10-K: Carters Navigates Tariffs, Restructuring Amidst Sales Growth

Carters, Inc. reports a 1.9% increase in net sales to $2.90 billion for fiscal 2025, driven by U.S. Retail and International growth, despite significant tariff impacts and a comprehensive organizational restructuring.

Summary

• Consolidated net sales increased 1.9% to $2.90 billion in fiscal 2025 (53 weeks) from $2.84 billion in fiscal 2024 (52 weeks), with the 53rd week contributing approximately $37 million.
• U.S. Retail sales increased 3.5% to $1.47 billion, with comparable net sales up 1.4% for the year, reflecting three consecutive quarters of positive growth.
• U.S. Wholesale sales decreased 2.0% to $1.00 billion, primarily due to decreased sales of the Simple Joys brand and lower demand from department stores.
• International sales increased 6.3% to $431.0 million, driven by growth in Canada and Mexico.
• Consolidated gross profit decreased 3.7% to $1.31 billion, and gross margin decreased 260 basis points to 45.4%, mainly due to higher average unit cost (AUC) from incremental tariffs (approximately $60 million impact) and product make investments.
• Consolidated operating income decreased 43.5% to $143.9 million, with operating margin down 400 basis points to 5.0%.
• Consolidated net income decreased 50.5% to $91.8 million, resulting in diluted net income per common share decreasing 50.6% to $2.53.
• Inventories increased 8.4% to $544.6 million, driven by approximately $50 million of incremental tariff-related costs capitalized within inventory balances.
• An organizational restructuring initiated in Q3 fiscal 2025 is expected to reduce offices-based roles by approximately 15% and generate $35 million in annual savings starting fiscal 2026, with $9.8 million in charges recorded in fiscal 2025.
• The quarterly cash dividend per common share was reduced by 69% to $0.25 in Q2-Q4 fiscal 2025, from $0.80 in Q1 fiscal 2025, to realign with current profitability and higher product costs from tariffs.
• The company refinanced its debt, issuing $575.0 million in 7.375% Senior Notes due 2031, redeeming $500.0 million in 5.625% Senior Notes due 2027, and replacing its secured cash-flow-based revolving credit facility with a new $750.0 million ABL facility.

Sentiment

Score: 4

Explanation: StockSavvy.ai views this as a challenging period for Carters, marked by significant declines in profitability and EPS due to tariff impacts and increased costs, despite modest sales growth. While strategic initiatives and debt refinancing are positive, the immediate financial performance and dividend reduction reflect headwinds.

Positives

• Consolidated net sales increased 1.9% to $2.90 billion in fiscal 2025.
• U.S. Retail segment sales increased 3.5% to $1.47 billion, with comparable net sales up 1.4% for the year, including three consecutive quarters of positive comparable net sales growth.
• International segment sales increased 6.3% to $431.0 million, driven by growth in Mexico and Canada.
• The Little Planet and Skip Hop brands experienced growth, with Skip Hop being the #1 brand in diaper bags in fiscal 2025.
• Successfully launched Otter Avenue, a new toddler-focused apparel brand.
• Organizational restructuring is expected to generate approximately $35 million in annual savings beginning fiscal 2026.
• The company maintains a strong financial position with $487.1 million in cash and cash equivalents and $743.7 million of undrawn availability under its new ABL facility.
• Improved trends in U.S. Retail include a second consecutive quarter of year-over-year growth in customer count and continued strength in the core baby assortment.
• Successfully refinanced debt, including the issuance of $575.0 million in new senior notes and a new $750.0 million ABL facility.
• No impairments were recorded on goodwill or indefinite-lived intangible tradename assets in fiscal 2025, despite interim impairment tests.

Negatives

• Consolidated gross profit decreased 3.7% to $1.31 billion, and gross margin decreased 260 basis points to 45.4%.
• Average unit cost (AUC) increased by a mid-single digit percentage, primarily due to approximately $60 million in incremental tariff-related costs and investments in product make.
• Consolidated operating income decreased 43.5% to $143.9 million, and operating margin decreased 400 basis points to 5.0%.
• Consolidated net income decreased 50.5% to $91.8 million.
• Diluted net income per common share decreased 50.6% to $2.53.
• U.S. Wholesale sales decreased 2.0% due to decreased sales of the Simple Joys brand and lower replenishment and demand with department stores.
• The quarterly cash dividend per common share was reduced by 69% to $0.25 in Q2-Q4 fiscal 2025.
• Inventories increased 8.4% to $544.6 million, partly due to approximately $50 million of capitalized incremental tariff costs.
• Consolidated SG&A expenses increased 8.1% to $1.19 billion, and the SG&A rate increased 230 basis points to 41.0%, driven by operating model improvements, leadership transition, restructuring, increased performance-based compensation, and investments in new/remodeled retail stores.
• Net cash provided by operating activities decreased 59.1% to $122.3 million.
• A loss on extinguishment of debt of $1.7 million was recorded in fiscal 2025.
• A non-cash pension settlement charge of $8.8 million was recognized in fiscal 2025.
• Foreign currency exchange rate changes had an unfavorable effect of $6.7 million on consolidated net sales.
• Reduced demand for the Simple Joys brand is expected to continue into fiscal 2026.

