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    CRI
    Earnings call· Jun 2026(Q2 FY26)

    CARTERS Q2 FY26 earnings call CRI

    Jul 31, 2026 Source

    Executive summary

    Carter's Q2 FY26 — Strong Sales Growth and Tariff Recovery Boost Profitability

    Carter's delivered solid Q2 FY26 results, exceeding outlook with net sales up 5% and adjusted operating profit increasing 54%, significantly bolstered by a $132 million tariff recovery. The company continues to see strong U.S. retail comparable sales growth and e-commerce acceleration, driven by effective marketing and platform investments. While navigating a complex macro environment with some wholesale softness and consumer price resistance, the new CEO is focused on leveraging iconic brands and a multi-channel model to drive consistent, profitable growth and enhance shareholder value.

    Highlights

    5

    • Net sales grew 5% over prior year for the third consecutive quarter.

    • Adjusted operating profit increased 54% to $18 million.

    • U.S. retail comparable sales grew 5%, marking the fifth consecutive quarter of comp sales growth.

    • Balance sheet and liquidity strengthened significantly with the recovery of $132 million in previously paid tariffs and related interest.

    • First half operating cash flow was over $200 million, compared to a use of cash of $8 million last year.

    Concerns

    5

    • Adjusted gross margin decreased 180 basis points to 46.3% due to tariff pressure and product make investments.

    • Second half wholesale demand is expected to be lighter than planned, with full-year wholesale net sales growth in the low single-digit range.

    • Moderated AUR assumptions for the second half due to consumer price resistance, planning for a more value-conscious consumer.

    • Q2 effective tax rate was 23%, largely driven by taxable tariff refunds, not comparable to prior year.

    • Higher interest costs from senior notes refinancing will weigh on full-year EPS by approximately $0.30 per share.

    Guidance & targets

    18
    CategoryTargetConfidence
    Full-year net sales growth
    2% to 3% growth
    high materiality
    Medium
    Full-year wholesale net sales growth
    low single-digit range
    medium materiality
    Medium
    Full-year U.S. retail sales growth
    low single-digit range
    medium materiality
    Medium
    Full-year U.S. retail comparable sales growth
    mid-single-digit range
    medium materiality
    Medium
    Full-year international net sales growth
    mid-single-digit growth
    medium materiality
    Medium
    Full-year adjusted operating income growth
    low to mid-single digits over 2025
    high materiality
    Medium
    Full-year effective tax rate
    approximately 23%
    low materiality
    Medium
    Full-year adjusted EPS outlook
    down high single digit to low double digits
    high materiality
    Medium
    Full-year operating cash flow
    $230 million to $240 million
    medium materiality
    Medium
    Full-year CapEx
    approximately $50 million
    low materiality
    Medium
    Q3 net sales
    approximately $750 million
    high materiality
    Medium
    Q3 U.S. wholesale sales growth
    down high single digits
    medium materiality
    Medium
    Q3 U.S. retail sales growth
    low single-digit growth
    medium materiality
    Medium
    Q3 international segment net sales growth
    mid to high single-digit growth
    medium materiality
    Medium
    Q3 gross margin
    expansion
    high materiality
    Medium
    Q3 adjusted operating income
    approximately $50 million
    high materiality
    Medium
    Q3 adjusted EPS
    approximately $0.85
    high materiality
    Medium
    Q4 consolidated net sales growth
    low to mid single-digit growth
    high materiality
    Medium

    Segment performance

    3
    SegmentRevenueYoYQoQMargin
    U.S. Retail
    Fifth consecutive quarter of comp sales growth. Growth across all core age segments, primarily baby products. E-commerce growth accelerated, driven by investments and attracting Gen Z. Higher clearance weighed on AUR and gross margin.
    Comparable retail sales: 5% increaseComp sales (H1): 8% increaseE-comm comp sales: double-digit increaseAUR: comparable to prior yearTraffic: comparable to prior year
    		grew 2%2%—increased over prior year
    U.S. Wholesale
    Strong growth, higher than forecasted due to earlier demand for fall product, primarily with mass channel customers. Operating profit increased 10%. Higher realized pricing, tariff mitigation, and expense leverage offset higher tariff and product costs.
    Growth in AUR and unitsGrowth in Little Planet and Skip Hop
    		increased 12%12%—roughly comparable
    International
    Reported sales benefited from favorable FX. Sales growth in Canada and Mexico offset lower sales in international partners business. Mexico's Q2 comps affected by Easter shift and World Cup, but demand rebounded strongly in July. Operating margin increased 180 bps to 5.7%, driven by productivity savings and lower product costs from favorable FX.
    Constant currency net sales: comparable to last yearCanada net sales: 1% increaseCanada comp sales: 1% increaseMexico net sales: 22% increaseMexico comp sales: essentially flatMexico year-to-date comp: 9% increase
    		increased 3%3%—increased 50% to more than $5 million

    Operational metrics

    28
    Net sales
    $615 million5% over prior year
    Q2 FY26

    Exceeded previous outlook, third consecutive quarter of growth.

