Carter’s (CRI) Shares Plunge on Margin Pressure, Tariff Headwinds, and Weakening Cash Generation

TLDR

• CRI shares tumble 11% premarket as profitability erodes and cash generation weakens.
• Annual revenue increased, but tariff pressures and product mix hurt margins broadly.
• Fourth quarter saw higher sales, yet adjusted earnings declined on rising costs.
• Cash flow from operations dropped sharply due to inventory buildup and softer profits.
• Fiscal 2026 outlook calls for sales growth but double-digit decline in adjusted EPS.

Shares of Carter’s (CRI) experienced a significant decline during premarket hours as investors reacted to deteriorating margins and elevated cost pressures despite modest revenue improvements in the fiscal 2025 period. The stock retreated to $37.35, representing an 11.15% decrease from the previous session’s closing price of $42.07. While the children’s apparel company posted revenue growth for the year, persistent margin headwinds and diminished cash flow generation drove negative market reaction.

Carter’s, Inc., CRI

Q4 Results Deliver Revenue Expansion Alongside Profitability Challenges

The company’s fourth-quarter performance demonstrated revenue advancement across its operating divisions. Carter’s reported quarterly net sales of $925 million, benefiting from a 14-week reporting period and improved customer traffic at retail locations. However, adjusted profitability metrics deteriorated as the business absorbed tariff-related expenses, unfavorable product category performance, and increased employee compensation costs.

While reported operating income showed modest improvement year-over-year, the adjusted operating income figure registered a substantial decline compared to the same quarter last year. This profitability pressure flowed through to earnings results, with diluted EPS coming in at $1.76 and adjusted diluted EPS reaching $1.90, down from prior-year levels. Management pointed to restructuring expenses and operational adjustments connected to long-term efficiency enhancement initiatives as contributing factors.

Net income improved on a reported basis primarily because last year’s comparative period included significant impairment charges. Nevertheless, adjusted net income decreased as the business faced ongoing cost pressures and made investments in strategic improvement programs. Company executives acknowledged that while the extra fiscal week contributed incremental revenue, it proved insufficient to counterbalance the margin deterioration experienced during the period.

Fiscal 2025 Annual Results Reveal Significant Margin Deterioration

For the complete fiscal 2025 year, Carter’s achieved moderate revenue expansion driven by growth in its U.S. Retail and International business units. Total net sales reached $2.898 billion, marking a 2% year-over-year increase with assistance from the additional 53rd week in the fiscal calendar. The Wholesale segment experienced softness, and comparable-week growth remained constrained.

Operating income contracted substantially as the operating margin compressed to 5.0%, pressured by escalating tariff costs and restructuring-related activities. The adjusted operating margin similarly declined as the company made investments in store infrastructure, employee compensation structures, and product innovation initiatives. Diluted EPS fell to $2.53 while adjusted diluted EPS decreased to $3.47, both reflecting the profitability challenges faced throughout the year.

Cash generation showed pronounced weakness as operating cash flow declined to $122 million versus $298.8 million in the prior fiscal year. Company leadership attributed this substantial decrease to elevated inventory positions and reduced earnings performance. Despite these challenges, Carter’s returned $56 million to shareholders during the period and preserved solid liquidity through debt refinancing activities and establishment of a new revolving credit arrangement.

Fiscal 2026 Guidance Projects Revenue Growth But Earnings Contraction

Looking ahead to fiscal 2026, Carter’s management provided guidance calling for net sales expansion in the low to mid-single digit percentage range. The company also projected growth in adjusted operating income as productivity enhancement programs deliver benefits. Despite the anticipated operating income improvement, adjusted diluted EPS is forecasted to decline in the low double-digit to mid-teens percentage range.

Management commentary indicated that potential tariff policy changes could ultimately provide tailwinds to business performance, though the timing of any such developments remains unclear. The company intends to maintain focus on enhancing product offerings, improving store productivity, and strengthening demand creation capabilities throughout 2026. Leadership expressed confidence that these initiatives and operational refinements will eventually restore sustainable earnings growth momentum.

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