Carter's Q1 2025 Earnings Report

Carter's EPS Results

• Actual EPS: $0.66
• Consensus EPS: $0.53
• Beat/Miss: Beat by +$0.13
• One Year Ago EPS: $0.98

Carter's Revenue Results

• Actual Revenue: $291.09 million
• Expected Revenue: $624.86 million
• Beat/Miss: Missed by -$333.77 million
• YoY Revenue Growth: -4.80%

Carter's Announcement Details

• Quarter: Q1 2025
• Date: 4/25/2025
• Time: Before Market Opens
• Conference Call Date: Friday, April 25, 2025
• Conference Call Time: 8:30AM ET

Carter's (NYSE:CRI) engages in the business of brand marketing of young children’s apparel. It operates through the following segments: the United States (US) Retail, US Wholesale, and International. The US Retail segment includes selling products through retail stores and ecommerce websites. The US Wholesale segment focuses on wholesale partners. The International segment is involved in selling in retail stores and ecommerce websites in Canada and Mexico, and to international wholesale customers and licensees. The company was founded by William Carter in 1865 and is headquartered in Atlanta, GA.

Carter's Q1 2025 Earnings Call Transcript

Presentation

[Operator]

Welcome to Carter's First Quarter Fiscal twenty twenty five Earnings Conference Call. On the call are Doug Palodini, Chief Executive Officer and President Richard Westenberger, chief financial officer and chief operating officer Kendra Kruvan, chief pre day creative and growth officer and Sean McHugh, treasurer. Please note that today's call is being recorded. I'll now turn the call over to Mr. McHugh.

[Sean McHugh, VP, IR & Treasurer at Carter's]

Thank you, and good morning, everyone. We issued our first quarter twenty twenty five earnings release earlier today. The release and presentation materials for today's call are available on our Investor Relations website at ir.carters.com. Note that statements on today's call about items such as the company's expectations and plans are forward looking statements. For a discussion of factors that could cause actual results to vary from those contained in the forward looking statements, please see our most recent SEC filings and the earnings release and presentation materials posted on our website.

[Sean McHugh, VP, IR & Treasurer at Carter's]

In these materials, you will also find reconciliations of various non GAAP financial measurements referenced during this call. After today's prepared remarks, we will take questions as time allows. I will now turn the call over to Doug.

[Doug Palladini, CEO at Carter's]

Thank you, Sean. Good morning, everyone. After almost two decades at Vance EDF and the past three years building my own practice as a consultant, board member, and executive coach, it feels just great to be back in a brand leadership role with Carter's, one of America's most iconic companies. I'm sincerely grateful to the Carter's Board of Directors for the faith they have placed in me to return Carter's to growth. And I very much look forward to earning the trust of all of our valuable stakeholders, including consumers, employees, key accounts, and yes, our investors.

[Doug Palladini, CEO at Carter's]

At Vans, I was able to help the brand grow from $350,000,000 in sales to more than $4,000,000,000 from a mostly California skate brand to a global lifestyle brand, and from an experiment for VF into the company's leading source of revenue and profits. Along the way, we were able to dramatically deepen consumer connectivity and loyalty, grow our brand equity and P and L performance commensurately and expand D2C to about two thirds of our global business top line, all of which applies directly to what I hope to achieve here at Carter's. My remit is clear, to return Carter's to growth. And not just any growth by the way, but quality, sustainable, long term and accretive growth. We are not going to buy sales.

[Doug Palladini, CEO at Carter's]

Our goal is to earn them. We're not going to BOGO our way to sales growth. Our goal is to increase profitability. Our ideal is to grow Carter's consistently and sustainably. April 3 was my first day of work.

[Doug Palladini, CEO at Carter's]

I'm well underway in my analysis of the company and our potential opportunities. Based on what I have gleaned so far, I can tell you that our drive for maximum financial efficiency must be balanced with strategic and surgical investment. Our historic focus on maintaining a certain level of operating margins must be paired with a focus on making quality products that resonate. Our transactional efforts must be equaled by emotional loyalty drivers and above all else, we must honor and revere that most human of life's milestones, raising children. As I get up to speed on our business and assess what must be true for a return to growth, we are going to suspend forward looking guidance at this time.

[Doug Palladini, CEO at Carter's]

I strongly believe in the tenet that we do what we say, and I'm assessing what is required to meet that commitment. In addition, the current tariff situation has introduced substantial uncertainty, greatly complicating our ability to accurately predict Carter's financial outlook. Our leadership team is already hard at work on a clear, simplified and focused strategy of priorities and commensurate investments with the goal of returning our brands to accretive growth as soon as possible. And I look forward to articulating that strategy soon. I will now turn the call over to Richard, who has done commendable work bridging the gap between Carter's leaders to walk you through our first quarter results.

