Carter's, Inc. Q3 FY2025 earnings call

Management Statement and Operational Highlights

• Business Transformation: Accelerating with core strategies taking hold; consumer response to new products strong, especially among Gen Z families.
• Q3 Results: Net sales $758M, operating income $29M, EPS $0.32; adjusted EPS $0.74. Included one-time charges for pension plan termination, deferred compensation, and restructuring.
• Tariff Management: Mitigated tariffs via supplier base ($40M+ duty reductions) and price increases; pricing critical for future tariff mitigation.
• Organizational Restructuring: Planning $45M gross savings in 2026, including 15% reduction in office-based roles ($35M savings in 2026) and further SG&A reductions.
• Store Closures: Target 150 store closures, expecting sales transfer and profitability accretion; inventory position improved heading into Q4.
• Marketing Investment: Q4 media spend up 11% y-o-y; plan to increase demand creation spend ~20% ($16M) in 2026, focusing on traffic and loyalty.

Segment Performance

• U.S. Retail: Net sales grew 3% in Q3 with a positive 2% total Retail comp. AURs increased mid-single digits, baby and toddler categories saw growth, inventory improved, and marketing investment led to increased brand awareness. Net sales contribution: Significant, with growth in key categories.
• U.S. Wholesale: Sales down, driven by lower Simple Joys sales on Amazon; department store sales also lower. Net sales contribution: Lower due to specific brand and customer trends.
• International: Sales up 5%, with Mexico achieving +16% comp and strong growth in international partners business. Net sales contribution: Positive growth, led by Canada and Mexico.

Guidance

• 2025: Focus on near-term profitability by reducing cost base; ongoing transformation to unlock full potential.
• 2026: Plan sales and earnings growth higher than typical year due to pricing; gross margin expected down due to tariffs, but productivity initiatives to offset. Q4 expectations: U.S. Retail low single-digit comp, wholesale down low single digits, International growth; net impact of tariffs on Q4 earnings $25M-$35M.

Risks

• Inflation: Persistence of inflation and its impact on consumer demand across purchase categories.
• Tariffs: Uncertainties in trade negotiations and their impact on costs, pricing, and profitability.
• Amazon Brand Management: Changes in Amazon's brand management affecting the Simple Joys brand and wholesale business.

Q: Kelly Crago asked about the Simple Joys brand and wholesale pricing.

A: Richard Westenberger and Douglas Palladini responded, noting Simple Joys is the smallest part of the exclusive brands portfolio and plans to focus on core brands on Amazon; wholesale pricing comparable in Q3, with more degrees of freedom in retail for price improvement.

Q: Jay Sole asked about 2026 sales growth.

A: Richard Westenberger stated sales growth higher than typical year due to pricing, with more revenue gains driven by price than units.

Q: Ike Boruchow asked about store closings and Simple Joys.

A: Richard Westenberger explained expected sales transfer from closed stores and that Simple Joys is a drag on wholesale revenue but core brands offer bigger opportunities on Amazon.

Q: Christopher Nardone asked about margins and tariffs.

A: Richard Westenberger and Douglas Palladini discussed tariff impact on margins, cotton costs being stable, and plans to raise prices thoughtfully while maintaining competitiveness.

Q: James Andrew Chartier asked about tariff impact and tax rate.

A: Richard Westenberger stated estimated $40M gross impact of tariffs in Q4 and 24% effective tax rate as a planning assumption.

Q: Paul David Kearney asked about SG&A savings and media spend.

A: Richard Westenberger and Douglas Palladini explained SG&A savings to start in 2026, demand creation spend increase, and focus on driving traffic and loyalty through storytelling.

Q: Janet Kloppenburg asked about comps and clearance inventory.

A: Richard Westenberger responded that comps are up due to lower promotional intensity last year, and clearance inventory is improved year over year.