Carter’s(CRI) - 2025 Q2 - Quarterly Results

Earnings Release Summary The new CEO outlines stabilizing sales trends in direct-to-consumer channels but notes a significant decline in profitability due to investments and tariffs CEO Commentary and Key Learnings The new CEO notes stabilizing direct-to-consumer sales but expresses disappointment in profitability decline due to investments and tariffs, emphasizing a return to fundamental, profitable growth - Direct-to-consumer businesses achieved comparable sales growth in the U.S., Canada, and Mexico, with improving trends in U.S. Retail store traffic, conversion, and demand for core Baby apparel[3] - Profitability declined due to investments in pricing, new stores, more normalized performance-based compensation, and the initial impact of higher tariffs on imported products[4] - The new CEO's strategy emphasizes a return to fundamentals, focusing on serving a new generation of families with high-quality, modern products and exceptional value to drive profitable growth[5][7] Financial Performance Analysis The company experienced sales growth in Q2 2025 but a sharp decline in profitability across consolidated and segment results due to increased costs Consolidated Results Consolidated results show Q2 2025 net sales growth of 3.7% contrasted with an 89.7% GAAP operating income decline, reflecting investments and special charges Second Quarter Fiscal 2025 vs. 2024 Q2 2025 saw net sales increase by 3.7%, but GAAP operating income and net income plummeted by 89.7% and 98.6% respectively Q2 2025 vs Q2 2024 Key Metrics | Metric | Q2 2025 (in millions) | Q2 2024 (in millions) | Change | | :--- | :--- | :--- | :--- | | Net Sales | $585.3 | $564.4 | +3.7% | | Operating Income (GAAP) | $4.0 | $39.5 | -89.7% | | Operating Margin (GAAP) | 0.7% | 7.0% | -6.3 p.p. | | Adjusted Operating Income | $11.8 | $39.5 | -70.2% | | Adjusted Operating Margin | 2.0% | 7.0% | -5.0 p.p. | | Net Income (GAAP) | $0.4 | $27.6 | -98.6% | | Diluted EPS (GAAP) | $0.01 | $0.76 | -98.7% | | Adjusted Diluted EPS | $0.17 | $0.76 | -77.6% | - The sales increase was driven by growth in International (+14.1%) and U.S. Retail (+3.2%) segments, while U.S. Wholesale was comparable to the prior year[11][12] - The significant drop in operating margin was due to investments in pricing, new/remodeled stores, costs for operating model improvements, leadership transition, and increased performance-based compensation[13] First Half of Fiscal 2025 vs. 2024 The first half of fiscal 2025 experienced a 0.9% sales decline and a 68.1% GAAP operating income drop, with operating cash flow turning negative H1 2025 vs H1 2024 Key Metrics | Metric | H1 2025 (in millions) | H1 2024 (in millions) | Change | | :--- | :--- | :--- | :--- | | Net Sales | $1,220 | $1,230 | -0.9% | | Operating Income (GAAP) | $30.1 | $94.5 | -68.1% | | Operating Margin (GAAP) | 2.5% | 7.7% | -5.2 p.p. | | Adjusted Operating Income | $47.1 | $94.5 | -50.1% | | Adjusted Operating Margin | 3.9% | 7.7% | -3.8 p.p. | | Net Income (GAAP) | $16.0 | $65.7 | -75.6% | | Diluted EPS (GAAP) | $0.43 | $1.80 | -76.1% | | Adjusted Diluted EPS | $0.83 | $1.80 | -53.9% | - The sales decline was due to lower U.S. Wholesale (-3.1%) and U.S. Retail (-0.7%) sales, partially offset by International growth (+4.1%)[16] - Net cash from operating activities turned negative to a use of $8.3 million, compared to a source of $91.7 million in H1 2024, primarily due to lower earnings and higher inventory levels[20] Business Segment Results International sales led growth in Q2 2025 and H1 2025, but all segments experienced significant operating margin compression Q2 2025 Segment Performance vs. Q2 2024 | Segment | Q2 2025 Net Sales (in millions) | YoY Change | Q2 2025 Op. Margin | Q2 2024 Op. Margin | | :--- | :--- | :--- | :--- | :--- | | U.S. Retail | $299.5 | +3.2% | 1.3% | 6.2% | | U.S. Wholesale | $193.0 | 0.0% | 14.0% | 18.8% | | International | $92.8 | +14.1% | 3.9% | 6.8% | H1 2025 Segment Performance vs. H1 2024 | Segment | H1 2025 Net Sales (in millions) | YoY Change | H1 2025 Op. Margin | H1 2024 Op. Margin | | :--- | :--- | :--- | :--- | :--- | | U.S. Retail | $594.0 | -0.7% | 1.0% | 5.4% | | U.S. Wholesale | $443.1 | -3.1% | 18.6% | 21.8% | | International | $178.1 | +4.1% | 1.9% | 4.5% | Business Outlook and Capital Allocation The company returned capital via dividends but suspended fiscal 2025 guidance due to leadership transition and significant tariff uncertainty Return of Capital The company returned $38.1 million to shareholders via dividends in H1 2025, including a $0.25 per share Q2 dividend, with no share repurchases - Paid a cash dividend of $0.25 per common share in Q2 2025, totaling $9.1 million[21] - Total cash dividends paid in the first half of fiscal 2025 amounted to $38.1 million[21] - No shares were repurchased in the first half of fiscal 2025[21] 2025 Business Outlook and Tariffs Fiscal 2025 guidance is suspended due to leadership transition and new tariffs, which could impact pre-tax earnings by $125 million to $150 million annually - Fiscal 2025 guidance has been suspended due to the leadership transition and