CARTERS INC Q3 FY2026 earnings call

• Brand Reimagining: Launched the first comprehensive branding update in 25 years, featuring a new logo and the promise 'Let every child's light shine.' The campaign generated over 1.6 billion media impressions in two months, increasing unaided brand awareness and branded search by nearly 20%.
• Product Innovation: Introduced the 'Stellar Sleep System' to simplify pajama purchasing and capture share in the sleepwear category, which saw double-digit unit and dollar growth. Launched the 'Bedtime Monster Scanner' app feature, driving double-digit conversion improvements.
• Organizational Restructuring: Announced new leadership roles including a Chief Product Officer (Maria Gemzell), Chief Brand Officer (Sarah Crockett), and Chief Commercial Officer (Allison Peterson) to unify retail, wholesale, and e-commerce. A search for a Chief Operating Officer is underway.
• Operational Agility: Despite softness in July and August due to warm weather and Prime Day pull-forward, strategic investments in September reversed negative traffic trends, delivering double-digit retail comp growth and strong profitability.
• Financial Discipline: Adjusted gross margin expanded 200 basis points to 47.1%, driven by higher U.S. retail mix and pricing. Adjusted SG&A decreased nearly 2% despite inflationary pressures, achieving 150 basis points of leverage year-to-date.

Net sales were $752 million, essentially flat year-over-year. Adjusted operating income was $57 million, an increase of 45% with an adjusted operating margin of 7.6%. U.S. Retail segment net sales were comparable to prior year; operating profit nearly doubled with a 250 basis point margin expansion. U.S. Wholesale segment net sales decreased 4% versus prior year; operating profit increased 11% with a 230 basis point margin expansion. International segment net sales increased 4%; operating income increased 28% to $12 million with a 10% operating margin.

• Q4 Net Sales: Forecasted at $860 million to $880 million, representing mid-single-digit lower sales compared to Q4 2025 (which included a 53rd week).
• Q4 Adjusted Operating Income: Forecasted at $74 million to $83 million, down from $89 million in Q4 2025.
• Q4 Adjusted EPS: Forecasted at $1.37 to $1.55, compared to $1.90 in Q4 2025.
• Full Year 2026 Net Sales: Maintained forecast of $2.91 billion to $2.93 billion, implying approximately 1% growth or 2% excluding the 53rd week impact.
• Full Year 2026 Adjusted Operating Income: Maintaining previous outlook for low single-digit to mid single-digit growth.
• Full Year 2026 Adjusted EPS: Maintaining outlook for high single-digit to low double-digit decline, primarily due to higher interest costs from debt refinancing.
• Cash Flow: Expects operating cash flow of $240 million to $250 million for the full year.

• Consumer Spending Pressure: Ongoing inflation, particularly gas prices, is impacting consumer sentiment and spending, leading to softer demand in Q4.
• Promotional Intensity: Anticipation of heavy discounting in November and December as competitors may repurpose tariff relief into price cuts.
• Supply Chain Disruptions: Port congestion and container availability issues have delayed product deliveries, though impacts remain limited so far.
• Tariff Uncertainty: Potential for further changes in tariff policies remains a risk, although current benefits are baked into near-term results.
• Macroeconomic Environment: Election year dynamics and geopolitical uncertainty could amplify consumer concerns and disrupt supply chains.

Q: Analyst asked about the interplay between wholesale and retail channels and how to improve retail traffic. / A: CEO explained that combining commercial functions under one leader will drive synergy and shared insights across channels. The strategy focuses on elevating the store experience through integrated solutions like the Stellar Sleep program and app features to build lifetime value. This approach aims to deepen partnerships with retailers rather than just transactional relationships, leveraging Carter's market share and heritage to create emotional connections with multi-generational consumers.

Q: Analyst inquired about the downward revision in Q4 revenue guidance and wholesale order books. / A: CFO clarified that the primary driver of the revised outlook is U.S. retail weakness, not wholesale. Wholesale volume planned for Q4 moved forward to Q3, benefiting the current quarter. Full-year wholesale results are expected to be flat to slightly down, but spring 2027 pre-ships are up 30%, supporting Q4. Fall sell-ins are pending, providing better visibility next quarter.

Q: Analyst asked about AUR trajectory, gross margins, and tariff impacts for Q4 and beyond. / A: Management expects low single-digit AUR increases in Q4, supported by surgical pricing optimization in key categories. Gross margin expansion is expected to continue, aided by a $10-11 million tariff benefit in Q4 compared to last year's IEPA schemes. Cotton costs are rising 20%, but this affects H2 2027 costing; however, freight surcharges due to oil prices add $4-5 million in incremental costs this year.

Q: Analyst questioned marketing spend levels and opportunities to increase investment post-relaunch. / A: CFO noted marketing spend is $20 million higher than last year, focusing on paid media with rigorous ROI measurement. CCO emphasized balancing short-term results with long-term brand relevance. CEO highlighted the shift from CMO to Chief Brand Officer reflects a strategic push to monetize brand assets. While marketing as a percent of sales remains low vs peers, management plans to increase spend if ROI remains consistent to drive profitable sales.

Q: Analyst asked about the timeline for filling the Chief Product Officer and COO roles. / A: CEO stated the Chief Product Officer role has been vacant since August 2025, with Maria Gemzell joining from H&M in January to lead product innovation and addressable market expansion. The COO search is ongoing due to the upcoming retirement of the current Chief Supply Chain Officer. CEO expressed confidence that Carter's scale and history will attract top talent, noting that while some roles take time, brand initiatives can launch quickly.