Operator: Welcome to Carter's Q3 fiscal 2026 earnings conference call. On the call are Sharon Price John, Chief Executive Officer and President, Richard Westenberger, the Chief Financial Officer, Allison Peterson, Chief Commercial Officer, and T.C. Robillard, Vice President of Investor Relations. Please note that today's call is being recorded. I will now turn the call over to T.C. Robillard.
T.C. Robillard: Thank you, and good morning, everyone. Earlier today, we issued two press releases, the announcement regarding the evolution of our leadership structure and our Q3 2026 earnings. These releases, as well as the earnings presentation materials for today's call, are available on our investor relations website at ir.carters.com. Note that statements on today's call about items such as the company's expectations and plans are forward-looking statements. For a discussion of factors that could cause actual results to vary from those contained in the forward-looking statements, please see our most recent SEC filings, as well as the earnings release and presentation materials posted on our website. In these materials, you will also find reconciliations of various non-GAAP financial measurements referenced during this call. After today's prepared remarks, we will take questions as time allows. I will now turn the call over to Sharon.
Sharon Price John: Thank you, T.C. Good morning, everyone, and welcome to our call. I am pleased to be here with you, and while this is my second earnings call with Carter's, it is actually the first one where I have served as the CEO for the entire period. During the last four months, I have continued to learn about this remarkable company while spending time with our talented and dedicated team. I believe we have made significant progress analyzing, clarifying, and prioritizing potential strategic initiatives by using our rich data and consumer insights.
Sharon Price John: All of this work reflects a vision to drive profitable sales by leveraging our core competencies and key assets, which include the strength and equity of our branded portfolio, the trusted relationship we have with our consumers, the stability of our balance sheet and cash flow, the significant breadth of our distribution, as well as the diversity and agility of our supply chain. I look forward to sharing more with you about our go-forward plan after the first of the year. Regarding the business at hand, Carter's Q3 results exceeded our outlook even as we navigated continued uncertainty and choppiness in the macroeconomic environment, which has resulted in some shifts in consumer confidence and spending. As we highlighted on our last call, we believed the delivery of our Q3 would largely hinge on the month of September.
Sharon Price John: September plays an important role for us even beyond Labor Day and back-to-school, because as you may know, it is also known as Baby Month. This is because it is historically the largest birth month of the year, which in turn makes it historically one of our biggest months. With that in mind, even as we experienced some softness in July and August, which, as we mentioned in the last call, was partially driven by the pull-forward Prime Day, unfortunately, as early September rolled in, that softness persisted. While the unseasonably warm weather was certainly not helpful in the marketing of back-to-school apparel, we quickly refocused to drive efforts through strategic investments using marketing insights, crisp promotions, and targeted merchandising.
Sharon Price John: This ultimately shifted our trend for both the month and the quarter, reversing the negative traffic and delivering improvements across numerous metrics, including net sales, retail comps, and operating income, while simultaneously increasing brand engagement. Importantly, these efforts included the multi-touchpoint introduction of Carter's new comprehensive branding initiative, marking the first reimagination of the look, feel, and promise of the brand in a quarter century. This fresh approach was developed with proprietary consumer research and insights that was designed to appeal to the changing sensibilities of today's generation of new parents. However, the execution was balanced with the understanding that we must also maintain the appeal to multiple generations, including a more nostalgic grandparent cohort who are the main drivers of our important gifting segment.
Sharon Price John: While I would not want us to trap or narrowly define Carter's as simply a heritage brand, it is without a doubt a brand that enjoys a rich history of delivering quality and value to seven generations of parents and children, which is how we have earned high marks for arguably the most important consumer metric, trust. With that in mind, we landed on embracing an elevated brand promise more aligned with today's parenting intentions, to let every child's light shine. This is not just a tagline.
Sharon Price John: This subtly shifts Carter's positioning to more purposely be about a broadened, rightful opportunity for us to be seen as a trusted partner for parents as they navigate the beautiful, sometimes precarious journey of childhood, versus just being seen as an apparel brand or, based on the consumer feedback, a brand that had slowly lost some of its emotional connection and relevancy with today's moms. I also am happy to share that the brand promise of allowing kids to shine, which is reflected in the shooting star element featured in our new logo treatment, is not only resonating with consumers, it is also inspiring our entire organization, from product to merchandising to promotion, and was the guiding light, if you will, for the two key initiatives that positively impacted the outcome for the quarter.
Sharon Price John: One, the launch of our comprehensive Stellar Sleep System, a new approach encompassing all of our ages based on consumer feedback that moms find navigating the pajama purchasing process confusing. It is supported with dedicated long-term merchandising and informative signage that is expected to drive our share in sleepwear, which is one of the largest kids apparel categories. Two, we evolved our annual baby sale offering to a branded Five-Star Baby Event, focusing on core baby items, which not only delivered a margin accretive promotion for Baby Month, but helped expand consumer interest, sales, and quarterly share in our total baby offering. Importantly, even in the brief time since the new branding launch, the results of the messaging have been impactful.
Sharon Price John: In less than 2 months, our campaign has generated over 1.6 billion impressions, a meaningful shift in positive sentiment across social media, higher unaided brand awareness, and increased purchase consideration, including nearly 20% growth in branded search versus the time period before the launch. All of this, including welcomed cooler weather in the last weeks of the quarter, ultimately delivered strong sales and profitability in the month of September, which positively impacted our quarterly results. Although Richard and Allison will take you through more details of our performance, some financial highlights from Q3 include net sales of $752 million were essentially flat compared to prior year, inclusive of the negative revenue impact from the net closure of more than 30 locations in our North American fleet as a part of our real estate rationalization.
