Carter's Gains 19.4% in 3 Months as Growth Momentum Supports Upside Case

Retail and International Growth Support CRI

Carter’s U.S. Retail segment continued to improve, with comparable sales rising 5.1% in the second quarter of 2026, marking the fifth consecutive quarter of comparable-sales growth. The company reported gains across core age categories, led by Baby products. U.S. Retail growth benefited from marketing investments, improved customer engagement and higher demand through digital channels.

E-commerce remained a key growth driver, with comparable sales increasing at a double-digit rate for the fourth consecutive quarter. Carter’s said investments in its digital platform, including enhanced outfitting tools, AI-optimized product reviews and improved customer service capabilities, helped drive higher visits, conversion rates and units per transaction.

International operations also contributed to growth. Second-quarter International sales increased 2.7% year over year, supported by gains in Canada and Mexico. Mexico sales increased 22% due to new store openings, shipment timing and favorable currency translation, while International operating income increased 50% year over year.

Wholesale Gains and Margin Recovery

U.S. Wholesale sales increased 11.7% year over year in the second quarter, driven by higher average unit revenues and units. The increase was partly supported by earlier demand for fall merchandise from mass-channel customers.

Profitability improved as productivity initiatives and supply-chain actions helped offset tariff pressure and higher operating costs. Adjusted operating income rose 54.1% to $18.1 million, while adjusted operating margin expanded 90 basis points to 2.9%. Adjusted SG&A declined 1.1% to $270.2 million as store closures and productivity actions offset higher marketing spending, wage inflation and rent costs.

Carter’s also strengthened its balance sheet during the quarter. The company ended the period with $653.6 million in cash and cash equivalents, helped by a $132 million recovery of previously paid import duties and related interest. First-half operating cash flow reached $202.3 million compared with an $8.3 million use of cash in the prior-year period.

Carter's Outlook

Management expects fiscal 2026 net sales to increase 2-3% from $2.898 billion in fiscal 2025. Adjusted operating income is projected to grow in the low-single-digit to mid-single-digit range, while adjusted earnings per share are expected to decline in the high-single-digit to low-double-digit range from $3.47 in 2025. The company forecasts operating cash flow of $230 million to $240 million and capital expenditures of $50 million.

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For the third quarter of fiscal 2026, Carter’s expects sales of approximately $750 million, adjusted operating income of about $50 million and adjusted earnings of roughly 85 cents per share. The outlook assumes gross-margin improvement from a higher mix of U.S. Retail sales and the comparison against elevated tariff costs in the prior-year period.

Caleres CAL operates in the footwear retail space, making it a comparable name within the broader retail apparel and footwear industry, while Steven Madden, Ltd. SHOO competes in branded footwear and accessories, providing a comparison point for Carter’s valuation and retail execution.

Risks Remain

Tariff uncertainty remains a key risk for Carter’s. Incremental tariffs reduced second-quarter gross profit by about $28 million before mitigation efforts, while adjusted gross margin declined 180 basis points to 46.3%. The company continues to rely on pricing actions, sourcing changes and productivity savings to manage cost pressures.

Store closures and consumer demand trends also require monitoring. While comparable U.S. Retail sales improved 5.1%, total segment sales increased only 1.7% as store closures and other non-comparable factors affected reported growth. Higher clearance activity and consumer resistance to higher prices could pressure margins if demand weakens.

Carter’s recent gains reflect improving execution across retail, wholesale and international channels. Still, investors will likely focus on the company’s ability to sustain sales momentum while navigating tariffs, pricing challenges and ongoing investments.

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