8-K: Carters Q3 Profit Plunges Amid Restructuring, Tariffs

Carters, Inc. reported a significant decline in third-quarter diluted EPS and operating income, alongside announcing a major organizational restructuring plan to improve profitability and address rising costs.

Summary

• Net sales for the third quarter of fiscal 2025 were $757.8 million, comparable to $758.5 million in the prior year.
• Diluted EPS (GAAP) for Q3 2025 was $0.32, a significant decrease from $1.62 in Q3 2024; adjusted diluted EPS was $0.74, down from $1.64 in Q3 2024.
• Operating income (GAAP) decreased 62.2% to $29.1 million in Q3 2025, with operating margin falling to 3.8% from 10.2% in Q3 2024.
• An organizational restructuring plan was approved on September 16, 2025, to right-size the cost structure and improve future profitability.
• The plan includes reducing office-based roles by approximately 300 positions, or 15%, by the end of 2025.
• Expected restructuring charges are $10.1 million to $11.1 million, with $6.1 million recorded in Q3 2025 and $4.0 million to $5.0 million expected in Q4 2025.
• The restructuring is expected to yield annualized savings of approximately $35 million beginning in 2026.
• The company plans to close approximately 150 stores in North America over the next three years, an increase from a previously disclosed target of 100 stores, representing approximately $110 million in annual net sales.
• Other SG&A reductions are targeting more than $10 million in annual spending reductions starting in 2026.
• Net cash used in operations for the first three quarters of fiscal 2025 was $136.3 million, a substantial shift from $11.3 million provided in the same period of 2024.
• The company has suspended its fiscal 2025 guidance due to ongoing and significant uncertainty surrounding incremental tariffs.
• Estimated gross pre-tax earnings impact of additional import duties is approximately $200 million to $250 million on an annualized basis, with a net adverse impact of $25 million to $35 million anticipated in Q4 2025.

Sentiment

Score: 3

Explanation: The company faces significant headwinds with a sharp decline in profitability and cash flow, largely due to elevated costs and tariffs. While proactive restructuring measures are being implemented, the immediate financial performance is poor, and the future outlook remains uncertain due to external factors.

Positives

• U.S. Retail comparable net sales increased 2.0% in Q3 2025, marking the second consecutive quarter of positive comparable sales and improved pricing.
• International segment net sales increased 4.9% in Q3 2025 and 4.4% for the first three quarters of fiscal 2025.
• The organizational restructuring and SG&A reductions are expected to generate annualized savings of approximately $45 million ($35 million from roles, $10 million from SG&A) starting in 2026.
• Commitments have been obtained for a new five-year asset-based revolving credit facility of no less than $750 million.
• Returned $47.2 million to shareholders through dividends in the first three quarters of fiscal 2025.

Negatives

• Diluted EPS significantly decreased to $0.32 (GAAP) and $0.74 (adjusted) in Q3 2025, from $1.62 and $1.64 respectively in Q3 2024.
• Operating income decreased 62.2% to $29.1 million (GAAP) and 48.9% to $39.4 million (adjusted) in Q3 2025.
• Operating margin decreased to 3.8% (GAAP) and 5.2% (adjusted) in Q3 2025, from 10.2% in Q3 2024.
• U.S. Wholesale segment net sales decreased 5.1% in Q3 2025 and 3.9% for the first three quarters of fiscal 2025.
• Profitability was meaningfully weighed down by elevated product costs, higher tariffs, and additional investments.
• Net cash used in operations was $136.3 million in the first three quarters of fiscal 2025, a significant decline from $11.3 million provided in the prior year, driven by lower earnings and higher inventory.
• The company estimates a gross pre-tax earnings impact of additional import duties of approximately $200 million to $250 million on an annualized basis.
• A net adverse impact to pre-tax income of approximately $25 million to $35 million related to additional tariffs is anticipated in Q4 2025.

Risks

• The company may not realize the anticipated benefits of the organizational restructuring plan to the extent or as quickly as anticipated or at all.
• The costs and charges associated with the restructuring plan may be greater than anticipated.
• The restructuring plan could negatively impact the company's ability to recruit and retain skilled personnel.
• The restructuring plan could negatively impact the company's business operations.
• Changes in global economic and financial conditions, and the resulting impact on consumer confidence and spending.
• Risks related to public health crises.
• Risks related to consumer tastes and preferences, as well as fashion trends.
• Failure to protect intellectual property.
• Diminished value of brands, potentially as a result of negative publicity or unsuccessful branding and marketing efforts.
• Delays, product recalls, or loss of revenue due to a failure to meet quality standards.
• Uncertainty regarding the future of international trade agreements and the United States position on international trade, as well as significant political, trade, and regulatory developments and other circumstances beyond the company's control.
• Increased competition in the marketplace.
• Financial difficulties for one or more major customers.
• Challenges in identifying locations and negotiating appropriate lease terms for retail stores.
• Distinct risks facing the eCommerce business.
• Failure to forecast demand for products and manage inventory.
• Increased margin pressures, including increased cost of materials and labor, and inability to successfully increase prices to offset these increased costs.
• Continued inflationary pressures with respect to labor and raw materials and global supply chain constraints that have, and could continue, to affect freight, transit, and other costs.
• Fluctuations in foreign currency exchange rates.
• Unseasonable or extreme weather conditions.
• Risks associated with corporate responsibility issues.
• Foreign sourcing arrangements and reliance on a relatively small number of vendors for a significant amount of products.
• Disruptions in the supply chain, including increased transportation and freight costs.
• Ability to effectively source and manage inventory.
• Problems with the Braselton, Georgia distribution facility.
• Pending and threatened lawsuits.
• A breach of information technology systems and the loss of personal data or a failure to implement new information technology systems successfully.
• Unsuccessful expansion into international markets.
• Failure to comply with various laws and regulations.
• Failure to properly manage strategic initiatives.
• Retention of key individuals.
• Acquisition and integration of other brands and businesses.
• Failure to achieve sales growth plans and profitability objectives to support the carrying value of intangible assets.
• Continued ability to meet obligations related to debt.
• Ability to close the new asset-based lending facility within the timeframe previously disclosed.
• Changes in tax obligations, including additional customs, duties or tariffs.
• Continued ability to declare and pay a dividend.
• Volatility in the market price of common stock.
• The cost or effort required for shareholders to bring certain claims or actions against the company, as a result of the designation of the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings.