[Richard Westenberger, Senior EVP, CFO & COO at Carter's]

Thank you, Doug. Glad to have you with us, and welcome to your first Carter's earnings call. Good morning, everyone. Before we walk through the presentation on our website, I'd like to share some overall thoughts on our business with you. It's only been about sixty days since our last call with you in late February, but there's been a tremendous amount of activity here at Carter's and of course in the broader marketplace in that time.

[Richard Westenberger, Senior EVP, CFO & COO at Carter's]

We'll try to give you a good update on everything this morning. At the top of the list, of course, is Doug's arrival as our new CEO. As you've heard, Doug has a tremendous background in brand management and a strong track record of driving growth. He's jumped right in with all of us. And as he said, he's taking the time required to come up to speed on our business and to align on the initiatives, which we believe will return us to sustained growth.

[Richard Westenberger, Senior EVP, CFO & COO at Carter's]

Today, we'll focus on our first quarter performance. We had a good first quarter. Sales and earnings were in line with our plan and consistent with the outlook we shared with you on our last call. While we achieved our plan, first quarter results were below last year and our objective is of course to be driving growth. It's difficult to imagine a more tumultuous market backdrop than we've experienced over the last couple of months.

[Richard Westenberger, Senior EVP, CFO & COO at Carter's]

The plans which have been announced to impose record tariffs on virtually everything being imported into The United States have led to renewed concerns about inflation, significant declines in consumer confidence and dramatic market volatility, especially for retail and consumer companies such as Carter's. Our objective is to continue to execute amid these broader market and consumer backdrops. Carter's has proven its staying power over the decades and we expect to weather these current challenges as well. So now to cover our Q1 results, I'll turn to the presentation materials posted on our website. On Page two, we have our GAAP basis P and L for the first quarter.

[Richard Westenberger, Senior EVP, CFO & COO at Carter's]

Our first quarter reported operating income of $26,000,000 included $9,000,000 of charges, which we have detailed on the following page. In the first quarter, we incurred $6,000,000 of charges related to our leadership transition. Additionally, we incurred $3,000,000 in costs related to the work we described on our last call. Namely, we have several work streams underway focusing on improving our product and brand development processes to be faster, nimbler and better able to respond to changing consumer preferences. We think this operating model work is very foundational to improving our capabilities and will ultimately facilitate a number of growth related initiatives, particularly related to our direct to consumer businesses.

[Richard Westenberger, Senior EVP, CFO & COO at Carter's]

This morning, I'll speak to our results on an adjusted basis, which excludes these items. On Page four, we have a summary of our first quarter performance relative to the expectations we shared on our last call. As you can see, we achieved all of our first quarter objectives with slightly higher than forecasted consolidated sales. Importantly, U. Retail, the largest part of our business, achieved its sales and earnings plan for the quarter.

[Richard Westenberger, Senior EVP, CFO & COO at Carter's]

We also had some favorable timing of wholesale demand, which benefited first quarter sales. From a product perspective, across our channels, we've seen strong sell through of seasonal spring and summer product, well ahead of last year's pace. And our core newborn to 24 baby business has continued to have good momentum in the market. Operating income was consistent with our plan. A couple of nonoperating items, including higher interest income and a lower effective tax rate, drove a bit more earnings per share than we had forecasted.

[Richard Westenberger, Senior EVP, CFO & COO at Carter's]

Our overall sales and profitability metrics are summarized on Page five. We posted $630,000,000 of net sales in the first quarter, down 5% from last year. And sales in each of our business segments were also down about 5% versus 2024. Adjusted operating income was $35,000,000 representing an adjusted operating margin of 5.6% and adjusted EPS was zero six six dollars Our adjusted P and L is on Page six. On the $630,000,000 in first quarter sales, our gross margin was 46.2%, a decline of 140 basis points versus last year.

[Richard Westenberger, Senior EVP, CFO & COO at Carter's]

The decline in gross margin was largely driven by the continued pricing investment in U. S. Retail, which we told you about on our last call, and the negative impact of FX on product costs in Canada and Mexico. There were some favorable offsets to these pressures, including lower product input costs and favorable channel mix with a lower mix of wholesale sales year over year. Royalty income was $5,000,000 up modestly from last year.