Sharon Price John: Adjusted operating income of $57 million, an increase of 45%, with adjusted operating margin expansion of 240 basis points, driven by healthy gross margin expansion, the benefits from our ongoing productivity improvements, as well as the closure of unprofitable store locations, and positive comparable store sales for US retail, aided by the team's delivery of double-digit retail comp growth for the month of September, despite the soft start. As noted, while there were some challenges, I believe this quarter's performance reflects well on the ongoing potential of the company in both broad-based and fundamental ways, ranging from the positive early campaign proof points, noting our ability to quickly recapture brand affinity and simultaneously connect with multiple generations of caregivers, to seeing the organization's dedication and agility to turn short-term setbacks into quarter-impacting opportunities.
Sharon Price John: While agility is a critical skill that we should continue to nurture, our long-range goal is to be both agile while operating in an evolved structure to support improved processes reflecting our stated strategic intent of becoming a more consumer-centric, brand-building, data-driven company that is focused on the consistent delivery of profitable growth and the creation of value for our shareholders. With that strategic intent in mind, we are pleased to have shared earlier today an evolved organizational structure designed to better align our leadership responsibilities with both longer-range planning and business opportunities. Briefly, this includes the previously vacant position of Chief Product Officer will be filled by Maria Gemzell, who we will welcome early next year when she joins us from her most recent position at the Swedish headquarters of one of the world's leading fashion companies, H&M, after having held multiple senior positions in relevant areas.
Sharon Price John: The chief marketing officer role will be broadened to overtly incorporate a comprehensive branding function and retitled as chief brand officer, led by Sarah Crockett, to reflect the importance of leveraging and monetizing our valued brand assets. The chief strategy officer role will be expanded to chief strategy and business development officer, led by Emily Evert, to create a sharper focus on identifying and driving incremental profitable business opportunities, while also consolidating our research and data areas to enable improved visibility to consumer and sales insights. We will be establishing a standalone role and conducting a search for a chief operating officer in light of the expected late Q1 2027 retirement of Karen Smith, our current chief supply chain officer.
Sharon Price John: We are creating a new chief commercial officer role to bring together the power and synergy of our more than 1,000-door vertical retail business, e-comm channel, and 20,000-location wholesale division, which will be led by Allison Peterson, who most recently has been successfully driving our North American retail organization. The overall goal is to effectively position the company across our brands, relationships, scale, and infrastructure to service today's multi-generational consumers with seamless shopping experiences that are enhanced by continuous engagement opportunities across channels, ages, and markets to create an emotional connection and increase lifetime value. We believe this structure, in conjunction with improved processes, will be conducive to identifying synergies across consumer and market data, product innovation and design, brand and marketing initiatives, as well as merchandising and promotional planning, with the goal of driving profitable outcomes.
Sharon Price John: Although we are energized by our future with the early success of this brand relaunch and the emerging strategy, along with the anticipated organizational changes and the delivery of a solid Q3, we also remain cognizant of the continued uncertainty in the macro market environment, especially with some of the softness we have seen in our Q4 to date sales. Considering this, as well as the historical tendency for amplified consumer concerns in election years, we have decided to take a prudent approach with a slight downward adjustment to our Q4 revenue outlook, which Richard will speak to in his remarks.
Sharon Price John: Even with this adjustment, however, our full year 2026 numbers will continue to deliver, from an expectations perspective, improvements on numerous key metrics, including net sales growth, inclusive of last year's 53rd week and our store rationalization, a positive US retail comp, and expansion of our operating margin. The team, therefore, remains highly focused on successfully delivering the year, especially given how overweight the impact of the Q4 and the holiday season are on both our top and bottom line. In the meantime, we also expect to continue to make progress on our growth strategy, improving our processes and identifying new opportunities, inclusive of the expansion of the total addressable market, ranging from age expansion to socioeconomic expansion to asset-light global expansion, and we look forward to sharing more with you in the coming months. Now, I'll turn the call over to Richard.
Richard Westenberger: Thank you, Sharon. Good morning, everyone. We are looking forward to updating you on the business today. We will recap our Q3 performance and share our latest outlook for Q4 and how we think the year may finish up. As always, our objective is to provide a balanced update. We will share what is working and where perhaps we have some reasons for caution. For the quarter, we achieved our net sales forecast and exceeded our expectations on profitability. Our teams are continuing to do a good job navigating the various challenges across the marketplace. We are grateful for their resilience and resourcefulness and their openness to change as we continue to transform and strengthen the company for the long term. Our comments this morning on our Q3 performance and our outlook will track along with the presentation posted to the investor relations portion of our website.
Richard Westenberger: Turning to our presentation materials, on page two, we have our GAAP basis P&L. As Sharon mentioned, net sales in Q3 were $752 million. Reported operating income was $56 million, and reported earnings per share were $1.00 compared to $0.32 last year. On page three, we have our GAAP basis P&L for the first nine months of the year. On year-to-date net sales of more than $2 billion, reported operating income was $224 million, which included the benefit of the tariff recovery in Q2, as well as the impact of several other non-recurring charges. Year-to-date reported earnings per share were $4.27 compared to $0.75 in 2025. On the following page, we have summarized our non-GAAP adjustments. In Q3, we recorded approximately $1 million in charges related to intellectual property litigation.
