TLDR
- CRI shares tumbled 11% in premarket hours as margin compression and cash flow deterioration alarmed investors.
- Fiscal 2025 revenue increased, but tariff expenses and product mix challenges pressured profitability.
- Fourth-quarter sales advanced, though adjusted EPS declined amid elevated restructuring and operational costs.
- Cash generation from operations dropped significantly as inventory levels rose and profit margins contracted.
- Fiscal 2026 guidance projects revenue growth but forecasts double-digit decline in adjusted EPS.
Shares of Carter’s (CRI) experienced a significant decline during pre-market hours as the children’s apparel company reported fiscal 2025 results marked by diminished profitability and elevated cost pressures that overshadowed revenue improvements. The stock price retreated to $37.35, representing an 11.15% decrease from the previous closing price of $42.07. While the company achieved revenue growth for the full year, intensifying margin headwinds and weakened cash flow generation influenced investor reaction negatively.
Q4 Results Demonstrate Revenue Expansion Alongside Profitability Challenges
The fourth quarter brought revenue improvements across Carter’s business operations, with the company reporting $925 million in consolidated net sales. Performance benefited from a 14-week reporting period and improved customer engagement at retail locations. However, adjusted profit margins contracted as the company navigated tariff-related expenses, shifts in product category performance, and increased employee compensation costs.
Reported operating income showed modest improvement compared to the previous year, but adjusted operating income experienced a material decline. This profitability pattern carried through to earnings results, with diluted EPS reaching $1.76 while adjusted diluted EPS fell to $1.90. Management cited restructuring expenditures and operational adjustments connected to strategic efficiency programs as contributing factors to the earnings decline.
Net income improved on a reported basis largely because year-ago results included substantial impairment charges. However, adjusted net income decreased due to persistent cost challenges and strategic investments in business transformation initiatives. The organization acknowledged that while the additional fiscal week contributed incremental revenue, it proved insufficient to counterbalance the margin deterioration experienced during the period.
Fiscal 2025 Annual Results Reflect Revenue Growth Offset by Profitability Decline
For the complete fiscal year 2025, Carter’s achieved modest top-line expansion driven primarily by performance in its U.S. Retail and International business divisions. Annual consolidated net sales reached $2.898 billion, representing a 2% year-over-year increase that included contributions from a 53rd week. The Wholesale segment posted softer results, and comparable-week revenue growth remained constrained.
Operating income contracted substantially as the operating margin compressed to 5.0%, pressured by escalating tariff costs and restructuring program expenses. Adjusted operating margin similarly deteriorated as the company directed resources toward store enhancements, workforce investments, and product innovation initiatives. Diluted EPS decreased to $2.53 from prior-year levels, while adjusted diluted EPS fell to $3.47, reflecting the broad-based profitability challenges.
Cash flow performance weakened considerably, with operating cash flow declining to $122 million compared to $298.8 million in the prior fiscal year. Management attributed this substantial decrease to elevated inventory positions and reduced profitability levels. Despite the cash flow compression, the company distributed $56 million to shareholders and maintained adequate liquidity through a refinanced debt structure and newly established revolving credit facility.
Fiscal 2026 Guidance Projects Top-Line Growth But Continued Earnings Pressure
Looking ahead to fiscal 2026, Carter’s management established guidance calling for net sales to grow in the low to mid-single digit percentage range. The company also anticipates expansion in adjusted operating income as productivity enhancement initiatives gain traction. Despite these operational improvements, adjusted diluted EPS is projected to decline in the low double-digit to mid-teens percentage range.
The company indicated that evolving tariff conditions could potentially provide performance support, though the timing of any benefits remains unclear. Strategic priorities for the upcoming year include enhancing product offerings, optimizing store operations, and strengthening demand creation capabilities. Management expressed commitment to reestablishing sustainable earnings growth as transformation initiatives and operational modifications take effect throughout the fiscal year.
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