[Richard Westenberger, Senior EVP, CFO & COO at Carter's]

SG and A was well controlled at $261,000,000 down 2% from last year. Incremental costs related to new stores and investments in retail technology were offset by favorable foreign currency translation and lower spending across a number of other areas. Operating income was $35,000,000 compared to $55,000,000 last year, principally a result of lower sales and the pricing investments in our U. S. Retail business.

[Richard Westenberger, Senior EVP, CFO & COO at Carter's]

First quarter net interest and other expense was roughly comparable to last year at $5,000,000 Our first quarter effective tax rate increased approximately 7% from about 24% last year, largely due to divesting of restricted stock. For the full year, we're forecasting an effective tax rate of approximately 23. Our share count was down modestly compared to last year, driven by share repurchases in 2024. So again, on the bottom line, adjusted diluted EPS was $0.66 compared to $1.4 in the first quarter of last year. A summary of our business segment performance is on Page eight.

[Richard Westenberger, Senior EVP, CFO & COO at Carter's]

As we had planned, operating income declined versus last year. Lower profitability in U. S. Retail and U. S.

[Richard Westenberger, Senior EVP, CFO & COO at Carter's]

Wholesale were the primary drivers. Corporate expenses were $3,000,000 lower due to lower marketing and lower performance based compensation provisions. I'll provide some additional perspective on the performance of each of our business segments, beginning with U. S. Retail on Page nine.

[Richard Westenberger, Senior EVP, CFO & COO at Carter's]

U. S. Retail first quarter net sales declined 4% with comp sales down about 5%. These comps were at the better end of our forecast for a decline in the mid to high single digit range. In terms of pacing during the quarter, we had a good January, largely weighted towards clearance, which is usually the case early in the year.

[Richard Westenberger, Senior EVP, CFO & COO at Carter's]

Business weakened in February as we believe it did broadly across the market. Q1 was always going to be all about March since it has historically represented one of the bigger volume months of the entire year. We concentrated our pricing investment and promotional firepower in March. In total, our pricing investment was approximately $12,000,000 This is in relation to our plan for approximately 20,000,000 in first half pricing, which we spoke about on our last call. And our go forward forecast reflect we intend to largely hold to that $20,000,000 amount.

[Richard Westenberger, Senior EVP, CFO & COO at Carter's]

We believe the pricing investments have continued to drive good benefits in the business. Business accelerated meaningfully in March, particularly online, where we saw some of the best performance in several years. We saw a lift in units, store conversion and continued growth in the number of new customers and improvement in our customer retention rates. In terms of product performance, as I said previously, the Baby category continues to be our strongest performing portion of our assortments, achieving a plus 4% comp in the first quarter. While we saw improvement in e commerce trends, store traffic declined in the high single digits.

[Richard Westenberger, Senior EVP, CFO & COO at Carter's]

We obviously need to drive better performance here. And sales in our older kid product categories declined, although in line with planned lower inventory levels as we shifted our inventory investment in favor of our baby and toddler categories. As we mentioned on our last call, we've increased our inventory investment in kid for the back half, increasing choice counts and options available to serve our multi child customers. In terms of profitability, Retail exceeded its internal profit plan in the quarter. The year over year decline in Retail's segment operating margin was largely driven by the pricing investment I mentioned and expense deleverage from lower sales.

[Richard Westenberger, Senior EVP, CFO & COO at Carter's]

Finish off on Retail, sales momentum has continued into April in part due to the later timing of the Easter holiday. April month to date comps in U. S. Retail are running up about 13%. For the combined MarchApril month to date period, U.

[Richard Westenberger, Senior EVP, CFO & COO at Carter's]

S. Retail comps are up about 4%. On Page 10, we have some highlights of our Wholesale and International segments. Sales in U. S.

[Richard Westenberger, Senior EVP, CFO & COO at Carter's]

Wholesale declined 5% year over year in the first quarter. We had planned first quarter wholesale sales down year over year in part due to differences in the planned timing of shipments versus last year. First quarter wholesale sales were somewhat better than we had planned due to higher demand from several customers. Bright spots in the quarter included year over year growth in Skip Hop and the clubs and off price channels. U.

[Richard Westenberger, Senior EVP, CFO & COO at Carter's]

S. Wholesale operating margin remained strong at 22.1% compared to 24% a year ago. The decline reflects changes in customer mix, lower pricing, higher freight rates and expense deleverage. International segment sales declined 5%. Unfavorable movements in foreign currency exchange rates were a $6,000,000 headwind to first quarter international sales.