    Adjusted operating income
    $18 million54% increase
    Q2 FY26

    Above previous outlook, driven by higher sales and lower spending.

    Adjusted operating margin
    2.9%90 basis points increase
    Q2 FY26
    Adjusted gross margin
    46.3%180 basis points decrease
    Q2 FY26
    SG&A leverage
    nearly 300 basis points
    Q2 FY26

    Achieved on a rate basis, due to productivity initiatives including store closures, offsetting marketing spend and inflationary pressures.

    Adjusted SG&A
    $270 million1% decrease
    Q2 FY26
    Adjusted EPS
    $0.2653% increase over last year's $0.17
    Q2 FY26
    Effective tax rate
    23%compared to 74% last year
    Q2 FY26

    Largely driven by taxable tariff refunds, not comparable to last year's rate.

    AURs (consolidated)
    mid single digits
    Q2 FY26

    Improved on a consolidated basis.

    Units (consolidated)
    low single digits
    Q2 FY26

    Up on a consolidated basis.

    Gen Z demographics growth
    mid-teens
    Q2 FY26

    New consumers, including Gen Z, grew mid-teens in the quarter.

    Tariff recovery (cash)
    $132 million
    Q2 FY26

    Received from the US government, taxable.

    Charges in Q2
    $6 million
    Q2 FY26

    Majority related to recent leadership transition.

    Children's apparel market sales growth
    about 2%
    H1 FY26

    Market has proven resilient.

    Share of age 0-10 market
    stable
    H1 FY26

    Share gains in baby and kid offset by decline in toddler.

    Cash on hand
    over $650 million
    Q2 FY26 end

    Boosted by tariff recoveries.

    Net inventories
    $578 million7% decline compared to prior year
    Q2 FY26 end
    Inventory units
    9% lower
    Q2 FY26 end
    Dividends paid
    $18 million
    H1 FY26
    53rd week contribution
    estimated $37 million
    FY25

    Will not repeat in FY26.

    Tariff cost reduction estimate
    $75 million
    FY26

    Estimated reduction in gross tariff amount over historical baseline, previously $200 million.

    AI consumer chat management
    one-third of our contacts
    Q2 FY26

    New functionality manages one-third of customer contacts, allowing reinvestment into high-touch care.

    Buy online pick up in store (BOPIS)
    upyear-over-year
    Q2 FY26

    Omni-channel metric showing consumer behavior shift.

    Net sales
    $1.3 billion7% increase over prior year
    H1 FY26
    Recorded operating income
    $168 million
    H1 FY26

    Included tariff recovery and other non-recurring charges.

    Reported EPS
    $3.26compared to $0.43 in 2025
    H1 FY26
    Reported operating income
    $140 million
    Q2 FY26

    Inclusive of tariff recoveries.

    Reported EPS
    $2.87
    Q2 FY26

    Industry KPIs

    8
    MetricValueDetails
    Effective tax rate23%%
    Inventory position$578 millionUSD
    Revenue by channel2% U.S. retail net sales growth%
    Operating margin sg a2.9% operating margin%
    Store fleet door investment—
    Share buyback capital return$18 millionUSD
    Tariff cost exposure recovery$132 million recoveredUSD
    Franchise product cycle performanceGrowth in baby products

    Product announcements

    1
    ProductTypeDetails
    Umbro collaborationlaunch

    Risks & headwinds

    8
    Complex macroeconomic environmentOngoing

    Not quantified, but mentioned as a backdrop for performance.

    Mitigation: Focus on execution, stabilizing business, returning to top-line growth.

    Tariff pressure on gross marginQ2 FY26, ongoing with new Section 301 tariffs.

    $28 million gross impact incremental to historical baseline in Q2.

    Mitigation: Increased pricing, tariff mitigation actions, productivity initiatives.

    Higher interest costs from debt refinancingFull-year FY26

    Will weigh on full-year EPS by approximately $0.30 per share.

    Mitigation: Improved outlook for interest income based on better than planned cash balance.

    Lighter second half wholesale demandH2 FY26

    Full-year wholesale net sales growth in low single-digit range. Q3 U.S. wholesale sales down high single digits.

    Mitigation: Adjusting outlook, reading the business, evaluating performance, and adjusting accordingly.

