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Introduction & Market Context
Carter’s, Inc. (NYSE:CRI) released its first quarter 2025 financial results on April 25, 2025, showing continued challenges across its business segments. The children’s apparel retailer reported declines in both sales and profitability compared to the same period last year, though it managed to meet or exceed its own guidance for the quarter.
The company’s stock has been under pressure, trading at $38.23 at the previous close, with a modest 2.58% increase. This represents a significant decline from earlier this year, with the stock now trading closer to its 52-week low of $32.12 than its high of $72.77.
Quarterly Performance Highlights
Carter’s reported first quarter 2025 net sales of $630 million, a 5% decrease from $661 million in the first quarter of 2024. Adjusted operating income fell 36% to $35 million (5.6% of net sales) from $55 million (8.3% of net sales) in the prior year period. Adjusted diluted earnings per share declined 37% to $0.66 from $1.04 a year ago.
As shown in the following chart comparing key financial metrics between Q1 2025 and Q1 2024:
Despite the year-over-year declines, Carter’s exceeded its sales guidance of $615-625 million and achieved operating income within its guidance range of $30-35 million. Diluted EPS of $0.66 surpassed the company’s guidance of $0.45-0.55, helped by favorable interest income and a lower effective tax rate.
The company’s detailed GAAP results show even steeper declines, with operating income down 53% to $26 million and diluted EPS falling 59% to $0.43. These GAAP figures include $6 million in leadership transition costs and $3 million in operating model improvement costs.
The following table provides a comprehensive view of Carter’s adjusted financial results for the quarter:
Segment Performance Analysis
All three of Carter’s business segments experienced sales and margin declines in the first quarter of 2025. The U.S. Retail segment saw net sales decrease by 4% year-over-year, with comparable sales down 5%. Operating margin contracted significantly to 0.8%, a 380 basis point decline from the prior year.
The U.S. Wholesale segment reported a 5% sales decline with operating margin falling 190 basis points to 22.1%. The International segment also experienced a 5% sales decrease, though sales grew 2% on a constant currency basis. International operating margin turned negative at -0.3%, down 270 basis points.
The following table breaks down the performance by segment:
There were some bright spots in the results. The baby segment was the strongest performer in U.S. Retail with comparable sales up 4%. The company also noted improved customer retention and growth in new customers versus last year. eCommerce showed its strongest traffic and comparable sales since Q4 2021.
In the U.S. Wholesale segment, the company saw stronger than planned demand for Skip Hop products and growth with Skip Hop, club customers, and the off-price channel compared to last year. International markets outside North America and Canada (up 4% in local currency) showed growth, while Mexico declined 4% due to distribution center transition issues.
Balance Sheet and Cash Flow
Carter’s maintained a strong liquidity position with $321 million in cash at the end of the first quarter, up from $268 million a year ago. The company’s total liquidity stood at $1.2 billion, including $844 million in borrowing capacity on its revolving credit facility.
Inventory levels remained stable at $474 million, virtually unchanged from $473 million in the prior year period. The company highlighted that the quality of inventory was strong with low levels of aged inventory.
The following table provides a detailed view of the company’s balance sheet and cash flow:
Operating cash flow deteriorated to -$49 million from -$26 million in Q1 2024, reflecting the lower net income. Free cash flow was -$59 million compared to -$38 million in the prior year period. The company paid $29 million in dividends during the quarter but did not repurchase any shares, compared to $9 million in share repurchases during the same period last year.
Tariff Challenges and Mitigation Strategies
A significant concern highlighted in the presentation is the potential impact of tariff rate increases on Carter’s global sourcing network. The company sources from a diversified set of countries, with its top four sourcing countries representing 75% of finished goods. China represents less than 4% of the company’s sourcing.
The presentation detailed the potential tariff rate increases that could significantly impact the company’s cost structure:
To mitigate these tariff impacts, Carter’s outlined several strategies including evaluating pricing, cost sharing with vendors, shifting country of origin mix, modifying product configurations, adjusting inventory management, and leveraging Foreign Trade Zones.
Forward Outlook
While the presentation did not provide specific guidance for the remainder of 2025, the company’s performance against its first quarter targets suggests it is navigating the challenging environment relatively well despite significant headwinds.
The leadership transition and operating model improvement costs indicate that Carter’s is undergoing organizational changes to address its challenges. The company’s ability to maintain its cash position and manage inventory levels provides some financial flexibility as it confronts margin pressures and potential tariff increases.
The company’s store count increased to 1,057 as of March 29, 2025, up from 1,027 a year ago, with growth across the U.S., Canada, and Mexico, indicating continued investment in its retail footprint despite the challenging environment.
As Carter’s moves forward in 2025, the effectiveness of its tariff mitigation strategies and ability to stabilize margins while driving traffic and sales will be critical to improving its financial performance and stock price, which remains significantly below its 52-week high.
Full presentation:
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