[Richard Westenberger, Senior EVP, CFO & COO at Carter's]

We had strong comparable sales in Canada and higher sales to our wholesale customers outside of North America. Similar to the trends in The U. S, we've seen strong April month to date sales in Canada and Mexico driven in part by the Easter holiday. April month to date comps in Canada are running up 9% and up 25% in Mexico. International posted a slight loss in the first quarter compared to an operating margin of 2.4% in last year's first quarter.

[Richard Westenberger, Senior EVP, CFO & COO at Carter's]

This decline principally reflects the net impact of foreign currency. We have some highlights for our balance sheet and cash flow on Page 11. Our balance sheet remains very solid. Total liquidity at quarter end was over $1,000,000,000 with over $300,000,000 of cash on hand and virtually all of the capacity under our revolver available to us. Inventories were also in good shape comparable to a year ago in total, and we feel good about the composition of the inventory on hand at quarter end.

[Richard Westenberger, Senior EVP, CFO & COO at Carter's]

The decline in operating and free cash flow tracks to the lower level of earnings year over year. CapEx was $10,000,000 down $2,000,000 from last year. Investments in the first quarter mostly related to eight new stores in The U. S. And Mexico and improvements to our distribution network.

[Richard Westenberger, Senior EVP, CFO & COO at Carter's]

And the distribution of capital of $29,000,000 represented the payment of our quarterly dividend. On Page 12, as has been the case a number of times over the years, supply chain has returned to the top of the list of key issues in our industry. To provide a little background, we have a highly capable supply chain at Carter's, which has been built to support the complexity of our business model. As you know, we operate in multiple channels with multiple brands. Also a differentiating aspect of our product assortment is the relatively high penetration of products sold as sets.

[Richard Westenberger, Senior EVP, CFO & COO at Carter's]

These multiple product configurations entail far more complexity than single garment items than most companies produce. The evolution of our supply chain has mirrored developments and trends in our industry and the rise of production capabilities outside of The United States. We've established strong direct sourcing capabilities based primarily in Hong Kong. We have approximately three fifty of our own employees located in eight countries across Asia who work with our suppliers and our teams here in The United States. Over the years, for a number of reasons, including declining labor cost competitiveness and increasing tariffs, we have meaningfully reduced our reliance on China.

[Richard Westenberger, Senior EVP, CFO & COO at Carter's]

We now have a broadly diversified production base. Vietnam, Cambodia, Bangladesh and India represent our largest countries of origin. In 2024, China production represents less than 2% of our apparel and accessories FOB and less than 4% of total FOB when including Skip Hop. In addition to reducing cut and sew operations in China, we've also eliminated the use of China sourced cotton fiber. The cotton used in our products is traceable back to its origin and comes primarily from The United States, Brazil, India and Australia.

[Richard Westenberger, Senior EVP, CFO & COO at Carter's]

Our Skip Hop business, which is more concentrated than hardlines, including those involving electronics, remains more penetrated in China with roughly 45% of its production base there. We continue to modify our sourcing for Skip Hop to further reduce our reliance on China based manufacturing. On the following page, obviously the big topic over the past several weeks has been the announcement by the administration of significantly increased tariffs on products imported into The United States. We already pay significant duties on the import of our products into The U. S.

[Richard Westenberger, Senior EVP, CFO & COO at Carter's]

In 2024, that amount was approximately $110,000,000 On Page 13, we summarize the significant increase in tariffs which have been proposed. As part of our response to this issue we've engaged advisors and have participated in varying lobbying efforts with Congress and the administration to make our point of view known on these matters. While we understand the objective of expanding manufacturing activity in The United States, very little baby or children's apparel is produced outside of Asia. Import data suggests that less than 5% of baby apparel specifically is produced in the Western Hemisphere. Manufacturing of these products in The United States would be even less than this.

[Richard Westenberger, Senior EVP, CFO & COO at Carter's]

We've evaluated nearshore production alternatives, specifically in Latin America, a number of times over the years. While there are certainly benefits from shorter transportation times and reduced or no duties, they are offset by uncompetitive labor costs, a lack of availability of important components beyond fabric such as snaps and zippers and a general absence of the capabilities and expertise required to produce our products. We do not believe baby and children's apparel production will return to The United States anytime soon. And if it did, we believe the resulting cost of these items to the end consumer would prove extremely prohibitive. We have already taken action across a number of areas in response to the higher tariffs, which have already been implemented.

[Richard Westenberger, Senior EVP, CFO & COO at Carter's]

Some of these actions are summarized here. The proposed higher tariffs would result in meaningful increases to our product costs if not otherwise mitigated. Certainly, raising prices is under evaluation as well. This obviously is not our preference. The proposed tariffs have the potential to raise prices on a range of essential items, including our products that families with young children rely upon.

