Children’s apparel manufacturer Carter’s (NYSE: CRI) missed Wall Street’s revenue expectations in Q3 CY2025, with sales flat year on year at $757.8 million. Its non-GAAP profit of $0.74 per share was in line with analysts’ consensus estimates.

Is now the time to buy CRI? Find out in our full research report (it’s free for active Edge members).

StockStory’s Take

Carter’s third quarter performance drew a positive market response, despite missing Wall Street’s revenue expectations and delivering flat year-on-year sales. Management attributed the results to pockets of strength in U.S. Retail and International segments, partially offset by continued weakness in U.S. Wholesale, particularly due to declining sales of its Simple Joys brand on Amazon. CEO Douglas Palladini emphasized the company’s ongoing transformation efforts and candidly noted, “Our current results do not represent my ambition for Carter’s nor where I believe we can be.” The quarter was shaped by higher product costs, increased tariffs, and investments in marketing and product innovation, all of which pressured operating margins.

Looking ahead, Carter’s forward strategy centers on mitigating tariff impacts through targeted price increases, cost reductions, and selective investments in marketing and product development. Management believes these actions, alongside store closures and assortment rationalization, will bolster profitability and drive sustainable growth. CFO Richard Westenberger highlighted that, “more of the revenue gains next year will be driven by price than units,” reflecting a shift toward price-led growth in response to industry-wide cost pressures. The company remains focused on maintaining competitiveness and expects to see benefits from organizational streamlining, new product launches, and digital platform enhancements.

Key Insights from Management’s Remarks

Management pointed to several key factors influencing third quarter results and outlined their approach to navigating ongoing tariff challenges and operational transformation.

• Tariff impact and mitigation: Carter’s faced a significant increase in tariffs, raising effective duty rates to the high 30% range, which management estimates will have an annualized impact of $200–$250 million. The company has responded by negotiating supplier concessions, realizing over $40 million in duty reductions, and implementing price increases, particularly in Direct-to-Consumer (D2C) channels where consumer acceptance has been strong.

• Retail channel momentum: U.S. Retail delivered positive comparable sales growth for a second consecutive quarter, supported by higher average unit retail (AUR) and strong performance in baby and toddler categories. The company credits new product introductions and improved inventory management for driving store and e-commerce gains, with growing engagement among young Gen Z families.

• Wholesale headwinds and strategy shift: U.S. Wholesale results were weighed down by declining sales of the Simple Joys brand on Amazon, which management described as a “material enough” drag to call out. The company is shifting focus to core brands like Carter’s and OshKosh for future growth on the Amazon platform and expects Simple Joys to become less significant over time.

• Organizational restructuring: Carter’s announced plans to reduce office-based roles by approximately 15% and close up to 150 North America stores by 2026, aiming for $45 million in gross annual savings beginning next year. Management expects these actions to streamline decision-making and support reinvestment in brand and product initiatives.

• Inventory and product strategy: The company has meaningfully lowered excess inventory and improved product quality by eliminating 20–30% of product choices and accelerating product development timelines. Management believes this more focused assortment and improved design will drive higher regular price sell-through and enhance consumer loyalty.

Drivers of Future Performance

Carter’s outlook is shaped by industry-wide tariff headwinds, a shift toward price-led growth, and cost-saving initiatives designed to support profitability in a challenging retail environment.

• Tariff-driven pricing actions: Management expects future sales growth to rely heavily on price increases across assortments to offset tariff pressures. CFO Richard Westenberger noted that “more will be driven by pricing in 2026 and less by units,” and emphasized that Carter’s maintains a competitive value proposition even as higher prices are implemented.

• Cost reduction and reinvestment: The company is executing a comprehensive cost savings plan, including workforce reductions and store closures, to deliver $45 million in annualized savings. These funds will be partially reinvested in marketing and digital initiatives, with management anticipating that increased demand creation spend can drive both revenue and margin improvement.

• Consumer and product innovation: Carter’s is focusing on attracting new consumers, particularly young Gen Z families, through enhanced product offerings, targeted marketing, and digital platform improvements. CEO Douglas Palladini highlighted ongoing gains in “better and best” product categories and the importance of a more resonant brand story to build loyalty and market share.

Catalysts in Upcoming Quarters

In upcoming quarters, the StockStory team will be closely monitoring (1) the pace and acceptance of price increases across retail and wholesale channels, (2) early indicators of cost savings and sales transfer from store closures and workforce reductions, and (3) continued growth in digital engagement and new product adoption among younger consumer segments. We will also track Carter’s ability to maintain market share and manage margin pressures amid persistent tariff-related cost challenges.

Carter's currently trades at $32.98, up from $32.37 just before the earnings. Is the company at an inflection point that warrants a buy or sell? The answer lies in our full research report (it’s free for active Edge members).

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