Risks

• The business is sensitive to overall levels of consumer spending, confidence, and sentiment, particularly in the young children's apparel market, which is affected by macroeconomic factors like inflation, interest rates, and birth rate fluctuations.
• Global operations expose the company to political and economic risks, including instability, conflicts (e.g., Russia-Ukraine, Israel-Hamas, Red Sea region), and changes in diplomatic and trade relationships.
• Public health crises could have a significant adverse effect on business, financial condition, and results of operations.
• Product acceptance is affected by consumer tastes, preferences, and fashion trends; failure to adapt could lead to promotional pricing and impact profitability.
• Inability to protect intellectual property rights could diminish brand value, weaken competitive position, and adversely affect reputation and results.
• Negative publicity, including actions by employees, vendors, marketing partners, third-party manufacturers, and licensees, could diminish brand value and sales.
• Failure of marketing efforts or negative publicity could adversely affect brand value and sales.
• Delays, product recalls, or loss of revenues/increased costs may occur if products do not meet quality standards.
• Uncertainty regarding international trade agreements and U.S. trade policy, including new or increased tariffs (e.g., Trump Administration tariffs, Uyghur Forced Labor Prevention Act), could materially impact supply chain, cost structure, margins, and competitiveness.
• The highly competitive market, with some competitors having greater financial resources, may allow them to compete more effectively.
• Financial difficulties or the loss of one or more major wholesale customers could result in a material loss of revenues (top two customers accounted for 11.0% and 10.3% of consolidated net sales in fiscal 2025).
• Retail success depends on identifying locations and negotiating appropriate lease terms; declining mall traffic and a shift to online retail could negatively impact brick-and-mortar sales.
• The eCommerce business faces distinct risks, including system failures, security breaches, reliance on third parties, shipping limitations, and payment fraud, which could negatively impact profitability.
• Failure to adequately forecast demand for products could lead to excess inventory (write-downs, discounted prices) or insufficient inventory (lost sales, reputational damage).
• Profitability may decline due to lower margins from pricing pressure, increased production costs (raw materials, labor, fuel, transportation, duties), and inability to fully offset inflationary pressures.
• Revenues, product costs, and other expenses are subject to foreign economic and currency risks due to operations outside the United States.
• Unseasonable or extreme weather conditions, or other effects of climate change, could materially adversely affect the business.
• Failure to appropriately address environmental, social, and governance (ESG) matters, or focus on certain ESG matters over others, may adversely impact business, reputation, financial condition, and results of operations.
• Dependence on foreign supply sources (primarily Asia, with Vietnam, Bangladesh, Cambodia, and India collectively representing approximately 75% of product sourcing spend in fiscal 2026) is subject to risks such as political instability, natural disasters, new laws/regulations, increased costs, supply interruptions, and global transportation disruptions.
• Reliance on a relatively small number of vendors (approximately 63% of products purchased from ten vendors in fiscal 2025) poses a risk if one or more are lost or experience difficulties.
• Labor or other disruptions along the supply chain (e.g., port strikes, work slowdowns) may adversely affect customer relationships, reputation, and results of operations.
• Inability to effectively source and manage inventory could negatively impact timely delivery and disrupt business operations.
• Problems with the Braselton, Georgia distribution facility, which handles a large portion of merchandise distribution, could adversely affect product delivery, exacerbated by competition for employees and increased wages.
• The company is subject to various claims and pending or threatened lawsuits, including intellectual property infringement, product liability, consumer protection, employment, and privacy laws.
• Breaches of information technology systems (internal or third-party) containing personal information and payment data could lead to adverse publicity, costly government enforcement actions, private litigation, and expenses.
• Failure to implement new information technology systems or needed upgrades successfully could adversely affect the business.
• Unsuccessful expansion into international markets due to differing consumer demand, business culture, legal environments, and integration difficulties.
• Failure to comply with various laws and regulations (e.g., Sarbanes-Oxley, Dodd-Frank, FCPA, health care, employment, product safety, data privacy, trade, environmental) could have an adverse impact on reputation, financial condition, or results of operations.
• The company may not fully realize the expected benefits of restructuring plans or other operating or cost-saving initiatives.
• Failure to properly manage strategic initiatives to achieve objectives may negatively impact the business.
• Success is dependent upon retaining key individuals within the organization to execute the strategic plan.
• Inability to grow through acquisitions or successfully integrate acquired businesses, or if acquisitions fail to achieve expected financial results.
• Failure to achieve sales growth plans, profitability objectives, and other assumptions supporting the carrying value of intangible assets could lead to impairment charges.
• Substantial debt ($575.0 million outstanding) could adversely affect financial health, ability to obtain future financing, and reaction to business changes.
• Restrictive covenants in the ABL Facility and senior notes indenture could significantly impact management's financial and operational flexibility.
• Variable rate indebtedness subjects the company to interest rate risk, potentially increasing debt service obligations.
• Fluctuations in tax obligations and effective tax rate may result in volatility in operating and financial results and stock price.
• Quarterly cash dividends and share repurchases are subject to uncertainties and may affect the price of common stock.
• The market price of common stock may be volatile.
• A limited duration stockholder rights agreement could delay or discourage a merger, tender offer, or assumption of control not approved by the Board.
• The designation of the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain shareholder actions could limit shareholders' ability to obtain a favorable judicial forum for disputes.

