8-K: Carters Q4, FY25 Mixed; Tariffs Cloud 2026 Outlook

Carters, Inc. reported mixed fourth quarter and fiscal year 2025 results, with sales growth offset by declines in profitability and a cautious 2026 outlook due to tariff uncertainties.

Summary

• Fourth quarter fiscal 2025 net sales increased 8% to $925 million compared to $860 million in Q4 2024.
• Fourth quarter fiscal 2025 GAAP operating margin decreased to 9.2% from 9.7% in Q4 2024, and adjusted operating margin decreased to 9.7% from 13.4% in Q4 2024.
• Fourth quarter fiscal 2025 GAAP diluted EPS increased to $1.76 from $1.71 in Q4 2024, but adjusted diluted EPS decreased to $1.90 from $2.39 in Q4 2024.
• Fiscal year 2025 net sales grew 2% to $2.898 billion compared to $2.844 billion in 2024.
• Fiscal year 2025 GAAP operating margin decreased to 5.0% from 9.0% in 2024, and adjusted operating margin decreased to 6.1% from 10.1% in 2024.
• Fiscal year 2025 GAAP diluted EPS decreased to $2.53 from $5.12 in 2024, and adjusted diluted EPS decreased to $3.47 from $5.81 in 2024.
• Operating cash flow for fiscal year 2025 was $122 million, down from $298.8 million in fiscal year 2024.
• The company returned $56 million to shareholders through dividends in fiscal year 2025.
• The 53rd week in fiscal 2025 contributed approximately $37 million in consolidated net sales.

Sentiment

Score: 4

Explanation: StockSavvy.ai views this as a challenging period for Carters, marked by significant declines in full-year profitability and a cautious outlook for 2026, despite some positive sales momentum in Q4. The ongoing impact of tariffs and the projected decline in adjusted EPS for the coming year weigh heavily on the sentiment.

Positives

• Improved fourth quarter results with sales growth across all U.S. Retail, International, and U.S. Wholesale segments.
• Momentum is building behind products and demand creation initiatives, leading to improved traffic, new customer acquisition, higher realized pricing, and increased penetration of best product assortments.
• The company strengthened its balance sheet and liquidity through successful refinancing of long-term debt and securing a new $750 million asset-based revolving credit facility.
• Total liquidity at the end of fiscal 2025 was $1.2 billion, comprising $487 million in cash and $744 million in available borrowing capacity.
• The Board of Directors declared a quarterly cash dividend of $0.25 per share.
• Management believes recent news regarding tariffs will be net positive for Carters, although the full implications are still being assessed.

Negatives

• GAAP and adjusted operating margins significantly decreased for both the fourth quarter and the full fiscal year 2025.
• Adjusted diluted EPS declined by 20.5% in Q4 2025 and by 40.3% for the full fiscal year 2025.
• Net cash provided by operations decreased substantially from $298.8 million in FY2024 to $122.3 million in FY2025, primarily due to lower earnings and higher inventory levels.
• The U.S. Wholesale segment experienced a 2.0% decline in net sales for fiscal year 2025.
• Incremental tariff costs, investments in product mix and make, and higher performance-based compensation provisions negatively impacted operating margins.
• The fiscal year 2026 outlook projects a low double-digit to mid-teens decline in adjusted diluted EPS.
• The first quarter fiscal 2026 outlook anticipates a significant decline in adjusted operating income ($12 million to $15 million vs. $35 million in Q1 2025) and adjusted diluted EPS ($0.02 to $0.08 vs. $0.66 in Q1 2025).

Risks

• Changes in global economic and financial conditions, impacting consumer confidence and spending.
• Risks related to public health crises.
• Ability to achieve expected savings from organizational restructuring plans.
• Risks related to consumer tastes, preferences, and fashion trends.
• Failure to protect intellectual property and potential diminished value of brands.
• Delays, product recalls, or loss of revenue due to failure to meet quality standards.
• Uncertainty regarding the future of international trade agreements and the impact of tariffs, including Section 122 tariffs.
• Ability to recover refunds of incremental tariff amounts.
• Increased competition in the marketplace.
• Financial difficulties for one or more major customers.
• Challenges in identifying retail store locations and negotiating appropriate lease terms.
• Distinct risks facing the eCommerce business.
• Failure to forecast demand for products and manage inventory effectively.
• Increased margin pressures due to higher material and labor costs, and inability to successfully increase prices.
• Continued inflationary pressures and global supply chain constraints.
• Fluctuations in foreign currency exchange rates.
• Unseasonable or extreme weather conditions.
• Risks associated with corporate responsibility issues.
• Dependence on foreign sourcing arrangements and a relatively small number of vendors.
• Disruptions in the supply chain, including increased transportation and freight costs.
• Problems with the Braselton, Georgia distribution facility.
• Pending and threatened lawsuits.
• Breach of information technology systems, loss of personal data, or failure to implement new IT 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.
• Challenges in 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.
• Ability to meet obligations related to debt.
• Changes in tax obligations, including additional customs, duties, or tariffs.
• Ability to continue to declare and pay a dividend.
• Volatility in the market price of common stock.
• Cost or effort required for shareholders to bring certain claims or actions against the company due to designated forum.