Richard Westenberger: Year-to-date, our results included several non-recurring items, the most significant of which was the roughly $130 million recovery of previously paid tariffs and related interest. We also recorded approximately $7 million in charges year-to-date related to costs associated with leadership transition and litigation. Last year, both our Q3 and year-to-date adjustments primarily related to operating model improvement costs, organizational restructuring, and leadership transition costs. Today, our comments will speak to our performance on an adjusted basis, which excludes these unusual items. Our Q3 adjusted P&L is on page 5. As mentioned, our Q3 net sales were $752 million, down less than 1% versus last year. Sales were roughly comparable year over year in our US retail segment, down in US wholesale, and we posted growth in international. Adjusted gross margin expanded 200 basis points in Q3 over last year to 47.1%.
Richard Westenberger: The improvement in gross margin was driven by a higher year-over-year mix of US retail sales and higher realized pricing, which offset higher tariff costs and investments in product make. On a consolidated basis, AURs increased mid-single digits, while units decreased mid-single digits in US retail. Q3 AURs were up low single digits over last year, and we also improved realized pricing in our US wholesale and international segments. Allison Peterson will comment further on US retail and wholesale trends in a moment. For the quarter, adjusted SG&A decreased nearly 2% versus prior year to $303 million, with benefits from our productivity initiatives, including store closures, more than offsetting incremental investments in marketing and year-over-year inflationary pressures in wages and rent. Spending is an area we have managed well throughout the year.
Richard Westenberger: Year-to-date adjusted SG&A is essentially flat with the prior year, and we have achieved 150 basis points of leverage.
Richard Westenberger: On a rate basis on roughly comparable sales in Q3, we achieved 30 basis points of SG&A leverage. Our Q3 adjusted operating income was $57 million at an adjusted operating margin of 7.6%, an improvement of 240 basis points over last year. Below the line, net interest and other expenses increased over prior year, driven by higher interest costs from last year's refinancing of our senior notes. Our effective tax rate for Q3 was 24% compared to 22% last year. The higher rate this year was the result of a higher proportion of US-based income, which included the tariff recovery. For the full year, we are forecasting an effective tax rate of approximately 23%. Out of all this, to the bottom line, Q3 adjusted earnings per share were $1.03, an increase of nearly 40% over last year's $0.74.
Richard Westenberger: On page 6, we have a summary of our Q3 performance by business segment. As I mentioned earlier, net sales were roughly comparable year-over-year in our US retail segment, down in US wholesale, and we posted growth in international. Of particular note, each of our business segments posted improvement in operating income and operating margin in Q3. Our newly named Chief Commercial Officer, Allison Peterson, will provide some additional perspective on our retail and wholesale businesses, beginning on page 7.
Allison Peterson: Thank you, Richard. I am thrilled to be stepping into this expanded role of Chief Commercial Officer at such an exciting time for our business. The structure we announced today creates an important opportunity to build on our strong foundation, accelerate growth, and strengthen our position as the market leader. Together, we plan to advance our go-to-market strategy, deepen our connections with customers and consumers, and deliver elevated experiences at every touchpoint. I believe in our ability to translate these opportunities into sustained growth, driving meaningful value for our business. Turning to our US retail segment results. Q3 net sales were comparable to prior year, while operating profit nearly doubled. Higher realized pricing and the benefits from our productivity initiatives, including store closures, drove a 250 basis point increase in our operating margin for the quarter.
Allison Peterson: Comparable retail sales increased 0.4% over last year, with AUR up low single digits. This built on last year's 2% comp growth and mid-single-digit AUR increase. For the quarter, units were down low single digits versus prior year. We saw continued growth in our baby and toddler business, with our most important baby segment delivering its eighth consecutive quarter of comp sales growth, driven by destination categories like bodysuits and sleepwear. Our older kid business was slightly down versus last year. Performance across both stores and e-commerce was comparable to prior year. We saw continued strength in average transactions, driven by growth in both AUR and UPTs. While traffic continues to be strong on a two-year basis, and we are pleased with the returns of our paid media investments, traffic decelerated from Q2 due to uneven product acceptance of our older kids' back-to-school seasonal assortment.
Allison Peterson: Additionally, we saw a softening of traffic to our stores as the average consumer continued to face higher gas prices, as well as other inflationary pressures, a trend that is in line with other reported retail traffic trends in the industry. As Sharon Price John mentioned, Q3 sales were expected to be weighted to the month of September, and that is exactly how the quarter unfolded. In July, comps were largely on plan, reflecting typical seasonal clearance activity. August trends were weaker than planned as warmer weather impacted much of the US. Although key back-to-school categories like denim and uniform showed strength, our older kids' seasonal assortment fell short of our expectations as consumers were being more strategic with their spending and delaying purchases closer to need, a trend we believe has continued into the Q4.
Allison Peterson: While Labor Day was softer than expected, as reported across much of the retail industry, we quickly pivoted our marketing and merchandising efforts from focusing on the entire collection to wear-now key items that were resonating with the consumer and saw the back-to-school business rebound. Knowing September was a must-win month, we also positioned the Carter's brand to resonate with new and existing families in a differentiated way. We took this important commercial timeframe to lean into our most iconic baby products and create relevancy with the next generation of families. Through elevated storytelling, updated merchandising, personalized experiences, and compelling value, September comps were up double digits and exceeded our plan. During this timeframe, we saw outsized growth in our baby segment, where we hold the number 1 market share position and acquired new consumers to the brand, including Gen Z.