[Richard Westenberger, Senior EVP, CFO & COO at Carter's]

To close and just to reiterate Doug's comments, we're suspending our forward guidance today. This decision reflects the unique circumstances of our leadership transition and the tremendous economic uncertainty related to the proposed tariffs. We think it's the prudent thing to do. I feel very good about the current momentum of the business and continue to believe that our long term prospects, the long term prospects of Carter's are very, very attractive. Those are our prepared remarks today and we're ready to take your questions.

[Operator]

Thank you. Our first question comes from the line of Jay Sole with UBS. Your line is now open.

[Jay Sole, Managing Director at UBS Group]

Great. Thank you so much. I have two questions. First, Doug, it's your first call obviously as Carter's CEO. I'd love any initial thoughts you have about what you've seen as you've gotten into the business and gotten to know the company and opportunities you see to improve the financial performance?

[Jay Sole, Managing Director at UBS Group]

And then secondly, I want to ask about the slide 13 in the slide deck that has the 2025 estimated annual effective tariff rates. Of these potential rates, say, for example, 44% on Vietnam, is that based on the rates as of today given the current pause versus the reciprocal rates that were announced on April 2? Is this something because number doesn't if you can explain where these numbers come from. Is this as it stands today or theoretical? And if it is theoretical, sort of can you talk about what the impact would be today just based on the rates that exist out there right now?

[Jay Sole, Managing Director at UBS Group]

Thank you so much.

[Doug Palladini, CEO at Carter's]

Yeah, thanks Jay. I'm not going to get into too much detail. As I said, looking forward down the road to really sharing a revised strategy with you all. But what I would say is that I'm truly honored to be at the helm of these iconic brands. I'm, seriously inspired by the people and the culture here.

[Doug Palladini, CEO at Carter's]

And I already have myriad reasons to believe in our future success. There's a lot of strength in our brand assets, our market distribution, and, we have substantial equity with generations of consumers. So look forward to adding a lot of specificity as we move forward. Richard, do you wanna take the

[Doug Palladini, CEO at Carter's]

second part of that?

[Richard Westenberger, Senior EVP, CFO & COO at Carter's]

Jay, on page 13, this was an attempt to be helpful and what we've done is we've gone kind of item by item through the various import codes and such, looking at what the reciprocal tariffs would mean and kind of aggregating that up. So obviously China has been hit particularly hard. That's relatively low, as I said, in terms of our country of origin. But significant exposure for Vietnam, Cambodia and Bangladesh.

[Richard Westenberger, Senior EVP, CFO & COO at Carter's]

So you can see it's going from an initial low kind of teens, low double digit tariff rate to something that would be much, much more meaningful. So this is a bit of a hypothetical. It does assume that the reciprocal tariffs that the administration has proposed do become effective. That's obviously not the case at the moment with the positives in effect. So we certainly have done our measure of internal quantification of it.

[Richard Westenberger, Senior EVP, CFO & COO at Carter's]

It would be a material increase to our product cost. But since it is hypothetical and we're certainly hoping that cooler heads, more rational heads will prevail and agreements will be reached, we're not going to quote a number today, but just wanted to make the point that for a company that I think has done an excellent job diversifying its sourcing base, creating broad based capabilities around the world, reducing our reliance on China for all the right reasons, this would be punitive to us, and it would be for, I think, everyone in the apparel industry. So hopefully, that's helpful. That's what it was intended to be.

[Jay Sole, Managing Director at UBS Group]

Okay. Understood. That is sort of based on the April 2 reciprocal rates. That's all right. I think making that clear is super helpful.

[Jay Sole, Managing Director at UBS Group]

So thank you so much. I'll pass it on.

[Richard Westenberger, Senior EVP, CFO & COO at Carter's]

Yes, thanks for helping us clarify, Jay.

[Operator]

Our next question comes from the line of Ike Boruchow with Wells Fargo. Your line is now open.

[Ike Boruchow, Managing Director & Senior Analyst at Wells Fargo]

Hey, good morning everyone. Good to talk to you Doug. A couple of questions for me. I'll give them in order. I guess the first question is the China exposure you guys are citing the less than four.

[Ike Boruchow, Managing Director & Senior Analyst at Wells Fargo]

Maybe Richard, I mean, is that a number that can go to zero? Is that a number that's kind of like you need what's produced there so that's as low as it can go? I'm just kind of curious like over time, can that number move lower? How should we think about that?

