Carter's Q2 Earnings Beat Estimates on Wholesale and Retail Gains

U.S. Retail segment sales increased 1.7% year over year to $304.7 million. Comparable sales rose 5.1%, marking the fifth consecutive quarter of comparable-sales growth. Sales increased across the company’s core age segments, led by continued strength in baby products.

U.S. Wholesale net sales rose 11.7% year over year to $215.6 million, surpassing our model’s estimate of $204.1 million for the segment and also contributing the largest portion of consolidated sales growth. The increase reflected gains in both units and average unit revenues, as some mass-channel customers requested fall merchandise earlier than expected.

International segment sales increased 2.7% to $95.3 million. Favorable currency translation added about $2.4 million, while constant-currency sales were nearly flat. Growth in Canada and Mexico offset lower revenues from international partners.

Focus on CRI’s Q2 Margins

Adjusted gross margin contracted 180 basis points to 46.3%. Incremental tariff costs of $28 million and investments in product quality weighed on profitability. Higher pricing, tariff-mitigation measures and productivity initiatives provided partial offsets.

Adjusted selling, general and administrative expenses declined 1.1% to $270.2 million. Store closures and other productivity actions more than offset higher marketing spending, wage inflation and rent costs, resulting in nearly 300 basis points of expense leverage.

Adjusted operating income rose 54.1% to $18.1 million, and adjusted operating margin expanded 90 basis points to 2.9%. The improvement reflected sales growth and lower operating spending despite gross-margin pressure.

CRI’s Financial Snapshot

Carter’s ended the quarter with $653.6 million in cash and cash equivalents, up from $338.2 million a year earlier. The balance included a $132 million recovery of previously paid import duties and related interest, equal to roughly $100 million after taxes.

Inventories declined 6.7% year over year to $577.7 million, while inventory units fell 9%. Operating cash flow totaled $202.3 million in the first half, compared with an $8.3 million cash use in the prior-year period.

The company paid $18.3 million in dividends during the first half and did not repurchase shares. Management plans to retain additional liquidity amid tariff uncertainty, seasonal inventory purchases and future investment planning under the new leadership team.

CRI's Q3 & 2026 View

Carter’s expects net sales to increase 2-3% in 2026 from $2.90 billion reported in 2025. Adjusted operating income is projected to grow in the low-single-digit to mid-single-digit range from $176 million in 2025, while adjusted earnings per share are anticipated 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-$240 million and capital expenditures of nearly $50 million.

The outlook assumes a lower gross margin due to incremental tariff costs, partly offset by pricing actions, tariff-mitigation initiatives and productivity savings. SG&A expenses are expected to rise in the low-single digits, while net interest expense and the effective tax rate are projected at approximately $35 million and 23%, respectively.

For the third quarter of 2026, CRI expects net sales of nearly $750 million compared with $758 million in the prior-year quarter. Adjusted operating income is projected at approximately $50 million, up from $39 million, while adjusted earnings are anticipated to be about 85 cents per share compared with 74 cents a year ago. The outlook assumes gross-margin expansion on a higher mix of U.S. Retail sales and the anniversary of elevated tariff costs, along with comparable SG&A expenses and a net interest expense of about $9 million.

The Zacks Rank #3 (Hold) stock gained 16.3% in the past three months against the industry’s 0.6% drop.

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