CARTERS INC Q2 FY2025 earnings call

Management Statement and Operational Highlights

• Product Development: Completed end-to-end process redesign, reducing product development time, working with vendors in Asia, aiming for faster response to consumer preferences.
• Retail Store Portfolio: Assessed store portfolio using analytics, identified opportunities to close stores and improve future site evaluation.
• Tariffs: Diversified sourcing footprint, largest countries of origin are Vietnam, Cambodia, Bangladesh, India. Intend to share costs with vendors, move production, raise prices, and offset tariffs by 2026 and beyond.
• Leadership Team: Added experienced leaders in retail, strategy, and marketing.
• Consumer Engagement: Completed major consumer research, reduced product development calendar by 3 months, elevated personalization via loyalty platform.
• Brand Focus: Prioritize Carter's brand, focusing on baby apparel, with Purely Soft and Little Planet performing well. Oshkosh B'gosh seen as global and differentiated brand.
• Store Strategy: Implement fleet segmentation strategy, rolling out in 2026, with segmented stores outperforming. Using proprietary algorithm to decide store closures, relocations, and openings.

Segment Performance

• U.S. Retail: Second quarter sales grew $9 million. Baby segment had double-digit sales growth. Retail profitability lower due to pricing investments and expense deleverage. Third quarter U.S. retail comp sales up ~2%, AURs higher than last year.
• Wholesale: Sales comparable to last year. Higher sales in off-price channel due to excess inventory. 2 out of 3 exclusive brand customers grew. Royalty income down due to tariff-related order cancellations. Adjusted operating margin 14%.
• International: All components posted sales growth. Canadian business had +8% comp, Mexico +19% comp. International wholesale sales grew driven by Brazil. Operating margin ~4%, impacted by stronger U.S. dollar.

Guidance

• Sales Growth: No specific numbers given, but confident in returning to sustainable growth.
• Margin Expectations: Aim to offset tariff impact by 2026 and beyond. Second half AURs planned up low single digits vs. down 4% in first half.
• Tariff Offset: Estimate $35 million net impact from incremental baseline tariffs in second half of 2025. Intend to fully offset tariffs by 2026.

Risks

• Tariffs: Uncertainty around additional tariffs, potential impact on gross margin and profitability.
• Consumer Response: Impact of higher prices on consumer sentiment and purchase behavior.
• Competitive Landscape: Intense competition, especially from private label in wholesale channels.

Question and Answer

• Q: What sales growth opportunity and earnings goal? A: Doug says they're focused on returning to sustainable growth but won't share specific numbers.
• Q: Tariffs offset details? A: Richard says price increases are key, also vendor sharing and product assortment changes; aim to offset by 2026.
• Q: U.S. retail store plans? A: Using proprietary algorithm, considering store closures, relocations; fleet segmentation starting 2026, segmented stores outperforming.
• Q: Pricing and margin impact? A: Richard says AURs planned up in second half, some offset to tariff impact, but $35M net impact in second half of 2025.
• Q: Wholesale business and new brands? A: Richard says opportunity to broaden brand portfolio, sell-throughs good, new brand Otter Avenue has potential.
• Q: AURs and promotions? A: Richard says promotional marketplace continues, retail team keeps competitive pricing, brands worth more to justify price increases.