    Consumer price resistance and value-conscious consumerH2 FY26

    Moderated AUR assumptions for H2.

    Mitigation: Planning for a more value-conscious consumer, focusing on value proposition.

    Promotional activity across the marketplaceUpcoming holiday season (H2 FY26)

    Not quantified.

    Mitigation: Monitoring the situation.

    Consumer sentiment (sustained higher gas prices, persistent inflation)Ongoing

    Not quantified.

    Mitigation: Monitoring the situation.

    Continued uncertainty regarding tariffsOngoing

    Administration may raise new Section 301 tariff rates (currently 10-12.5% above historical baseline).

    Mitigation: Maintaining liquidity, cautious approach.

    What to watch in Q3 FY26

    5

    Wholesale demand trajectory

    Q3 FY26
    CurrentQ2 wholesale sales benefited from pull-forward; H2 expected to be lighter.
    TargetStabilization or improvement in wholesale demand, particularly for Q3.

    Why it matters

    Wholesale sales contribute significantly to overall revenue, and a sustained slowdown could impact full-year guidance.

    First, we expect second half wholesale demand will be a bit lighter than we had originally planned. Q2 wholesale sales included some pull forward📎 of sales initially planned to occur in the third quarter.

    Q&A highlights

    7

    Clarify the contradiction between earlier wholesale demand and conservative H2 outlook, and explain the accounting for the tariff refund, specifically if it reduced inventory.

    Richard explained that earlier fall product demand was strong, but H2 wholesale demand is expected to be lighter due to some customers being more conservative. He clarified that the tariff refund did not reduce inventory as the goods were already sold, and the $18 million in inventory from higher tariffs relates to the +10% tariffs post-IEPA. He also noted strong forward bookings for fall, winter, and early spring 2027.

    “So the accounting did not reduce inventory. At this point, we have sold through the goods that were brought into the country and tariffed at the higher level, of tariff rates.”

    asked by Paul Leshway from Citi · answered by Richard

    2 min read6 chapters

    Detailed Narrative

    01

    New CEO's Vision and Strategic Focus

    Sharon Price-John, the new CEO, outlined her initial focus on leveraging Carter's iconic brands, strong consumer base, market leadership, multi-channel business model, and talented organization. Her objective is to deliver consistent, profitable growth by becoming consumer-centric and data-driven, building relationships, and expanding total lifetime value. She emphasized brand building to monetize equity and trust, and evolving to meet marketplace needs, aiming to lead change within the industry.

    02

    Tariff Recovery and Impact

    The company recovered approximately $132 million in previously paid tariffs and related interest in Q2 FY26, with $128 million benefiting gross profit and $4 million recorded as interest income. This recovery was taxable, resulting in a $30 million tax provision. The Section 122 tariffs expired, replaced by Section 301 tariffs at 10% to 12.5% above the historical baseline. Changes in tariff rates impact inventory costs first, then flow into cost of goods sold upon sale.

    03

    E-commerce Acceleration and Digital Investments

    U.S. e-commerce sales accelerated, achieving double-digit comp sales growth for the fourth consecutive quarter, driven by strong traffic and profitability. Investments in platform and user experience, including enhanced outfitting, AI-optimized product reviews, passwordless login, and an AI consumer chat managing one-third of contacts, are driving increased visits, higher conversion, and more units per transaction. These digital enhancements are effectively attracting Gen Z families and driving engagement with higher AUR products.

    04

    Marketing Effectiveness and Brand Engagement

    Marketing investments are yielding measurable gains in customer acquisition and brand relevance. A collaboration with Umbro for the World Cup drove strong engagement, particularly with Gen Z and multicultural markets, with purchasers buying higher AUR items and more units. The company plans continued marketing investment in H2 FY26 given strong returns, focusing on increasing share of voice and improving consumer experience across channels.

    05

    Wholesale Dynamics and Inventory Management

    Q2 wholesale net sales increased 12%, exceeding forecasts due to earlier demand for fall product, primarily from mass channel customers. However, second half wholesale demand is expected to be lighter, with some customers adopting a more conservative outlook on inventory commitments. Net inventories declined 7% YoY to $578 million, with units 9% lower, and inventory quality is strong heading into H2 FY26, having cleared seasonal goods.

    06

    Consumer Behavior and Channel Shift

    While U.S. retail traffic was comparable to prior year, e-commerce accelerated, suggesting a consumer shift towards online convenience, potentially influenced by inflation and gas prices. Omni-channel metrics like buy online, pick up in store (BOPIS) were up. The company views this channel shift as positive, as consumers shopping across both physical and digital channels tend to have greater lifetime value and higher average unit retail (AUR).

    AI-generated summary of the company’s earnings call. Not investment advice.