet margins deteriorated due to higher clearance activity and a larger mix of excess inventory sales.

Higher Inventories and Working Capital Impact

Year-end net inventories stood at $545 million, up 8% in dollar terms even as units were 4% lower, with tariffs inflating inventory value by about $50 million. The combination of higher inventories and reduced earnings weighed on working capital and contributed to the year-over-year decline in operating cash flow.

Elevated SG&A and Near-Term Spending

Q4 adjusted SG&A rose 5% to $315 million, reflecting the 53rd week, stepped-up demand creation, and inflation in wages and rents, along with higher performance-based pay. For 2026, management plans SG&A to be roughly flat to slightly higher, as about $40 million of productivity savings largely offset new marketing, technology, and wage investments.

Higher Interest and Tax Rate Headwinds

Debt refinancing and a rising rate environment will push 2026 net interest expense to just under $40 million, reducing EPS by about $0.30. The effective tax rate is also moving up to around 22% for the year, with Q1 spiking to roughly 37% due to the timing of stock-based compensation.

First-Half Profitability Softness and Q1 Low EPS

Management emphasized that 2026 results will be back-half weighted, with first-half profits under pressure from tariff timing, limited early-year pricing offsets, and higher interest. For Q1, adjusted operating income is expected at just $12 million to $15 million, translating to EPS of only $0.02 to $0.08.

Guidance and Forward-Looking Outlook

For 2026, Carter’s is guiding to low- to mid-single-digit net sales growth, with modest gains across U.S. Retail, Wholesale, and International, and stronger growth internationally early in the year. Adjusted operating income should grow at a similar low- to mid-single-digit pace, but gross margin will be under pressure from over $200 million in tariffs, while higher interest and taxes are expected to drive adjusted EPS down low double digits to mid teens versus 2025.

Carter’s earnings call underscored a company regaining top-line traction while absorbing significant cost shocks that will restrain near-term earnings. Investors will be watching whether productivity initiatives, strategic store closures, and pricing power can offset the tariff, interest, and tax headwinds enough to support the modest growth targets laid out for 2026 and beyond.