Allison Peterson: Another driver of our strong September performance was the launch of our new branding campaign, which can be seen on page 8. For the first time in 25 years, we have reimagined the Carter's brand. As you can see, the brand has a new look and feel, a new logo, and an elevated brand promise, "Let every child's light shine." On page 9, you can see some of the other ways we are bringing the new Carter's branding to life. Our intention is to increase the appeal and relevance of this great brand to a new generation of parents while maintaining a nod to Carter's rich 160-year heritage. While this is a multi-year strategy, we are encouraged with the early results, as unaided awareness and consideration are increasing. Engagement is also meaningfully up across our website and social media platforms, signaling that the content is resonating with our target consumers.
Allison Peterson: We will continue to build on our momentum with new brand moments in Q4 as we move through the key holiday period. Turning to page 10, we have reimagined the way consumers shop sleepwear, launching our Stellar Sleep Shop featuring our Not-So-Scary Monsters collection. We saw a big opportunity to gain share in the important sleepwear category and connect with a new generation of consumers through new products, updated merchandising, and enhanced marketing. This category, which historically generates a high lifetime value, delivered double-digit unit and dollar sales growth in the quarter. We expanded the role Carter's plays in sleep by moving beyond product and into bedtime routines as a way to keep Carter's top of mind and be of service to our consumers.
Allison Peterson: In Q3, we launched our free Bedtime Monster Scanner as part of the Carter's app to help parents and kids quell the anxiety we know is associated with the bedtime routine. Not only did we see great adoption within the app, it drove double-digit conversion improvements to users who engage with this feature. Finding new ways to expand the role Carter's can play in families' lives continues to be a focus for us as we elevate our brand in the minds of our consumers. Turning to the performance of our US wholesale segment on page 11. Third quarter net sales for our wholesale segment decreased 4% versus prior year, which was better than expected, driven by earlier demand for fall products from key customers.
Allison Peterson: As many of you know, our wholesale business can vary quarter to quarter due to shipment timing, that has certainly been the case this year. On a year-to-date basis through Q3, net sales are up approximately 2% over prior year. For the third quarter, pricing increased over prior year due in part to higher product costs. However, this is more than offset by a decline in units. Sales of our exclusive brands decreased mid-single digits versus last year in the quarter, driven by earlier fall shipments that benefited our Q2 results. Year-to-date, exclusive brand sales are up high single digits over last year, driven by Carter's, Child of Mine, and Just One You. Wholesale operating profit for the third quarter increased 11% over prior year, and operating margin expanded 230 basis points.
Allison Peterson: From a margin standpoint, higher realized pricing, favorable customer mix, and productivity initiatives more than offset higher tariff and product costs. I will now turn the call back to Richard.
Richard Westenberger: Thank you, Allison. Turning to our international segment, our businesses outside the United States continued to perform well in the third quarter. Total reported international net sales increased 4% over last year, with growth in all parts of our international business, Canada, Mexico, and with our wholesale partners outside of North America. In Canada, the largest component of our international business, net sales increased 4% over prior year in the third quarter, driven by a 2% increase in retail comp sales and growth in the Canadian wholesale channel. In Mexico, comparable sales increased 8% over the prior year, which was led by our stores. Our team in Mexico drove a nice lift in units per transaction through some creative new merchandising and promotional initiatives, which resonated well with consumers in the quarter. Third quarter sales in Mexico also benefited from new store openings.
Richard Westenberger: In the first 9 months, we have opened 6 new stores in Mexico. We continue to see strong momentum in the performance of these new store investments in this market. International operating income increased 28% over last year to $12 million, and segment operating margin increased 180 basis points to 10%. The improved profitability was driven by higher realized pricing, productivity savings, and FX benefits, partially offset by higher product costs. Turning to page 12, we have some balance sheet and cash flow highlights. Our balance sheet remains very strong, and we ended the quarter with significant liquidity, including cash on hand and short-term investments of over $525 million. Net inventories at quarter-end were $587 million, 11% lower than prior year.
Richard Westenberger: Our inventory position at quarter-end was a bit lower than we had planned, in part due to some delayed delivery of product from port congestion and container availability issues. To date, these disruptions have not had a meaningful impact on the business, but our supply chain team is monitoring the situation closely. Year-to-date, we have generated operating cash flow of more than $100 million compared to a use of cash of $136 million last year. Our improved cash flow was driven by tariff recoveries and improved working capital, including lower inventories. We have also had good performance on a free cash flow basis, generating $72 million versus negative free cash flow of nearly $180 million in the first 9 months of last year. On returning capital to shareholders, we paid $27 million in dividends through the first 9 months of the year.
Richard Westenberger: Overall, we believe our strong balance sheet and free cash flow generation are differentiating and strategic advantages for Carter's. Pages 13 and 14 summarize our adjusted P&L and segment results for the first 3 quarters. This information is provided for your reference. Year-to-date through the first 3 quarters, net sales increased 4% with growth in all 3 of our business segments. Q3 year-to-date adjusted operating profit increased 20%, and adjusted EPS increased 7%. As you will recall, the difference between operating income growth and EPS growth reflected higher net interest expense from last year's refinancing of our senior notes. Turning now to our outlook, beginning with the Q4 on page 16. Q4 is obviously very important in our business, not just in retail, but also in wholesale, where we have significant shipments planned, including product for the upcoming spring 2027 selling season.