Future Outlook

The company is focused on returning to consistent, profitable growth, recapturing market share, and creating long-term shareholder value through three strategic pillars: consumer-led product and innovation, a brand-focused operating model, and a direct-to-consumer first approach. Key initiatives include stabilizing business performance through product assortment revisions, marketing investments, and pricing strategies, as well as mitigating tariff impacts. Near-term productivity will be increased through store portfolio optimization (closing approximately 60 stores in fiscal 2026), organizational restructuring (15% reduction in offices-based roles by Q2 fiscal 2026, generating $35 million in annual savings), and process efficiency. Long-term growth investments include enhancing product style and value, increasing marketing spend, testing new store formats, and modernizing infrastructure and technology. Reduced demand for the Simple Joys brand is expected to continue into fiscal 2026. The company plans to invest approximately $55 million in capital expenditures in fiscal 2026 and expects to liquidate Rabbi Trust investments to fund deferred compensation plan obligations by Q4 fiscal 2026. The trade policy environment remains dynamic, but the company believes its liquidity sources are sufficient to manage these developments.

Management Comments

• "Our purpose is to embrace the wonder of childhood and uplift those shaping the future."
• "We believe our brands are complementary to one another in product offering and aesthetic. Each brand is uniquely positioned in the marketplace and offers great value to families with young children."
• "We are investing to become a more consumer-led organization, grounded in deep consumer insights that inform product creation, innovation, and assortment decisions across our portfolio."
• "We are executing a brand-focused strategy centered on a true house of brands operating model."
• "We leverage a unique global, multi-channel platform to extend the reach of our brands."
• "We believe our direct-to-consumer businesses provide the best expression of our brands, with curated assortments led by newness, knowledgeable and engaged associates in our stores, a clear brand point of view, and total value that is easy to understand."
• "We are focused on returning to consistent, profitable growth, recapturing market share, and creating long-term shareholder value."
• "The action [to reduce dividend] was taken to realign our dividend with our current level of profitability, especially against the backdrop of a challenging market environment and the significantly higher product costs the Company will incur as the result of the incremental tariffs on products imported into the United States."
• "We believe these actions have contributed to improved trends in U.S. Retail, including three consecutive quarters of positive comparable net sales, a second consecutive quarter of year-over-year growth in customer count, and continued strength in our core baby assortment."

Industry Context

StockSavvy.ai notes that Carters operates in a highly competitive and fragmented baby and young children's apparel market, where its leading market share (9% for Carters brands, 1% for OshKosh in the 0-10 age segment) provides a strong foundation. The strategic focus on consumer-led product innovation, a "house of brands" model, and direct-to-consumer first approach aligns with broader retail trends emphasizing brand differentiation, customer experience, and omni-channel capabilities. The challenges faced, such as declining birth rates and inflationary pressures, are common across the consumer goods sector, while the impact of tariffs highlights the ongoing geopolitical and trade complexities affecting global supply chains for many international retailers. The company's investment in sustainable brands like Little Planet also reflects a growing consumer demand for ESG-conscious products in the industry.