[Richard Westenberger, Senior EVP, CFO & COO at Carter's]

Yeah. Sure. I would say, in terms of our branded apparel, there's very, very little that's left in China. It's largely our accessories vendors, our third parties who produce licensed products for us. Footwear is a is a good example.

[Richard Westenberger, Senior EVP, CFO & COO at Carter's]

Some of that product is is still manufactured in China. We've been working with those licensed vendors to continue to migrate their production to other countries, and that's underway as well. So I think it can go down from here, but that probably will take some And then Skip Hop is probably more dependent, as I mentioned, than we would like it to be on China. A lot of that business is resident in China, particularly the components that have to do with electronics. I think capabilities to produce those products have been slower to ramp up in the other countries, but we're continuing to actively work on that as well.

[Ike Boruchow, Managing Director & Senior Analyst at Wells Fargo]

Got it. And then two more. So I know you're not going get into guidance and specifics, but I guess I'll try to ask something at a high level. Just well, first, when are you expecting the tariff impacted goods to begin to hit your shelves? And then how are you thinking about mitigation efforts near term and long term?

[Ike Boruchow, Managing Director & Senior Analyst at Wells Fargo]

And then a follow-up to that is just, you expecting to price out the pressure? And how are you thinking about price elasticity and potential declines in volume or total revenue as a repercussion of what you might need to do just to kind of maintain or keep the gross margins steady?

[Richard Westenberger, Senior EVP, CFO & COO at Carter's]

Sure. Ike, I would say we're importing product on kind of a continuous basis. I think the first imports will be subject to these tariffs kind of the May from memory. But we probably have on order on hand something like one hundred and fifty days of supply across our various businesses. So like a lot of other retailers, we have inventory in stock that's not subject to the tariffs and so we have a little bit of time before it really bleeds into the cost structure.

[Richard Westenberger, Senior EVP, CFO & COO at Carter's]

The mitigation efforts, I would say, have been pretty effective in what's been implemented so far. So we have raised prices on some items, particularly related to Skip Hop. We have partnered with some of our vendors to share some of those costs. We are continuing to move production around to lower tariff geographies. So those mitigation actions have already been taken in some cases.

[Richard Westenberger, Senior EVP, CFO & COO at Carter's]

We would have to do more of that. Pricing is the big question mark. I think there would be some measure of that that we would have to implement. I don't know that I'm going to probably say much more at this point because we're in the realm of speculation at this point. But this would be a material increase to our product costs.

[Richard Westenberger, Senior EVP, CFO & COO at Carter's]

And I think like everybody in the industry, we're trying to figure out exactly how much can the consumer bear. It probably makes sense to perhaps do it on some products versus others, and that's all part of the analysis that we have underway.

[Kendra Krugman, Senior EVP and Chief Creative & Growth Officer at Carter's]

And we will look at our unit to offset price increases as necessary with minimal impact or minimal liability.

[Richard Westenberger, Senior EVP, CFO & COO at Carter's]

I would say one other step that we have taken is taking a look at our kind of late year inventory commitments. We have scaled those back slightly. Just, out of prudence, we probably don't think we're going to need as many units as we thought initially, and I think that reduces a bit of our exposure also.

[Ike Boruchow, Managing Director & Senior Analyst at Wells Fargo]

Got it. Thank you, guys.

[Operator]

Thank you. Our next question comes from the line of Paul Lejuez with Citi. Your line is now open.

[Paul Lejuez, Managing Director at Citi]

Hey, thanks guys. Hey, Richard, just building on that last comment on scaling back inventories. Can you quantify that for us? How much are you pulling back in second half inventory relative to your plan? And I'm also curious what you're seeing from your big retail partners, specifically the big three?

[Paul Lejuez, Managing Director at Citi]

Have you already started to see some order cancellations and that's what's driving you pulling back? Or are you just anticipating that you might see some of those cancellations? And then, just second, I'm just curious, what product is already on hand? Are you already fully stocked? You have products for back to school?

[Paul Lejuez, Managing Director at Citi]

And I guess how much is still on the come for holiday? If you could just maybe talk about the timing of, what you're receiving and when?

[Richard Westenberger, Senior EVP, CFO & COO at Carter's]

Yes. I would say most of what we have on hand is spring summer inventory. The fall winter product would start to arrive in kind of late May, June and the holiday product would come after that. So the balance of our inventory receipts clearly are still ahead of us, but we have a good portion of our business, as you know, that's on replenishment, so we have those products on hand kind of at all times. I would say the inventory adjustments largely relate to our own businesses, our own U.

