Carter's, Inc.CRI reported solid third-quarter fiscal 2026 results, wherein earnings and revenues surpassed the Zacks Consensus Estimate. Revenues declined year over year, while earnings increased.
CRI posted adjusted earnings of $1.03 per share, beating the Zacks Consensus Estimate of 85 cents. Earnings increased 39.2% from 74 cents in the year-ago quarter.
Net sales declined 0.7% year over year to $752.5 million but exceeded the Zacks Consensus Estimate of $750 million. Higher realized pricing, productivity improvements and stronger retail performance in September supported profitability. U.S. Retail comparable sales increased 0.4%, aided by double-digit comparable-sales growth in September.
Carter's, Inc. Price, Consensus and EPS Surprise
Carter's, Inc. price-consensus-eps-surprise-chart | Carter's, Inc. Quote
CRI's Q3 Segment Performance
U.S. Retail segment sales remained nearly flat year over year at $362.6 million, beating the Zacks Consensus Estimate of $357 million. Comparable sales increased 0.4%, building on 2% growth in the prior-year quarter. Average unit retail prices rose in the low-single digits, while units declined in the low-single digits. Continued strength in baby and toddler products offset softer demand for older kids' back-to-school assortments.
U.S. Wholesale net sales declined 3.8% year over year to $273.1 million, missing the Zacks Consensus Estimate of $282 million, primarily due to shipment timing that benefited the preceding quarter. Higher pricing was more than offset by lower units. However, segment operating income increased 10.7% to $48.7 million, beating the Zacks Consensus Estimate of $27.8 million, while operating margin expanded 230 basis points to 17.8%.
International segment sales increased 4.5% to $116.7 million, beating the Zacks Consensus Estimate of $111 million, supported by growth across Canada, Mexico and international wholesale partners. Canadian sales rose 4%, while comparable sales increased 2%. Mexico recorded 8% comparable-sales growth. International operating income advanced 27.6% to $11.7 million, beating the Zacks Consensus Estimate of $7.6 million, with operating margin expanding 180 basis points to 10%.
Carter's Retail Initiatives Support Demand
The company benefited from targeted merchandising and promotional initiatives that helped reverse weaker consumer demand earlier in the quarter. September's double-digit retail comparable-sales growth reflected improved engagement with core baby products and more focused marketing efforts.
Carter's launched its first major brand refresh in 25 years, introducing a new logo and positioning aimed at younger parents. The initiative generated more than 1.6 billion media impressions and an 18% increase in branded searches. Its Stellar Sleep initiative also gained traction, with comparable sleepwear sales increasing 18% during the quarter.
Focus on CRI's Q3 Margins
Adjusted gross margin expanded 200 basis points year over year to 47.1%. A higher sales mix from U.S. Retail and improved realized pricing supported profitability, offsetting increased tariff costs and investments in product quality. Consolidated average unit retail prices increased in the mid-single digits.
Adjusted selling, general and administrative expenses declined nearly 2% to $303 million. Productivity initiatives, including store closures, more than offset increased marketing spending and inflationary pressures on wages and rents. The company achieved 30 basis points of expense leverage.
Adjusted operating income increased 44.6% to $56.9 million, while adjusted operating margin expanded 240 basis points to 7.6%. Higher pricing and disciplined spending supported the improvement despite relatively flat consolidated sales.
Carter's Financial Position Remains Strong
Carter's ended the quarter with $451 million in cash and cash equivalents and $75 million in short-term investments. Total liquidity stood at approximately $1.1 billion. Inventories declined 10.5% year over year to $587 million, reflecting improved working-capital management.
Operating cash flow totaled $101.8 million during the first nine months compared with cash used of $136.3 million in the prior-year period. Free cash flow reached $72 million against negative $179 million a year earlier. The improvement reflected tariff recoveries and working-capital benefits. Carter's paid $27.5 million in dividends during the nine-month period without repurchasing shares.
CRI's Q4 Outlook Reflects Cautious Demand
For the fourth quarter of fiscal 2026, Carter's expects net sales of $860-$880 million compared with $925 million in the prior-year period, which included an additional week. Adjusted operating income is projected to be $74-$83 million, while adjusted earnings are anticipated to be $1.37-$1.55 per share.
The outlook assumes higher gross margin, comparable to low-single-digit lower SG&A expenses and approximately $10 million in net interest expense. Management expects softer U.S. Retail demand and moderated wholesale replenishment orders amid continued consumer spending pressures.
Carter's Updates Fiscal 2026 Sales Guidance
The Zacks Rank #2 (Buy) company now expects its full-year net sales to be between $2.91-$2.93 billion, which suggests year over year increase of approximately 1%, or 2% excluding the prior year's additional week, compared to the previously guided 2% to 3% growth.
CRI maintained its adjusted operating income outlook of $178-$187 million and adjusted earnings guidance of $3.05-$3.23 per share. Operating cash flow is now projected to be in the range of $240-$250 million, with capital expenditures of approximately $50 million. Management expects a slightly lower gross margin, comparable SG&A expenses and net interest expense of approximately $32 million.
In the past six months, CRI's shares have lost 6.4% compared with the industry's 10.9% growth.
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