Future Outlook

The company has suspended its fiscal 2025 guidance due to ongoing and significant uncertainty surrounding incremental tariffs and their potential impact. It anticipates a net adverse impact to pre-tax income of approximately $25 million to $35 million related to additional tariffs in the fourth quarter of fiscal year 2025. The company intends to partially offset these additional costs through changes to product assortments, cost sharing with vendor partners, changes to production mix by country, and raising prices. The organizational restructuring actions are expected to be substantially completed by the second quarter of fiscal 2026, yielding annualized savings of approximately $35 million beginning in 2026, with other SG&A reductions targeting over $10 million in annual savings also starting in 2026. The company expects to close on a new five-year asset-based revolving credit facility of no less than $750 million in the fourth quarter of fiscal 2025 and is evaluating opportunities to refinance its existing $500 million senior notes maturing in March 2027. A portion of productivity-related savings will be reinvested in high-return, growth-driving initiatives, including demand creation.

Management Comments

• "Our third quarter performance reflected continued improvement in U.S. Retail business demand as we achieved positive comparable sales and improved pricing for the second consecutive quarter."
• "However, elevated product costs, in part due to the impact of higher tariffs, as well as additional investment, weighed meaningfully on our profitability."
• "While we are steadying our business in 2025, there’s still meaningful work to do for Carters to unlock its full potential in terms of exceeding both consumer and shareholder expectations."
• "Today we are announcing a significant acceleration of our productivity agenda. We are pursuing several initiatives, including closing low-margin retail stores, right-sizing our organization, and honing product choices, which we believe will generate significant savings, improve overall cost structure, and provide investment capacity as we establish the foundation to return to consistent, profitable growth going forward."
• "In light of the difficult decisions being made to improve our performance, the Board of Directors and I have also decided to reduce our 2026 compensation."
• "I’m confident our new product, marketing, and consumer experience initiatives, which have begun to bear fruit, will further strengthen our market position in the years ahead."

Industry Context

Carters, Inc. operates as North America's largest and most-enduring apparel company exclusively for babies and young children, leveraging a 160-year legacy and a multi-channel business model for unparalleled market presence. The significant new tariffs on imported products, which are adding substantially to the company's duties, represent a broader industry challenge impacting companies with international sourcing arrangements. The company's strategic response, including cost sharing with vendors and potential price increases, reflects common industry approaches to mitigating such external pressures.

Corporate Governance

Stakeholder Impact

• **Shareholders:** Experienced a significant decline in diluted EPS and operating income, but the restructuring plan aims to improve future profitability. Dividends were paid in the first three quarters of fiscal 2025.
• **Employees:** Approximately 300 office-based roles (15% of the workforce) are planned for reduction by the end of 2025 due to organizational restructuring, impacting job security.
• **Customers:** May face potential price increases on products due to the company's strategy to offset higher tariff costs. The planned closure of approximately 150 stores over the next three years could alter shopping accessibility.
• **Suppliers/Vendors:** The company intends to pursue cost sharing with vendor partners as part of its strategy to mitigate the impact of increased tariffs.
• **Creditors:** The company has secured commitments for a new $750 million asset-based revolving credit facility and is evaluating refinancing options for its $500 million senior notes, indicating active management of debt obligations.

Next Steps

• Substantially complete organizational restructuring actions by the second quarter of fiscal 2026.
• Pay substantially all restructuring costs in the first two quarters of fiscal 2026.
• Close on the new five-year asset-based revolving credit facility in the fourth quarter of fiscal 2025.
• Share more details on refinancing existing $500 million senior notes when appropriate.
• Reinvest a portion of productivity-related savings in high-return, growth-driving initiatives, including demand creation.
• Hold a conference call with investors on October 27, 2025, to discuss third quarter fiscal 2025 results and provide a business update.

Key Dates

Recommendation

While the third-quarter results show a significant decline in profitability and cash flow, driven by elevated costs and tariffs, the company is taking aggressive and proactive steps through a comprehensive restructuring plan. This plan includes significant cost reductions, store closures, and a commitment from management to reduce their own compensation, which signals a serious effort to improve future financial performance. The securing of a new credit facility also provides liquidity. Given the current headwinds but also the decisive actions, a 'hold' recommendation is appropriate, awaiting evidence of the restructuring plan's effectiveness and the impact of tariff mitigation strategies.

Keywords

Carters, CRI, Q3 2025, financial results, organizational restructuring, apparel, children's wear, retail, tariffs, cost reduction, store closures, EPS, operating income, supply chain, corporate governance