Richard Westenberger: November and December have historically been the largest months of the Q4, and of the entire year for that matter, so we have some big weeks and months ahead of us. Our teams are focused on finishing the year strong, continuing the progress we have achieved this year. As we said in our discussion of Q3 results, we have to acknowledge some slowing of demand relative to earlier in the year. Given the various pressures which our target consumers are facing, this is not overly surprising. As such, we have updated our outlook for net sales for the balance of the year prudently, we believe, to reflect an expectation for more moderate demand than in our previous forecast. Specifically, we have adjusted our assumption in our US retail business to reflect current trends.
Richard Westenberger: In US wholesale, we have also moderated our forecast for replenishment demand to better align with trends in the business.
Richard Westenberger: Over the past several years, we have seen a compression in the Q4 shopping period as consumers shopped much closer to the holidays. This has resulted in a corresponding acceleration in our business in the last six weeks or so of the year. It seems possible we may see a similar consumer behavior this year as well. It is also worth a reminder that last year included an extra week, which we have estimated contributed approximately $37 million in net sales. For the fourth quarter, we are forecasting net sales in the range of $860 million to $880 million, or mid-single digit lower sales than last year's fourth quarter, using the midpoint of the range. For adjusted operating income, we are forecasting a range of $74 million to $83 million, which compares to $89 million a year ago.
Richard Westenberger: For adjusted fourth quarter EPS, we are forecasting a range of $1.37 to $1.55, versus $1.90 in Q4 last year. Our outlook for the full year is included on page 17. We are now expecting full year net sales in the range of $2,910 million to $2,930 million. At the midpoint of the range, this represents growth of approximately 1% versus prior year, or 2% growth excluding last year's 53rd week. Over the past few quarters, we have been able to offset lower-than-planned demand and additional promotional cadence to manage through some underperforming products, with the benefit of lower-than-planned tariff costs and prudent expense management. As such, we are maintaining our previous outlook for full-year adjusted operating income growth in the low single-digit to mid-single-digit range.
Richard Westenberger: We are also maintaining our outlook for adjusted EPS to decline in the high single digits to low double digits. Again, as a reminder, the delta between our forecast for adjusted operating income growth and lower adjusted EPS is the higher interest costs related to last year's debt refinancing. Even with the moderated outlook for the top line, achievement of our forecast would cap a good year for Carter's, delivering growth in net sales despite the net closure of nearly 40 stores and last year's 53rd week, and posting meaningful improvement in operating profit. As also summarized here on page 17, we expect to have a good year on cash flow, with an outlook for operating cash flow in the range of $240 million to $250 million, reflecting the net tariff recovery and favorable movements in working capital.
Richard Westenberger: As we finish the year, risks we are monitoring include consumer sentiment and spending, given the ongoing pressures of persistent inflation, including the price of gas. We have also seen some impact on demand in past election cycles, including related inflation in the cost of media, so the upcoming midterms are on our radar. Given geopolitical uncertainty around the world, it is possible there may be some additional disruption to the supply chain and the delivery of product. Finally, we will be carefully monitoring and reacting to the overall promotional intensity of the market, particularly around the holidays. With these remarks, we are ready to take your questions.
Operator: Thank you. Ladies and gentlemen, to ask a question at this time, you will need to press *11 on your telephone and wait for your name to be announced. To withdraw your question, simply press *11 again. As a reminder, in the consideration of time, please limit yourself to one question and one follow-up. Please stand by while we compile the Q&A roster. Our first question coming from the line of Jay with UBS. Your line is now open.
Jay Sole: Great. Thank you so much. Sharon, as you've had a chance to really dig into the business over the last quarter, can you just maybe talk about how you feel about the interplay between the wholesale channel for Carter's and the US retail channel? Is there one channel you need to prioritize, and how do you think you're going to What's the best way you think you have to improve the traffic into the US retail stores? Thank you.
Sharon Price John: Yeah. Thanks, Jay. Appreciate the question. That really leads back to some of the organizational changes that we just spoke about. You just heard Allison speak, and she's been leading very strong results over the past few, well, quite a few quarters at this point in US retail. We also saw an opportunity, therefore, to combine the entire commercial area under her as the Chief Commercial Officer, inclusive of both wholesale, retail, and then e-comm.
Sharon Price John: The first thing that I would note is what we see is an opportunity to drive synergy over that entire area, recognizing trends more quickly, recognizing consumer insights, pushing them across all the different areas, and then working much closely with now a branded organization, not just a marketing organization, to create proper segmentation on how consumers see particularly the Carter's brand from our own retail channels, through our partners, through our exclusive brands, with some of our biggest customers. That segmentation is going to be critical for us to maintain a position that separates us from our own other brands, including Little Planet, or as I say, some of the exclusive brands that we have across some of our largest retailers, and the experience that you would have at Carter's.
Sharon Price John: In a Carter's store, you will likely see us just start working toward, as we have mentioned, higher engagement experiences to drive traffic with not only an elevated brand promise, as we spent some time on, but then delivering on that promise through more integrated solutions, like I just mentioned on the Stellar Sleep program, where we also had a free app for the Bedtime Monster Scanner, which everybody needs, by the way. If you do not have a monster scanner, you should get it. I have not found a monster yet. We have no monsters reported. But it helps integrate us into the bedtime process. This is just a singular example of how Carter's, as I mentioned, is elevating itself beyond, quote-unquote, "an apparel brand." We have every right to do that with 160 years of heritage and the highest trust numbers in the space.
Sharon Price John: That is the store experience.