significant uncertainty surrounding proposed new tariffs[26] - The estimated gross annualized pre-tax earnings impact of additional import duties is approximately $125 million to $150 million[24] - The company anticipates a net additional baseline tariff impact to pre-tax earnings of approximately $35 million in the second half of fiscal 2025[25] - Mitigation strategies for tariffs include changes to product assortments, cost sharing with vendors, altering production mix by country, and raising prices[24] Consolidated Financial Statements Key financial statements reveal Q2 2025 sales growth but a sharp decline in profitability, increased inventories, and negative operating cash flow in H1 2025 Condensed Consolidated Statements of Operations Q2 2025 net sales increased to $585.3 million, but operating income plummeted to $4.0 million and net income to $0.4 million due to higher expenses Statement of Operations Summary (in thousands) | Account | Q2 2025 | Q2 2024 | H1 2025 | H1 2024 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $585,313 | $564,434 | $1,215,139 | $1,225,926 | | Gross profit | $281,760 | $282,937 | $572,850 | $598,127 | | Operating income | $4,044 | $39,452 | $30,146 | $94,488 | | Net income | $446 | $27,639 | $15,985 | $65,672 | | Diluted EPS | $0.01 | $0.76 | $0.43 | $1.80 | Condensed Consolidated Balance Sheets As of June 28, 2025, total assets reached $2.46 billion, marked by a significant increase in finished goods inventories to $619.1 million Balance Sheet Summary (in thousands) | Account | June 28, 2025 | Dec 28, 2024 | June 29, 2024 | | :--- | :--- | :--- | :--- | | Cash and cash equivalents | $338,183 | $412,926 | $316,646 | | Finished goods inventories, net | $619,074 | $502,332 | $599,295 | | Total current assets | $1,158,221 | $1,142,672 | $1,102,386 | | Total assets | $2,455,552 | $2,433,167 | $2,355,517 | | Total current liabilities | $525,671 | $508,816 | $527,643 | | Long-term debt, net | $498,531 | $498,127 | $497,735 | | Total liabilities | $1,601,650 | $1,578,605 | $1,543,767 | | Total shareholders' equity | $853,902 | $854,562 | $811,750 | Condensed Consolidated Statements of Cash Flows H1 2025 saw a $8.3 million net cash outflow from operating activities, a reversal from prior year, driven by lower earnings and increased inventories Cash Flow Summary for First Half (in thousands) | Account | H1 2025 | H1 2024 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(8,338) | $91,691 | | Net cash used in investing activities | $(26,546) | $(24,315) | | Net cash used in financing activities | $(42,817) | $(99,357) | | Net decrease in cash and cash equivalents | $(74,743) | $(34,567) | - The negative operating cash flow was primarily driven by lower net income and a significant increase in finished goods inventories ($114.0 million)[44] Non-GAAP Financial Measures Reconciliation The company provides reconciliations for non-GAAP adjustments, including operating model and leadership transition costs, and constant currency sales Reconciliation of GAAP to Adjusted Results Non-GAAP adjustments, primarily for operating model and leadership transition costs, significantly increased Q2 2025 adjusted operating income to $11.8 million Q2 2025 GAAP to Adjusted Reconciliation (in millions, except EPS) | Metric | As Reported (GAAP) | Adjustments | As Adjusted | | :--- | :--- | :--- | :--- | | Operating Income | $4.0 | $7.7 | $11.8 | | Net Income | $0.4 | $5.9 | $6.3 | | Diluted EPS | $0.01 | $0.16 | $0.17 | H1 2025 GAAP to Adjusted Reconciliation (in millions, except EPS) | Metric | As Reported (GAAP) | Adjustments | As Adjusted | | :--- | :--- | :--- | :--- | | Operating Income | $30.1 | $17.0 | $47.1 | | Net Income | $16.0 | $14.1 | $30.1 | | Diluted EPS | $0.43 | $0.40 | $0.83 | - Adjustments for Q2 2025 consist of $6.6 million for operating model improvement costs and $1.1 million for leadership transition costs[10] Reconciliation of Net Income to EBITDA and Adjusted EBITDA Q2 2025 EBITDA declined to $18.8 million, with Adjusted EBITDA at $26.5 million, reflecting a significant drop in core operational profitability Reconciliation of Net Income to EBITDA and Adjusted EBITDA (in millions) | Metric | Q2 2025 (in millions) | Q2 2024 (in millions) | H1 2025 (in millions) | H1 2024 (in millions) | | :--- | :--- | :--- | :--- | :--- | | Net Income | $0.4 | $27.6 | $16.0 | $65.7 | | EBITDA | $18.8 | $53.5 | $58.1 | $123.1 | | Total Adjustments | $7.7 | $— | $17.0 | $— | | Adjusted EBITDA | $26.5 | $53.5 | $75.0 | $123.1 | Reconciliation of Constant Currency Net Sales Foreign currency fluctuations negatively impacted reported sales, with Q2 2025 consolidated net sales growth at 3.7% reported versus 4.2% constant currency Q2 2025 Constant Currency Net Sales Reconciliation | Segment | Reported Net Sales % Change | Constant Currency Net Sales % Change | | :--- | :--- | :--- | | Consolidated | 3.7% | 4.2% | | International | 14.1% | 17.9% | H1 2025 Constant Currency Net Sales Reconciliation | Segment | Reported Net Sales % Change | Constant Currency Net Sales % Change | | :--- | :--- | :--- | | Consolidated | (0.9)% | (0.1)% | | International | 4.1% | 9.7% |