Future Outlook

For fiscal year 2026 (a 52-week year), Carters projects low single-digit to mid-single-digit percentage growth in net sales and adjusted operating income. However, adjusted diluted EPS is expected to decline by low double-digits to mid-teens. Operating cash flow is projected to be between $110 million and $120 million, with capital expenditures of $55 million. Earnings contributions are anticipated to be weighted towards the second half of the year due to the projected greater net impact of tariffs and investment spending in the first half. A lower gross margin rate is expected, reflecting incremental tariff costs partially offset by higher pricing and productivity savings. The outlook for fiscal year 2026 and the first quarter of fiscal 2026 does not reflect the potential impacts of recent U.S. Supreme Court and global tariff decisions, as the company is still assessing their implications. For the first quarter of fiscal 2026, the company projects mid-single-digit percentage growth in net sales, but adjusted operating income of $12 million to $15 million and adjusted diluted EPS of $0.02 to $0.08, both significantly lower than the prior year's first quarter.

Management Comments

• "Carters delivered improved fourth quarter results with each of our business segments posting sales growth over last year. We see momentum building behind our products and demand creation initiatives, which have driven an improvement in the rate of traffic, new customer acquisition, higher realized pricing, and increased penetration of the best portions of our product assortments. All of this gives us confidence that our strategies are gaining traction."
• "2025 was a year of meaningful progress in stabilizing our business while responding to significant new tariffs. We took actions to right-size our cost structure and we launched several important initiatives to improve the productivity of our merchandise assortments and store fleet. We also strengthened our balance sheet and liquidity with the successful refinancing of our long-term debt and a new asset-based revolving credit facility in place."
• "While we’re encouraged by our progress, much work remains. Excluding the recent tariff developments, for 2026 we’re planning growth in net sales as we build on the momentum of our product and demand creation strategies. We’re also planning growth in operating income. We will remain focused and disciplined in our investments and overall spending and expect solid contributions from productivity initiatives."
• "We believe the recent news regarding tariffs will be net positive for Carters, but it will take some time to fully understand the implications for our business and the broader marketplace. Our talented and dedicated teams and I are committed to returning Carters to long-term sustainable, profitable growth over time."

Industry Context

StockSavvy.ai notes that Carters operates in a highly competitive children's apparel market, where consumer discretionary spending and evolving fashion trends are critical factors. The company's emphasis on demand creation and product assortment productivity aligns with broader retail strategies aimed at mitigating inflationary pressures and supply chain disruptions. The ongoing impact of tariffs, particularly the uncertainty surrounding recent developments, remains a significant industry-wide concern for apparel companies with extensive international sourcing.

Comparison to Industry Standards

• NA

Corporate Governance

Legal Proceedings

• The company mentions 'pending and threatened lawsuits' as a risk factor, but provides no specific details on any current litigation or regulatory matters.

Stakeholder Impact

• Shareholders: Received $56.4 million in dividends in FY2025, with a $0.25 quarterly dividend declared. However, adjusted diluted EPS declined significantly, and a further decline is projected for FY2026, potentially impacting stock valuation.
• Employees: Organizational restructuring initiatives led to severance and termination benefits, indicating workforce adjustments.
• Customers: Benefit from investments in product mix and make, demand creation initiatives, and higher realized pricing, aiming to enhance product offerings and shopping experience.
• Creditors: The successful refinancing of long-term debt and establishment of a new ABL facility improved the company's liquidity and financial position, strengthening its ability to meet debt obligations.

Next Steps

• Hold a conference call with investors on February 27, 2026, at 8:30 a.m. Eastern Standard Time to discuss results and business outlook.
• Remain focused and disciplined in investments and overall spending.
• Continue efforts to return Carters to long-term sustainable, profitable growth.
• Further understand the implications of recent tariff developments for the business and broader marketplace.

Key Dates

Recommendation

While Carters demonstrated some sales momentum in Q4 and successfully strengthened its balance sheet through debt refinancing, the substantial decline in full-year profitability (operating income, net income, and adjusted EPS) and the projected further decline in adjusted EPS for fiscal year 2026, largely attributed to tariff impacts and strategic investments, indicate ongoing operational headwinds. The company is actively implementing strategies to stabilize and foster long-term growth, but the immediate financial outlook remains cautious. A 'Hold' recommendation reflects these mixed signals: the positive aspects of operational improvements and balance sheet strength are currently balanced by significant profitability challenges and a conservative near-term earnings forecast.

Keywords

Carters, CRI, Q4 2025 Earnings, Fiscal Year 2025 Results, Children's Apparel, Baby Clothing, Retail, Wholesale, International Sales, Tariffs, EPS, Operating Margin, Dividends, Debt Refinancing, 2026 Outlook