Carter's, Inc. (CRI) - Q2 2026 10-Q Summary
Business Context and Reporting Period
This report covers the fiscal quarter and two fiscal quarters ended July 4, 2026. Carter's, Inc. is North America's largest apparel company for babies and young children, operating through U.S. Retail, U.S. Wholesale, and International segments. The company operates on a 52-week fiscal calendar for 2026. Significant corporate developments during the period included the departure of former CEO Douglas C. Palladini and the appointment of Sharon Price John as CEO effective June 15, 2026.
Key Financial Metrics
| Metric | Q2 2026 | Q2 2025 | YTD 2026 | YTD 2025 |
|---|---|---|---|---|
| Net Sales | $615.5 million | $585.3 million | $1,296.6 million | $1,215.1 million |
| Gross Profit | $412.6 million | $281.8 million | $706.5 million | $572.9 million |
| Gross Margin | 67.0% | 48.1% | 54.5% | 47.1% |
| Operating Income | $139.8 million | $4.0 million | $168.3 million | $30.1 million |
| Net Income | $105.0 million | $0.4 million | $119.3 million | $16.0 million |
| Diluted EPS | $2.87 | $0.01 | $3.26 | $0.43 |
| Operating Cash Flow (YTD) | $202.3 million | ($8.3 million) | N/A | |
| Cash & Equivalents | $653.6 million | $338.2 million | ||
| Long-Term Debt | $567.8 million | $498.5 million | N/A | |
| Inventory | $577.7 million | $619.1 million |
Material Changes vs. Prior Period
- Tariff Refund Recovery: The most significant driver of financial performance was the receipt of approximately $132 million in refunds (including interest) for previously paid IEEPA tariffs. Approximately $128 million was recorded as a reduction to Cost of Goods Sold, and $4 million as interest income. This non-recurring item inflated gross margin to 67.0% and operating income significantly.
- Revenue Growth: Consolidated net sales increased 5.2% in Q2 and 6.7% YTD. U.S. Wholesale sales grew 11.7% in Q2, driven by core brands and Fall product demand. U.S. Retail comparable sales increased 5.1% in Q2, marking the fifth consecutive quarter of growth.
- Cost Structure: Selling, General, and Administrative (SG&A) expenses decreased 1.7% in Q2 due to fixed cost leverage, lower performance-based compensation, and the absence of operating model improvement costs incurred in the prior year. However, Average Unit Cost (AUC) increased due to new Section 122 and Section 301 tariffs.
- Debt Refinancing: In late 2025, the company issued $575 million in 7.375% Senior Notes due 2031 and redeemed $500 million of 5.625% Senior Notes due 2027. This increased interest expense by 44.0% in Q2 compared to the prior year.
Guidance, Outlook, and Risks
- Trade Policy Uncertainty: While IEEPA tariffs were ruled unlawful, new Section 122 tariffs (10%) were imposed in February 2026 and expired in July 2026. New Section 301 tariffs (10% to 12.5%) were imposed effective July 24, 2026, on imports from approximately 60 countries. The company has paid approximately $26 million in incremental Section 122 tariffs, with $18 million remaining in inventory.
- Adjusted Performance: Management highlights "Adjusted" metrics excluding the tariff refund and leadership transition costs. Adjusted Operating Income for Q2 was $18.1 million (2.9% margin), and Adjusted Net Income was $9.4 million ($0.26 EPS).
- Liquidity: The company maintains strong liquidity with $653.6 million in cash and $568.6 million available under its Asset-Based Lending (ABL) facility. No borrowings were outstanding under the ABL facility as of July 4, 2026.
- Capital Allocation: The company paid $0.25 per share in dividends for Q2. No open market share repurchases were made in the first two quarters of 2026, though $599.0 million remains under authorization.
- Risks: Key risks include geopolitical instability (specifically conflicts involving the U.S., Israel, and Iran), supply chain disruptions, inflationary pressures on labor and materials, and the potential for further tariff actions or trade restrictions.
Investor Verification Checklist
- Tariff Sustainability: Verify the sustainability of gross margins excluding the one-time $128 million IEEPA tariff refund. Assess the impact of new Section 301 tariffs on future Cost of Goods Sold.
- Adjusted vs. GAAP: Compare GAAP results to Adjusted Non-GAAP measures to understand core operational performance versus one-time items (tariffs, leadership transition costs).
- Debt Service: Monitor the impact of the higher interest rate on the new 7.375% Senior Notes on future cash flows and interest coverage ratios.
- Inventory Levels: Review inventory turnover and days of supply, noting the $41.3 million decrease in inventory compared to the prior year period, to ensure alignment with sales demand.
- Leadership Transition: Evaluate the strategic direction and execution under the new CEO, Sharon Price John, following the departure of Douglas C. Palladini.