TLDR
- Carter’s dives 11% premarket as costs crush margins, cash flow sinks.
- FY25 sales rose, but tariffs and mix shifts squeezed profits across segments.
- Q4 revenue climbed, yet adjusted EPS slipped as restructuring and costs rose.
- Operating cash flow plunged as inventories climbed and earnings cooled in FY25.
- FY26 sales may grow, but management expects EPS to drop double digits.
Carter’s (CRI) stock dropped sharply in pre-market trading as weaker profitability and rising costs overshadowed modest sales gains in fiscal 2025. The share price fell to $37.35, down 11.15%, after a prior close at $42.07. The company reported higher annual revenue, yet significant margin pressure and softer cash generation shaped market sentiment.
Fourth-Quarter Performance Shows Growth but Lower Margins
Carter’s posted higher fourth-quarter sales as all business segments expanded their revenue performance. The company recorded $925 million in net sales, supported by a 14-week quarter and stronger retail traffic. Adjusted margins declined as tariff costs, product mix changes, and higher compensation provisions reduced profitability.
Operating income increased slightly on a reported basis, yet adjusted operating income fell meaningfully from the prior year. Earnings reflected this trend because diluted EPS reached $1.76 while adjusted diluted EPS decreased to $1.90. The company attributed the decline to restructuring costs and operational changes linked to long-term efficiency plans.
Net income rose on a reported basis because comparisons included prior-year impairment charges. Yet adjusted net income eased due to cost pressures and investments tied to ongoing improvement initiatives. The company noted that the extra fiscal week added revenue but did not offset margin compression.
Full-Year 2025 Results Highlight Margin Compression and Lower Earnings
Carter’s delivered modest full-year revenue growth as U.S. Retail and International segments expanded. The company generated $2.898 billion in net sales, reflecting a 2% annual increase with support from an additional 53rd week. Wholesale results softened, and overall growth remained limited on a comparable week basis.
Operating income declined sharply because operating margin fell to 5.0% amid higher tariffs and restructuring activities. Adjusted operating margin also decreased as the company absorbed investments in stores, compensation, and product development. Diluted EPS dropped to $2.53 while adjusted diluted EPS declined to $3.47, driven by lower profitability.
Cash flow weakened significantly because operating cash generation fell to $122 million from $298.8 million last year. Management cited higher inventory levels and reduced earnings as the primary reason for the decline. The company returned $56 million to shareholders and maintained stable liquidity supported by refinanced debt and a new revolving credit facility.
Outlook for FY26 Signals Sales Growth but Lower Earnings Ahead
Carter’s set expectations for fiscal 2026 that anticipate net sales growth in the low to mid-single digits. The company also guided for growth in adjusted operating income as its productivity programs advance. However, adjusted diluted EPS is expected to decline in the low double-digit to mid-teens range.
The company stated that tariff developments could eventually support performance, though timing remains uncertain. Management plans to continue improving product assortments, store efficiency, and demand generation efforts through 2026. The company aims to restore sustainable profit growth as new initiatives and operating changes progress.
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