[Richard Westenberger, Senior EVP, CFO & COO at Carter's]

S. Retail business. And I would say it's fairly modest in the scheme of things. We're committed pretty far out at this point, so it's kind of the late holiday winter deliveries that we're talking about impacting. I don't think I'm gonna quantify for you exactly how much that is.

[Richard Westenberger, Senior EVP, CFO & COO at Carter's]

So it largely relates to our own retail business. I would say our momentum in wholesale continues to be good. We continue to have an active dialogue with our wholesale customers. I think they're approaching the situation with a great deal of caution as well. There's great uncertainty to all of them and all of their business models as well.

[Richard Westenberger, Senior EVP, CFO & COO at Carter's]

We have not seen any meaningful trend towards reduced inventory commitments coming from the wholesale channel, not a significant trend towards order cancellations, but we're obviously watchful for that. But everyone's uncertain right now, the prospect of having to raise prices. And I think just looking at what's happened in the consumer backdrop as well the last couple of months, we've seen consumer confidence drop extremely rapidly and significantly over the last couple of months. And I think our wholesale customers are trying to evaluate, the health of their consumer, and, and what their outlook will look like for the balance of the year.

[Paul Lejuez, Managing Director at Citi]

Paul, to add on Richard's Go ahead. Go ahead. Sorry, go ahead.

[Kendra Krugman, Senior EVP and Chief Creative & Growth Officer at Carter's]

I was just gonna add on to what Richard was saying. We a robust time and action calendar that the teams are managing, so we will hold off on any decisions around units or cancellations or pricing as long as we possibly can.

[Paul Lejuez, Managing Director at Citi]

Yeah, and just to clarify, we go to the back to school season would be the first sort of full season that would be subject to tariffs that would have products subject to the new tariffs?

[Richard Westenberger, Senior EVP, CFO & COO at Carter's]

I think more and more of that assortment would be subject to it because that product will be imported later.

[Paul Lejuez, Managing Director at Citi]

Got it. Okay. Thank you. Good luck, guys.

[Richard Westenberger, Senior EVP, CFO & COO at Carter's]

Thank you, Paul.

[Operator]

Our next question comes from the line of Chris Nardone with Bank of America. Your line is now open.

[Chris Nardone, Director, Equity Research at Bank of America]

Thanks, guys. Good morning. First, I wanted to ask on the retail comp improvement you saw over the last two months. I know you've probably received an impact from the Easter shift, but is there a way you could parse out how much of the improvement is coming from products where you had been more sharp on price? And then Kendra, just given the changing macro dynamics since we last spoke, are there any changes to your strategies to help drive some improved performance in your retail business in the back half of the year?

[Kendra Krugman, Senior EVP and Chief Creative & Growth Officer at Carter's]

Sure. So we have some signals that are some significant signals that our product strategies are working that we've spoken about over the last few calls. Where we've leaned into fashion with styling and fabric and details, our customers responding and we're seeing that in our conversion rates in our stores that are very positive versus last year and our sell throughs are up across channels. We're also the more competitive pricing, to answer that question, is driving UPTs at retail specifically. It's not a big portion of our assortment that is like super sharp pricing that we've made adjustments on, but we are seeing the UPTs lift on those products and the consumers are adding additional products to those baskets so it's not that those opening price point styles are standing alone.

[Kendra Krugman, Senior EVP and Chief Creative & Growth Officer at Carter's]

Our marketing strategies are also driving new customers to our channels, driving new customers that are very style centric and baby customers. So that has been a great metric that we're seeing. Regarding macro trends, they're certainly having an impact on our business. It's hard to know exactly how much. I would say that we have some typical channel shifts across our retailers and our channels that we normally see.

[Kendra Krugman, Senior EVP and Chief Creative & Growth Officer at Carter's]

But also there is likely a little bit of pull forward of demand as consumers are planning ahead to avoid tariff related price increases. In the back half we have some significant inventory investments in the kid category which is where we've seen the most challenging portion of our business both in breadth and depth investments in kid that will help to continue the momentum in products. But other than that the same strategies we've been working towards will continue in the back half to drive our business.

[Chris Nardone, Director, Equity Research at Bank of America]

Got it. Okay, that's very helpful. And then just a quick follow-up for Richard, if we put tariffs to the side for a second can you just talk about your visibility you're having to other costs such as cotton, freight and labor? Maybe if you can just talk through the cadence as we move through the year, which may be good guys, bad guys, anything that can help us think through our margin forecast?

[Richard Westenberger, Senior EVP, CFO & COO at Carter's]

Sure, sure. Well, outlook for cotton has been pretty benign. It's somewhere in the low $0.60 range. I was looking at some data the other day. Apparently crop yields around the world have been good and so that is taking some price pressure out of the system.