Sharon Price John: We will be looking through, we are looking at testing and management and insights on how to arrange that store in a way that highlights our businesses, our brands, as well as gives us that permission to stretch into the older consumer, which we have also mentioned, and the gift-giving grandma, grandpa. The look for the Carter's business, and it will take us a minute. We have over 1,000 locations. But I think you are going to start to see a different kind of approach on the integration between e-comm and the stores, and the elevation of the experience inside of a Carter's store to drive that lifetime value. The good thing about that, it is a little bit of a long answer, but that was a very broad question. That will also We understand basically that our consumers also co-shop all over the place.
Sharon Price John: That would not be an exclusive advantage to just the Carter's world. That also benefits our very valued big retail partners, and all of our retail partners. We mentioned 20,000 doors that we have. We see that that kind of approach then can be executed in partnership with our retailers, sort of like one partner at a time, building that relationship and that partnership more than a buyer-seller kind of relationship or purchasing, buying kind of relationship, to assure that the company that owns the number one market share in baby with such an iconic brand is positioned in a way that it should be in every location where a consumer can find children's apparel.
Jay Sole: Got it. That is helpful. If I can follow up, you announced a new organizational structure. I am interested in the position of chief strategy and business development officer. Can you just talk about, I know it is early, but just some high-level ideas that you may have for finding new revenue streams for Carter's? I mean, you touched on becoming a bigger part of the sleep time, I think.
Sharon Price John: Stellar Sleep
Jay Sole: moment with parents and children. Just give us a sense, where can this brand go beyond what we are used to seeing from just baby and young children's apparel?
Sharon Price John: Well, first, thank you for that because I think that it is important to focus on not just strategy, but then how do you execute said strategy? It is great to have all this information, but what are we doing with it? How are we executing? How are we pushing it across the organization to find continued value and new opportunities? Stellar Sleep is one of those. As I noted, it was proprietary research that provided the insights that moms just find the whole how you buy for sleep confusing, and we are like, "Wow." First of all, sleep, it stretches across all the ages. It has a very high lifetime value connection. If we solve whatever might be the challenge for the parent with that type of thing where you are engaged in an experience, they are generally going to stick with you, right?
Sharon Price John: So you go from a one-child household to a multi-child household. Sleep was a really great place for us to start, and that solution that we have come up with, of course, we have also spoken to our key customers about this, you can actually see that solution being pushed out across numerous retail outlets where we have started and tested and proven the concept in our own stores. That is a really important model to just keep in the back of your mind as we move forward. Consumer insights driven into broader consumer touchpoints. That is number one. Number two, as I mentioned at the tail end of my script today, and have spoken to some of you guys at the most recent Goldman conference, we are looking at the purposeful expansion of the addressable market across 3 different vectors.
Sharon Price John: That first vector is aging up the consumer. I know you've heard this over and over again, but we have a lot more data now and a lot more insights about how to do that in a meaningful way, not just from design and development, but all the way through how our stores look and how engaging those stores are for a. When I say an older consumer, I am talking about a 6, 7, 8, 9, 10-year-old, right? So don't get too old on me, but that type of consumer, as well as aging up the, excuse me, pushing up the socioeconomic strata, which we've been able to prove our ability to do so with our sub-brand, Little Planet.
Sharon Price John: While early, it is showing us that that consumer is absolutely willing to be engaged and involved in a sub-brand of Carter's for a much more elevated look, feel, and approach with a bigger promise that is linked to sort of the environmental concepts of some of the things that that particular consumer is looking for today. Then finally, on the third vector is the expansion onto more of an international approach. We are already a global brand. We have just not really had a consistent strategy on how we are rolling out across the globe, and we have a lot of good touchpoints and a lot of good success in some of the markets that we are in. So, we are looking at an asset-light approach to a very systematic execution as we look toward that.
Sharon Price John: In fact, one of the reasons we have created this role beyond pulling together all of our consumer insights, which will drive this across many of our categories and consumers, the international team will report into the Chief Strategy and Business Development Officer as we work toward a strategic approach to evolving in that area.
Operator: Thank you. Our next question in queue coming from the line of Kelly Crago with BMO Capital Markets. The line is now open.
Kelly Crago: Hi. Thank you for taking our question. I just want to dig into the US wholesale business a little further. You are guiding it down quite meaningfully versus prior expectations in Q4. Last quarter, you sounded very positive on the retailer reception of your product and pricing. Just curious if you could dig into what has really changed there and provide us with any sort of color on how you are seeing order books phasing up for you as wholesale into next year. Secondly, on pricing, obviously you have taken a lot of price this year. Just curious what you are thinking on the pricing dynamics into next year, given some of the cost headwinds we are anticipating. Thanks.
Richard Westenberger: Hi, Kelly. I will start, and my colleagues may want to add some thoughts. As it relates to the revision in revenue outlook, I would say the majority of that relates more to the US retail business than it does to wholesale. We had revised wholesale down in our previous forecast. I think we have further refined our outlook for replenishment demand, which is a component, obviously, of the wholesale revenue stream. The more significant component would be US retail as opposed to wholesale. Wholesale on balance, there are lots of moving pieces, as Sharon Price John said in her remarks. We had some volume that had been previously planned for Q4 that moved forward and benefited Q3. That happens all the time in this business.
Richard Westenberger: I think if you look at our revised forecast, it implies kind of flattish to down slightly for the full year segment results for wholesale. I think we are going to cap a good year in wholesale overall. We had good demand for the order book for spring 2027. The challenge with that is not all that comes next season. We actually have more of that going in Q4. Spring pre-ships are up about 30% in Q4. That will benefit Q4 versus early next year. We have not done sell-ins yet for fall. That will take place as we exit the year here. On our next call, we will probably have better line of sight to that.