Comparison to Industry Standards

• Carters brands collectively hold the #1 position with approximately 9% market share in the U.S. zero to 10-year-old apparel market as of December 2025.
• Carters brands maintained the leading market position with approximately 21% in the zero to two-year-old baby market and approximately 8% in the three to four-year-old toddler market.
• The OshKosh brand has approximately 1% market share in the U.S. zero to 10-year-old apparel market as of December 2025.
• Skip Hop was the #1 brand in diaper bags in fiscal 2025.
• StockSavvy.ai notes that Carters' market share leadership in key baby and toddler segments demonstrates strong brand equity compared to its diverse set of competitors, which include both national brands (e.g., Gap, Old Navy, The Children's Place, Disney, Nike, Adidas, Under Armour) and private labels (e.g., Cat & Jack at Target, Garanimals at Walmart). The company's extensive retail footprint (1,068 stores in North America) and wholesale distribution (19,500 locations) provide a scale advantage over many smaller specialty brands. However, the decline in OshKosh tradename value in fiscal 2024 and the decrease in Simple Joys sales indicate challenges in maintaining market position across all brands against aggressive competition and evolving consumer preferences.

Management Changes

Corporate Governance

Legal Proceedings

• The company is subject to various claims and pending or threatened lawsuits in the normal course of business.
• Currently, the company is not a party to any legal proceedings that it believes would have a material adverse effect on its financial position, results of operations, or cash flows.
• Risk factors mention potential litigation related to product liability, consumer protection, employment, and privacy and information security laws, as well as intellectual property infringement claims.

Related Party Transactions

• Emily D. Evert, appointed Chief Strategy Officer in August 2025, was previously a managing director and partner at The Boston Consulting Group, Inc. (BCG).
• The company engaged BCG for general consulting services in fiscal 2024, paying approximately $4.9 million.
• The company engaged BCG to support operating model improvement initiatives in fiscal 2025, paying approximately $14.8 million.
• These arrangements were entered into with BCG prior to Ms. Evert joining the company and on terms management believes to be consistent with arms-length transactions.

Stakeholder Impact

• Shareholders: Impacted by a significant decline in profitability and diluted EPS, a 69% reduction in quarterly dividends, and the implementation of a stockholder rights agreement (anti-takeover measure). Potential for long-term value creation through strategic initiatives.
• Employees: Affected by an organizational restructuring plan that includes a 15% reduction in offices-based roles, but also by investments in talent development and a rebranded loyalty program. New CEO and Chief Strategy Officer appointments signal leadership changes.
• Customers: Benefit from new brands (Otter Avenue), enhanced product assortments, improved retail fleet (remodels, new experiences), and omni-channel capabilities. May be impacted by potential price increases due to tariffs.
• Suppliers: Affected by changes in product sourcing mix due to tariffs and potential cost-sharing initiatives. The company relies on a relatively small number of key vendors.
• Creditors: Impacted by the debt refinancing, including new senior notes and an ABL facility, and the associated covenants that restrict certain corporate actions.

Next Steps

• Assess and mitigate the impacts of new tariffs and trade measures.
• Pay substantially all remaining severance and other termination benefits during the first two quarters of fiscal 2026.
• Distribute surplus pension plan assets, net of final plan expenses and adjustments, in the first quarter of fiscal 2026.
• Invest approximately $55 million in capital expenditures in fiscal 2026, primarily for the retail store fleet, distribution facilities, and strategic information technology initiatives.
• Close approximately 60 stores across fiscal 2026 as part of the store portfolio optimization strategy.
• Reduce offices-based roles by approximately 15% by the end of the second quarter of fiscal 2026.
• Evolve the Amazon partnership by shifting assortment toward core flagship brands, expecting reduced demand for Simple Joys to continue into fiscal 2026.
• Liquidate Rabbi Trust investments to fund deferred compensation plan obligations, with final settlement expected in the fourth quarter of fiscal 2026.
• The Board will evaluate future dividend declarations based on business conditions, financial performance, and credit facility restrictions.
• File the definitive proxy statement for the Annual Meeting of Shareholders, expected to be held on May 13, 2026.

Key Dates

Recommendation

The company faces significant headwinds from tariffs and increased costs, leading to a substantial decline in profitability and a dividend reduction. While strategic initiatives like restructuring and store optimization aim for long-term growth and efficiency, their full impact is yet to be realized. The current financial performance suggests caution, but the company's strong brand recognition and market leadership in key segments provide a stable foundation. A "Hold" recommendation is appropriate as investors await clearer signs of successful execution of the turnaround strategy and mitigation of macroeconomic pressures.

Keywords

Children's apparel, Baby clothing, Toddler clothing, Retail, Wholesale, E-commerce, Carters, OshKosh Bgosh, Skip Hop, Little Planet, Otter Avenue, SEC filing, 10-K, Financial results, Tariffs, Restructuring, Corporate governance, Shareholder rights, Debt refinancing, Supply chain, Cybersecurity, Consumer spending, Market share