Earnings call transcript: Carter’s Q2 2025 earnings miss expectations

Carter's Inc. reported mixed Q2 2025 earnings, with EPS of $0.17 significantly missing the $0.34 forecast, while revenue of $585 million surpassed estimates, resulting in a nearly 20% stock price decline in aftermarket trading. The earnings miss was largely attributed to pricing investments, tariffs, and higher freight costs, which compressed gross margins by 200 basis points. Despite these pressures, the company achieved 4% year-over-year revenue growth, particularly driven by strong baby category sales, and outlined plans to improve profitability and achieve sustainable growth by optimizing its store footprint, investing in new brands, and actively mitigating tariff impacts through price adjustments and supply chain diversification, aiming to fully offset these costs by 2026.

Analysis

Carter's Inc. (CRI) reported a highly mixed second quarter, defined by a significant profitability shortfall that overshadowed top-line growth and triggered a nearly 20% decline in its stock price aftermarket. While revenue grew 4% year-over-year to $585 million, beating estimates, earnings per share of $0.17 constituted a 50% miss against the $0.34 forecast and a steep decline from $0.76 a year prior. This severe margin compression, evidenced by a 200-basis-point drop in gross margin to 48.1%, was attributed to a combination of intentional pricing investments, higher freight costs, and an emergent tariff burden. The company faces a projected $35 million net impact from tariffs in 2025 and has consequently withdrawn specific earnings guidance, citing market uncertainty. Despite these headwinds, management pointed to positive underlying trends, including a 10% sales increase in the core baby category and strong international performance. The strategic response is multi-faceted, involving price increases to mitigate tariff costs by 2026, a rationalization of the store fleet with plans to close approximately 100 locations, and a focus on growing newer, higher-margin brands.

Key Decisions for Investors

• The severe Q2 earnings miss and withdrawal of formal guidance introduce substantial near-term uncertainty, warranting caution until there is clear evidence of margin stabilization.
• Investors should closely monitor the execution of planned price increases in the second half of the year, as this is the key to offsetting the estimated $35 million net tariff impact for 2025.
• The effectiveness of the new CEO's turnaround plan, including the closure of 100 stores and growth from new brands, will be critical to watch, as the stock's recovery is contingent on a return to profitable growth by 2026.
• Given the sharp stock drop, the current price may attract long-term value investors, but a position should be predicated on confidence in management's ability to navigate cost pressures and successfully reinvigorate the brand's profitability.