Children’s apparel manufacturer Carter’s (NYSE: CRI) announced better-than-expected revenue in Q1 CY2025, but sales fell by 4.8% year on year to $629.8 million. Its non-GAAP profit of $0.66 per share was 27.8% above analysts’ consensus estimates.

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StockStory’s Take

Carter’s first quarter results reflected ongoing challenges in the children’s apparel market, as sales declined year over year but surpassed Wall Street revenue expectations. Management attributed performance to targeted pricing strategies in its U.S. retail segment and promotional activity that drove strong March and April momentum, particularly in e-commerce. CEO Doug Palladini, newly appointed in April, emphasized a balance between financial efficiency and investment in products that resonate with consumers, while also highlighting the importance of consumer loyalty and brand strength for future growth.

Looking ahead, Palladini announced a suspension of forward-looking guidance, citing significant uncertainty surrounding proposed U.S. tariffs on imported apparel and his own ongoing assessment of Carter’s strategic direction. The leadership team noted that higher tariffs could materially impact product costs, and that all mitigation options, including potential price increases and further supply chain adjustments, are under evaluation. Management stated they will provide more detailed strategic plans once the external environment and internal priorities are clearer.

Key Insights from Management’s Remarks

Carter’s first quarter performance was influenced by the arrival of a new CEO, promotional activities in U.S. retail, and external pressures from proposed U.S. tariffs. Management discussed the following drivers and trends:

• Leadership transition and strategy review: Doug Palladini joined as CEO in April, bringing extensive experience from Vans and emphasizing a focus on sustainable, quality-driven growth rather than solely pursuing sales volume through promotions or discounts.
• Promotional investments in retail: U.S. retail saw increased promotional activity, especially in March, leading to improved store conversion rates and higher online growth, but also contributing to margin pressure. The company invested approximately $12 million in pricing initiatives during the quarter.
• Product category shifts: The baby category remained the strongest performer, with positive comparable sales and increased inventory investment, while older kids’ categories continued to decline as Carter’s shifted inventory to higher-performing segments.
• Supply chain diversification: Management highlighted significant progress reducing reliance on China for apparel production, now under 4% of total volume, though the Skip Hop brand remains more exposed. Ongoing efforts are focused on further diversifying sourcing and reducing exposure to tariff-affected geographies.
• Tariff and cost inflation pressures: Proposed U.S. tariffs on imported apparel created major uncertainty. Management noted mitigation actions already underway, such as selective price increases and cost-sharing with vendors, but indicated further responses—including additional pricing actions—are under review. They cautioned that consumer willingness to absorb higher prices remains a key unknown.

Drivers of Future Performance

Management framed near-term visibility as limited due to leadership transition and the uncertain tariff environment, but identified several factors that will influence Carter’s results over the coming quarters and year:

• Tariff impact and mitigation: The company is assessing the effect of proposed U.S. tariffs on imported apparel, with mitigation strategies including further price adjustments, continued supply chain diversification, and potential inventory reductions to limit exposure.
• Demand trends and category focus: Carter’s is leaning into categories with the strongest momentum, particularly baby and toddler apparel, and making selective inventory investments in kids’ products for the back half of the year to support top-line stabilization.
• Consumer behavior and promotional intensity: Management is monitoring shifts in consumer demand, including possible pull-forward of purchases ahead of price increases, and is balancing promotional investments to drive store traffic and online sales without eroding profitability.

Top Analyst Questions

• Jay Sole (UBS): Asked CEO Doug Palladini about his initial observations and opportunities for financial improvement, and sought clarification on the methodology behind projected tariff impacts. Management confirmed the estimates are hypothetical based on proposed reciprocal tariffs and acknowledged significant cost implications if enacted.
• Ike Boruchow (Wells Fargo): Inquired whether Carter’s China sourcing can be reduced further and how quickly. Management stated apparel exposure is already minimal, but further reductions, especially in accessories and the Skip Hop brand, are ongoing but gradual.
• Ike Boruchow (Wells Fargo): Probed on the expected timing of tariff impact and Carter’s mitigation strategies, including pricing and inventory adjustments. Management indicated initial tariff-affected goods could arrive mid-year, and that selective price increases, production shifts, and modest inventory pullbacks are underway.
• Paul Lejuez (Citi): Sought details on inventory reduction plans and whether wholesale partners are canceling orders. Management clarified inventory pullbacks are modest and mostly confined to Carter’s own retail, with no material trend of order cancellations from wholesale customers yet.
• Christopher Nardone (Bank of America): Asked how much recent retail comp improvement is driven by sharper pricing versus product strategy, and whether macro changes have altered Carter’s retail approach. Management cited both improved pricing and styling, along with new marketing strategies, as contributing factors.

Catalysts in Upcoming Quarters

Looking ahead, our analysts will monitor (1) Carter’s mitigation and adaptation to any finalized U.S. tariff changes, (2) the effectiveness of new inventory investments in revitalizing performance in underperforming categories such as kids’ apparel, and (3) the pace and clarity of strategic direction under CEO Doug Palladini. The timing and magnitude of promotional activity, as well as consumer response to potential pricing changes, will also be important indicators of near-term momentum and profitability.

Carter's currently trades at a forward P/E ratio of 9.6×. In the wake of earnings, is it a buy or sell? The answer lies in our free research report.

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