Operator: Thank you. Our next question in queue coming from the line of Ike Boruchow with Wells Fargo. Your line is now open.
Ike Boruchow: Hey, guys. Good morning. Was hoping you could talk about AUR and gross margins specifically for Q4, what your expectation is, and how you kind of see the trajectory of AUR into next year.
Richard Westenberger: Sure. Again, I will start out there. So, we had a nice lift in AUR in Q3. I think that is a testament to how the retail team came together and developed that compelling late September promotional drive, which was accretive overall to margins and profitability. So, we do have pricing planned up, I would say low single digit in the US retail business in Q4 as well. A little less than perhaps what we achieved in Q3, but Q4 is naturally a bit more of a promotional period than Q3 is. So, sequentially, you lose a little bit of that. Still planning higher prices. I think we have been able to maintain those reasonably well. I think we have sold in, at this point, spring 2027, so that pricing is kind of known at this point.
Richard Westenberger: We have yet, as I mentioned, to sell in the fall assortment for the H2 of the year, so more to come on that.
Sharon Price John: I would like Allison Peterson to add some color to this, but as we noted in the remarks, we recognized, and actually shared in the last call, the importance of September, and had that soft start in Labor Day, which apparently, from some of our research, was reflected in a lot of different sectors of the marketplace. But I was really proud to see the team double down on how to approach September and come back with a winning strategy to end up with a double-digit comp in September that clearly positively impacted the quarter overall. It was a very scalpel approach to the way they attacked this opportunity. Ultimately, that too was a protector of the AUR being positive for the quarter.
Allison Peterson: Yeah, absolutely.
Ike Boruchow: Good job.
Allison Peterson: I think the team has done an excellent job surgically optimizing price across the assortment to deliver a low single-digit AUR increase in the quarter, and that was on top of a mid-single-digit AUR increase last year. The teams are definitely taking price where they can, and that is even without considering some of the product headwinds that we talked about. We are really seeing the teams lean in a very strong way, and taking price and realizing price in our destination categories, in our most important baby business, in our sleep business, and we are really seeing the benefits of that flow through to our gross margin, as Richard mentioned.
Ike Boruchow: Got it. As follow-up, on the gross margins, can you just quantify what was the lower tariff rate benefit to gross margin in Q3, and what kind of a benefit do you have baked in on Q4, just so we can kind of separate the core versus the tariff rate noise?
Richard Westenberger: Yeah, I would say, in Q3, gross margin expanded by about 200 basis points. About half of that expansion had to do with just higher mix of the gross margin-rich US retail business. We had a higher proportion of US retail sales. The balance would be improved pricing, largely. Tariffs were not as meaningful of a year-over-year driver in Q3. We get more of a benefit, Ike, in Q4 from tariffs. From memory, it is $10 or $11 million of lowered gross tariff burden in Q4, because last year, we were selling through product that we had imported under the much higher IEEPA tariffs.
Operator: Thank you. Our next question in the queue coming from the line of Jim Chartier with Monness, Crespi, Hardt & Co. Your line is now open.
Jim Chartier: Good morning. Thanks for taking my question. I wanted to talk about the marketing spend. How does this year's marketing spend compare to years past? Given the strong response that you have seen to the initial brand relaunch, is there an opportunity in the near term to lean into marketing in a bigger way to drive the business? Where do you see total marketing spend going over time?
Richard Westenberger: Well, this has clearly been an area of investment for us, Jim, and one that we are really pleased by. We felt like the benchmarking that we had done indicated that we under-indexed other good branded companies in terms of what we spend on marketing overall. We are spending about $20 million more on demand creation this year versus a year ago, and that is across a range of areas. Paid media, in particular, has proven to be a very good area for investment. One of the things I like about our colleagues in marketing, they are very rigorous in measuring the return on that investment. We do believe it is driving traffic for us. We will continue to do that, and I do not think we are at the point of inefficiency yet with spending. We are kind of stepping our way into more spending over time.
Allison Peterson: I would also add that our marketing investment is intentionally balanced across really two priorities, which is delivering results today while investing in the long-term relevance of our brands. You will see that show up in the work we are doing around reimagining the brands, and that is a strategy that we expect to pay off over a longer-term horizon. We do continue to see, as Richard mentioned, marketing contribution to retail sales grow year-over-year, and our increased spend is proving effective and efficient. Although we are starting to feel, as the team mentioned, more pressure in our efficiency due to rising media costs, we are very pleased with the efficiencies we are seeing and the effectiveness we are seeing in terms of marketing's contribution to our total business.
Sharon Price John: I would want to note that the change of the chief marketing officer to chief brand officer is not just in name. It is a very important concept of how we feel we can drive value across the organization with our iconic brands. That combination of upper funnel marketing with a branded engagement to push us up in a top-of-mind awareness and a high to drive that affinity, combined with the scalpel approach to promotions and occasionally marking down versus marketing in its most specific approach, is a very dynamic way to drive business over time. I would suggest that we would hope to see much more of that as we move forward, particularly with the positive impact of this branded initiative that we have launched.
Sharon Price John: While our marketing as a percent of sales, as Richard mentioned, has been comparatively low, and frankly, still is comparatively low to like companies, we will likely, as long as that ROI maintains some consistency, we will likely see a greater expense in marketing. Of course, that is with the objective to drive profitable sales.
