Carter's Q3 Earnings Call Highlights

Key Points

• Third-quarter results exceeded expectations: Sales were $752 million, while adjusted operating income rose 45% to $57 million and adjusted EPS increased nearly 40% to $1.03. Improved margins, pricing, productivity initiatives and strong international performance supported profitability.
• Brand and product initiatives gained traction: Carter’s relaunched its brand, generating more than 1.6 billion media impressions, while baby products, sleepwear and customer acquisition—particularly among Gen Z consumers—helped drive double-digit September comparable-sales growth.
• Fourth-quarter outlook was lowered: The company now expects sales of $860 million to $880 million, citing softer U.S. retail demand, cautious consumers and more moderate wholesale replenishment. Full-year sales guidance was maintained at $2.91 billion to $2.93 billion.

Carter's NYSE: CRI reported third-quarter fiscal 2026 results that met its sales outlook and exceeded its profitability expectations, while the children’s apparel company lowered its fourth-quarter revenue forecast to reflect softer recent demand and a cautious consumer environment.

Third-quarter net sales totaled $752 million, down less than 1% from a year earlier, as comparable performance in U.S. retail and growth in international operations partly offset lower U.S. wholesale revenue. Adjusted operating income rose 45% to $57 million, while adjusted operating margin expanded 240 basis points to 7.6%. Adjusted earnings per share increased nearly 40% to $1.03.

Chief Executive Officer and President Sharon Price John said the company’s results exceeded its outlook despite “continued uncertainty and choppiness” in consumer spending. While sales softened during July and August, Carter’s changed its marketing, promotional and merchandising approach during September, helping to improve traffic and sales trends.

“September comps were up double digits and exceeded our plan,” Chief Commercial Officer Allison Peterson said. She said the performance was supported by outsized growth in the baby segment and customer acquisition, including among Gen Z consumers.

Brand Relaunch and Product Initiatives

Carter’s introduced a new brand campaign during the quarter, marking the first major reimagination of the Carter’s brand in 25 years. The initiative includes a new logo and the brand promise, “Let every child’s light shine.”

John said the campaign is intended to strengthen Carter’s emotional connection with new parents while retaining its appeal among grandparents and other gift buyers. In less than two months, the company said the campaign produced more than 1.6 billion media impressions, increased unaided brand awareness and purchase consideration, and generated nearly 20% growth in branded search compared with the period before launch.

The company also introduced its Stellar Sleep System, designed to simplify sleepwear shopping across age groups. The sleepwear category delivered double-digit growth in unit and dollar sales during the quarter, according to Peterson. Carter’s also added a Bedtime Monster Scanner feature to its app, which the company said drove double-digit conversion improvement among users who engaged with it.

In addition, Carter’s rebranded its annual baby promotion as the Five-Star Baby Event. John said the event focused on core baby products, expanded customer interest in the company’s baby assortment and was margin accretive.

Segment Performance

U.S. retail sales were comparable with the prior-year quarter, while comparable retail sales increased 0.4%. Average unit retail, or AUR, increased by low single digits, while units declined by low single digits. The segment’s operating profit nearly doubled, and operating margin increased 250 basis points, helped by pricing and productivity initiatives, including store closures.

The company’s baby business continued to grow, with its core baby segment posting its eighth consecutive quarter of comparable-sales growth. The older-kids business declined slightly from the prior year, as the seasonal back-to-school assortment did not meet expectations and consumers delayed purchases closer to need.

U.S. wholesale sales declined 4% in the third quarter, though the result was better than management expected because some fall demand from key customers arrived earlier than anticipated. On a year-to-date basis through the third quarter, wholesale sales were up approximately 2%. Wholesale operating profit increased 11%, and segment operating margin expanded 230 basis points.

International sales increased 4%, with growth across Canada, Mexico and international wholesale partners. Canadian sales rose 4%, supported by a 2% retail comparable-sales gain and wholesale growth. Mexico comparable sales increased 8%, and the company opened six stores in the market during the first nine months of the year. International operating income increased 28% to $12 million, with operating margin rising 180 basis points to 10%.

Margins, Cash Flow and Inventory

Adjusted gross margin increased 200 basis points to 47.1% in the third quarter. Chief Financial Officer Richard Westenberger said the improvement reflected a higher mix of U.S. retail sales and improved realized pricing, which more than offset higher tariff costs and investments in product make.

Adjusted selling, general and administrative expense declined nearly 2% to $303 million as productivity initiatives and store closures offset higher marketing spending and inflation in wages and rent. Carter’s is spending about $20 million more on demand creation this year than last year, according to Westenberger, with paid media among the areas producing favorable returns.

The company ended the quarter with more than $525 million in cash and short-term investments. Inventory was $587 million, down 11% from a year earlier. Westenberger said inventory was somewhat below plan because of port congestion and container availability issues, though those disruptions had not materially affected the business to date.

Year-to-date operating cash flow exceeded $100 million, compared with a $136 million use of cash in the prior-year period. Free cash flow was $72 million, compared with negative free cash flow of nearly $180 million a year earlier.

Lower Fourth-Quarter Sales Outlook

Carter’s reduced its fourth-quarter sales outlook, citing softer current U.S. retail trends and more moderate expectations for wholesale replenishment demand. The company now expects fourth-quarter sales of $860 million to $880 million, representing mid-single-digit sales declines from the prior-year quarter at the midpoint. Adjusted operating income is projected at $74 million to $83 million, and adjusted EPS is expected to range from $1.37 to $1.55.

For the full year, Carter’s expects net sales of $2.91 billion to $2.93 billion. At the midpoint, that would represent roughly 1% growth from the prior year, or approximately 2% growth excluding the benefit of last year’s 53rd week. The company maintained its outlook for low- to mid-single-digit adjusted operating-income growth and for adjusted EPS to decline by high single digits to low double digits, reflecting higher interest expense associated with its prior-year debt refinancing.

Management said it is monitoring consumer sentiment, inflation and gas prices, supply-chain risks, media-cost inflation related to the upcoming midterm elections, and holiday promotional activity. Peterson said the company expects promotional activity to intensify in November and December and has incorporated a more aggressive competitive environment into its forecast.

The company also announced leadership changes intended to support its longer-term strategy. Maria Gemzell will join early next year as chief product officer, Sarah Crockett’s role will become chief brand officer, and Emily Evert will become chief strategy and business development officer. Carter’s also plans to search for a chief operating officer ahead of Chief Supply Chain Officer Karen Smith’s expected late-first-quarter 2027 retirement.

About Carter's (NYSE:CRI)

Carter's, Inc NYSE: CRI is a major designer, source and marketer of apparel and related products for babies and young children. The company offers clothing, accessories, footwear, gifts and other products for infants, toddlers and children through brands including Carter's, OshKosh B'gosh, Little Planet and Skip Hop.

Founded in 1865, Carter's has built a long-standing presence in the children's apparel market. Its products are sold through company-operated retail stores, e-commerce websites and wholesale partners, including department stores, mass merchants and specialty retailers.

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