Carter’s Inc. Balances Strong Sales With Margin Strain

Carter’s Inc ((CRI)) has held its Q1 earnings call. Read on for the main highlights of the call.

Carter’s Inc. struck a cautious but resilient tone in its latest earnings call, highlighting solid top-line momentum and improving productivity even as profits came under pressure. Management underscored strong retail and international growth and better cash generation, but stressed that elevated tariffs, higher interest costs, and rising SG&A are weighing on margins and earnings in the near term.

Net Sales Growth and Top-Line Momentum

Carter’s opened the quarter with net sales of $681 million, an 8% increase year over year that underscored solid demand across its portfolio. The growth was broad-based and signaled that the brand is maintaining relevance with value-conscious families despite an uneven macro environment.

U.S. Retail Strength and Comp Sales Gains

U.S. Retail remained the standout, with net sales up nearly 13% and comparable sales climbing over 10% versus last year and nearly 5% on a two-year basis. Management pointed to higher store traffic and bigger baskets as key drivers, marking the fourth straight quarter of positive comps in the retail channel.

Unit Growth and AUR Improvements

Pricing and volume trends both moved in the right direction, with consolidated average unit retails rising in the high single digits and units up low single digits. In U.S. Retail, unit volumes grew double digits while AURs increased modestly, suggesting Carter’s is gaining share without relying solely on discounting.

International Outperformance Led by Mexico

International operations continued to outperform, with net sales up 14% reported and 8% in constant currency. Mexico was the star market, delivering sales growth above 40% and comps up 21%, and Carter’s plans to add 12 new stores there this year to capitalize on the momentum.

Productivity Gains and Cost Savings

Productivity initiatives generated about $6 million in cost reductions during the quarter, spanning both cost of goods sold and SG&A. These actions helped the company achieve roughly 180 basis points of SG&A leverage even as it stepped up investment in growth and brand-building activities.

Improved Cash Flow and Leaner Inventory

Cash generation improved markedly, with $6 million of positive operating cash flow versus a $49 million use in the prior-year quarter. Inventories were tightly managed, ending at $466 million, down 2% year over year and more than 14% below year-end, with units down 9%, reducing markdown risk and supporting future margin recovery.

Marketing and Collaborations Attract New Shoppers

Incremental marketing spending drove higher traffic and expanded the consumer file, with particular success in attracting younger, Gen-Z parents. High-profile collaborations, including Disney x OshKosh Winnie-the-Pooh and Umbro, outperformed expectations, with Winnie-the-Pooh products achieving average prices more than double the U.S. Retail norm.

Gross Margin Squeezed by Tariffs

Despite healthy sales, gross margin fell to 43.1%, more than 300 basis points below last year, primarily due to tariffs. The company cited roughly $50 million of incremental tariff impact in the quarter and ended with $26 million of remaining tariff-related inventory costs still embedded in the balance sheet.

Earnings Per Share Under Pressure

Profitability lagged the top line, with adjusted EPS dropping to $0.39 from $0.66 a year earlier. Management noted that the recent debt refinancing alone reduced EPS by roughly $0.08, compounding the drag from lower gross margins and higher operating expenses.

Operating Income and Margin Decline

Adjusted operating income fell by about $7 million compared with last year, driving the adjusted operating margin down to 4.2%. The contraction highlights the gap between Carter’s sales momentum and its current earnings power, as cost headwinds offset the benefits of higher volumes and pricing.

Wholesale Profitability Weakness

U.S. Wholesale remains a weak spot, with profitability “meaningfully lower” than a year ago as tariffs and lower unit volumes compressed margins. Management acknowledged that wholesale margins are now below historical levels, leaving this business particularly exposed to policy-driven cost swings.

Higher SG&A and Cost Inflation

Adjusted SG&A rose 3% to $270 million, driven by stepped-up demand-creation, wage and rent inflation, professional fees, and timing of store closures. Carter’s now expects SG&A to rise low single digits for the year, up from its prior assumption of roughly flat, adding another layer of pressure on operating margins.

Rising Interest Expense Weighs on Bottom Line

Net interest and other expenses increased versus last year due to higher interest rates and a larger debt balance following the refinancing of senior notes. These higher financing costs, alongside lower operating margins, contributed to the sharper decline in net income and EPS.

Near-Term Margin Headwinds and Q2 Outlook

Management flagged continued margin pressure in the near term, guiding to a roughly 100 basis point gross margin decline in the second quarter. For Q2, Carter’s expects net sales to rise low single digits, adjusted operating income between $11 million and $13 million, and adjusted EPS of just $0.02 to $0.06, underscoring a slow earnings ramp.

Tariff Uncertainty and Refund Risk

Tariff policy remains a major wild card, with Carter’s having filed for approximately $130 million in potential tariff refunds but choosing not to recognize any benefit until cash is received. The company is planning under the assumption that higher IEEPA-level tariffs could return midyear, signaling ongoing policy risk to both margins and cash flow.

Consumer Value Sensitivity and April Softness

Management noted that consumers are increasingly value-focused, driving higher penetration of opening price points and elevated clearance activity. April trends softened, with comparable retail sales down just under 4%, suggesting demand momentum has cooled and reinforcing the need for prudent inventory and pricing discipline.

Forward-Looking Guidance and Outlook

Carter’s reiterated its full-year 2026 outlook, calling for net sales growth in the low- to mid-single digits and adjusted operating income growth at a similar pace, weighted to the back half of the year. Adjusted EPS is still expected to decline low double digits to mid-teens versus 2025, while operating cash flow is targeted at $110 million to $120 million and CapEx around $55 million, with guidance assuming lower tariffs through Q2 but potential re-escalation thereafter.

Carter’s earnings call painted a picture of a brand successfully driving sales and improving operational efficiency but wrestling with external cost shocks and higher financing expenses. Investors will be watching the second half closely to see whether planned margin recovery, tariff outcomes, and disciplined inventory management can translate top-line strength into more durable earnings growth.