Operator: Thank you. Our next question in queue coming from the line of John Keypour with Goldman Sachs. Your line is now open.
John Keypour: Hey, good morning, everybody. Thank you for the question. Just a quick bookkeeping to start. If you could give us the quarter-to-date comp, please.
Richard Westenberger: It's down, John. We're actually going to move away from providing the intra-quarter data point. We had a lot of lessons in this last quarter about how that can move around as you get to the higher volume periods. We are running down month-to-date, but the bigger volume periods, November and December, are still ahead of us. We're focused on delivering those.
John Keypour: Okay, totally. Thank you. If we could just talk about SG&A a bit, and maybe, actually, let's start with gross margin. If you could give us a picture of what you're expecting in terms of freight and cotton and how the tariff lapse should influence margins next year.
Richard Westenberger: Yeah, so I'll start near end. Gross margin for Q4, we are expecting expansion again year over year in Q4, not to the same extent that we saw in Q3. You don't have quite the same mix benefit. You do get a bit more of a tariff benefit in Q4, as I just mentioned. Cotton is clearly up in the marketplace. It's up about 20%. Just a reminder, we don't buy raw cotton. We buy finished goods, and so our vendors buy cotton on our behalf. They're buying all across the time continuum on our behalf. So, the more expensive cotton is really more an issue for our H2 product costing in 2027. At this point, we've costed our assortments for the first part of next year, so I don't expect cotton itself is a huge inflationary pressure.
Richard Westenberger: I do think we are seeing other sources of inflation in transportation costs with the cost of oil being what it is. This year, we are probably incurring another $4 million or $5 million of incremental freight surcharges just from our carriers because of the price of oil. Too early to probably be more specific on 2027. I do think that we are seeing a trend towards inflation in our product input costs, probably more a second half phenomenon. Tariffs, to your question, I think that is anybody's guess. I do not think we are out of the woods as it relates to tariffs. The administration clearly has a preference for this as a policy matter. I think the more recent tariffs have obviously been much more benign than the IEEPA-level tariffs.
Richard Westenberger: My personal opinion is we are not out of the woods as it relates to potential further changes there.
Richard Westenberger: We are mindful of what may happen.
Operator: Thank you. Our last questioner will come from the line of Tom Nikic with Needham & Company. Your line is now open.
Tom Nikic: Hey, good morning, everyone. Thanks for taking my question. I wanted to ask about some of the leadership changes. Obviously, a lot of folks moving into new roles and things like that. Sharon, can you give us any sort of timeline as to how long it will take for the new leadership structure to really impact the business and to get operating at the level that you are hoping to see?
Sharon Price John: Well, thanks for that. We do have a lot of the key executives already in place. It is just an elevation and expansion of certain roles. So, this is a really concerted approach to some consistency in key seats while adding newness in other areas, inclusive of a chief product officer, which, as I noted, had been vacant, and the time period of that vacancy has been since August of last year. Not August of this year, August of 2025. So, when you think about the kind of impact of someone coming to us from such an iconic company like H&M, who has managed across multiple areas of apparel, including kids, of course, that could have quite a strong impact on the way we think about the business, and in regards to many of the strategic initiatives that I have mentioned, particularly expansion of the addressable market.
Sharon Price John: We expect her to be able to start in January-ish, after the first of the year. We will see. The other opportunity is with the chief operations officer, which we will be searching for, so that is really hard to say. I am quite hopeful that a company like Carter's, with a Fortune 1000 organization, with 160 years of history and iconic brands, and a situation where we have so much opportunity ahead of us, I certainly hope that that will attract the top talent, as I have in other areas. So, it will come in phases, to be truthful. In some cases, the work that will be done of creating more synergy across the organization and pulling up consumer insights and brand earlier into the process of the development of our products, and driving insights across the entire organization, all the way to the execution in the stores.
Sharon Price John: The strategic insights of that will happen fairly rapidly, I would assume, but the ongoing execution of that will hit the market in different phases as we move forward. Even with that note that we have already, in the first 4 months, launched an entirely new brand look, feel, and logo for Carter's, which we have already driven 1.6 billion impressions, and a very positive response from the consumer. So, some things can go fast, and some things might take a minute.
Tom Nikic: All right. Very helpful. If I could squeeze one in before the call ends here. There was a comment about monitoring and reacting to the promotions in the marketplace. Have you seen anything from the competitors out there that gives you any concern heading into the holidays?
Allison Peterson: Thank you for the question. We saw competitors raise prices on fall products until Labor Day, when they pivoted to deeper discounts and increased their promotionality for the month, given what Sharon spoke to, which is a challenging Labor Day period, which we perceive happened across the market. Coming out of September, we have seen competitors pull back on promotions, but we are absolutely anticipating the promotional environment will intensify with heavy discounting in November and December, as many brands and retailers are talking about taking their tariff relief and potentially repurposing it back into price. So, we have considered and contemplated a more aggressive promotional environment in our forecast.
Operator: Thank you.
Sharon Price John: That being said, just recall the last 2 months of the year are the most important months. We are completely focused on driving profitable sales through the end of the quarter, and we are constantly monitoring the competitive environment and the consumer. But as Richard noted earlier, this compressed timeline as we approach holidays is something to just keep in mind as we complete 2026 with an expectation of positive results across all of the key metrics. With that, we would like to thank you very much for joining us today, and look forward to updating you on our progress in the next call.
Operator: Thank you, ladies and gentlemen. That does conclude our conference for today. Thank you for your participation. You may now disconnect.