[Richard Westenberger, Senior EVP, CFO & COO at Carter's]

So I think the outlook for cotton is actually very favorable at the moment. And we've procured all of our cotton for balance of the year. So I think we're in good shape there. I think on labor, we have seen a trend towards labor inflation. We'll see what happens with the global economy.

[Richard Westenberger, Senior EVP, CFO & COO at Carter's]

That tends to drive, kind of the outlook for labor rates in Asia and I think it's been a bit mixed. We had seen some pressure there. I was looking at some data across a couple of other countries and it looked like it had moderated a bit. So we're still planning for a bit of inflation there. I think wages tend to only go kind of one direction.

[Richard Westenberger, Senior EVP, CFO & COO at Carter's]

And I would say on transportation costs, freight costs, we've got some modest inflation, kind of going forward. We just finished renegotiating our ocean freight contracts. I think you were aware that we had that going on. And I think the procurement team and the supply chain teams did an outstanding job with those renegotiations. I think the rate impact that we're expecting this year is only a couple of million dollars across our P and L.

[Richard Westenberger, Senior EVP, CFO & COO at Carter's]

So that's obviously very manageable. We had some extraordinary costs last year, probably $12,000,000 13 million dollars of unusual costs, would say, in transportation related to rerouting vessels, some of the surcharges, the disruption that was coming out of The Middle East and such. We don't expect to have those costs this year. So even with a bit of rate inflation in our new contracts, it's a fairly modest dollar amount exposure to the P and L.

[Chris Nardone, Director, Equity Research at Bank of America]

Okay. Thank you. Good luck, guys.

[Richard Westenberger, Senior EVP, CFO & COO at Carter's]

Thank you, Chris. Good luck.

[Operator]

Thank you. Our next question comes from the line of William Reuter with Bank of America. Your line is now open.

[William Reuter, Analyst at Bank of America]

Hi, good morning. I have two. So the first, in the event that their tariffs had been eliminated last week, would you have still pulled guidance, meaning, I guess, with the change in management and consumer uncertainty, was that a large part of the decision to pull guidance? Or is it mostly related to the tariffs and who knows where that's going to go?

[Richard Westenberger, Senior EVP, CFO & COO at Carter's]

Yes, think both factors contributed to it, Bill. I would love to be in that zero tariff world that you just described. Sounds pretty attractive at this point. But I think it's not uncommon to have a new CEO come in and take the time that's required to assess what's underway. So I think likely we would have made the same decision.

[William Reuter, Analyst at Bank of America]

Yeah, I'd like no tariffs too. Secondarily, I think in your prepared remarks you mentioned marketing was down a bit. It was higher a little bit year over year last year. I think it was expected to be flat this year in '25. Is that still the expectation or are you going to pull back a little bit or is your plan to pull back a little bit like given the kind of uncertainty around consumer confidence, etcetera?

[Richard Westenberger, Senior EVP, CFO & COO at Carter's]

I think that the previous plan is still the case around anticipated marketing expenditures. The comment related to the portion of marketing costs that remain in the unallocated bucket and don't get pushed out, so that tends to be more technology costs and personnel costs and such, but not really the the consumer facing portion of marketing. So those costs are are resident in the in the business segment. So it's a bit of accounting geography.

[William Reuter, Analyst at Bank of America]

Got it. Alright. That's all for me. Thank you.

[Richard Westenberger, Senior EVP, CFO & COO at Carter's]

Thank you, Bill.

[Operator]

Thank you. And I'm currently showing no further questions at this time. I'd like to hand the call back over to Doug Palladini for closing remarks.

[Doug Palladini, CEO at Carter's]

Thank you all for your time and your interest in Carter's. Despite all the uncertainty we reviewed today, I've been incredibly impressed by the drive and the acumen our people are exemplifying every day, and we really look forward to sharing future strategic specificity as we move forward. Thank you all.

[Operator]

This concludes today's conference call. Thank you for your participation. You may now disconnect.

Participants

Executives

• Sean McHugh, VP, IR & Treasurer
• Doug Palladini, CEO
• Kendra Krugman, Senior EVP and Chief Creative & Growth Officer

Analysts

• Richard Westenberger, Senior EVP, CFO & COO at Carter's
• Jay Sole, Managing Director at UBS Group
• Ike Boruchow, Managing Director & Senior Analyst at Wells Fargo
• Paul Lejuez, Managing Director at Citi
• Chris Nardone, Director, Equity Research at Bank of America
• William Reuter, Analyst at Bank of America