Carter's Sales Rise, But Tariffs and Costs Squeeze 2026 Profit Outlook

By Charles Anderson

ATLANTA, GA – February 27, 2026 – Carter’s, Inc. (NYSE:CRI) presented a complex picture to investors with its latest financial results, reporting a strong finish to fiscal 2025 with sales growth across all business segments in the fourth quarter, while simultaneously forecasting a challenging year ahead for profitability.

The children's apparel behemoth saw its fourth-quarter net sales climb 7.6% to $925.5 million, a performance CEO Douglas C. Palladini attributed to growing momentum. “We see momentum building behind our products and demand creation initiatives, which have driven an improvement in the rate of traffic, new customer acquisition, higher realized pricing, and increased penetration of the best portions of our product assortments,” Palladini stated in the earnings release.

However, the full-year results tell a different story. While fiscal 2025 net sales saw a modest 1.9% increase to $2.90 billion, the company's bottom line suffered significantly. Full-year GAAP net income plummeted 50.5% to $91.8 million, and adjusted diluted earnings per share (EPS) fell 40.3% to $3.47. Looking ahead to fiscal 2026, Carter’s projects continued sales growth but anticipates a low double-digit to mid-teens decline in adjusted diluted EPS, signaling that the path back to profitable growth is fraught with near-term hurdles.

Navigating the Tariff Tightrope

A primary driver of the pressure on Carter's profitability has been the volatile and costly landscape of international trade tariffs. The company disclosed that tariffs had a substantial negative impact on its fiscal 2025 results, contributing to a 400 basis point drop in its adjusted operating margin for the year. The fourth quarter alone saw a gross tariff impact of approximately $40 million on its gross margin.

These challenges are set to continue. The company's outlook for 2026 is clouded by the recent upheaval in U.S. trade policy. Following a Supreme Court decision that invalidated certain tariffs, a new global tariff was imposed under Section 122 of the Trade Act of 1974, applying a 15% duty on most U.S. imports for a 150-day period. For Carter's, this translates to an anticipated gross tariff impact of over $200 million in 2026.

In response, the company is implementing a multi-pronged mitigation strategy. This includes passing on some costs through higher pricing, which management expects will largely offset the tariff impact over the full year. Carter's is also aggressively diversifying its supply chain, reducing its reliance on China to less than 3% of its product sourcing spend in 2025. Instead, it is strengthening partnerships in Vietnam, Cambodia, Bangladesh, and India, which now account for about 75% of its sourcing.

Despite the immediate pain, CEO Douglas Palladini expressed a cautiously optimistic long-term view. “We believe the recent news regarding tariffs will be net positive for Carter’s, but it will take some time to fully understand the implications for our business and the broader marketplace,” he noted.

Strategic Overhaul in a Competitive Market

While battling external tariff pressures, Carter's is also in the midst of a significant internal strategic overhaul. The company is investing heavily in what it calls “operating model improvements” and “demand creation initiatives,” which incurred costs of $14.2 million in fiscal 2025. These initiatives are designed to modernize product development, enhance brand appeal, and optimize its physical and digital footprint.

Part of this strategy involves rationalizing its store fleet. Carter’s plans to close approximately 150 of its lower-margin stores by 2028, with around 60 closures slated for 2026. This follows the 35 stores shuttered in 2025. The company has also undertaken an organizational restructuring, aiming to eliminate about 300 office-based roles to achieve an estimated $35 million in annual savings starting in fiscal 2026.

The competitive landscape underscores the urgency of these moves. While Carter’s posted top-line growth, key competitor The Children’s Place reported declining sales in its recent quarter but managed to significantly expand its gross margin and swing to an operating profit by focusing on cost discipline and reduced promotions. This contrast highlights Carter's current strategy: sacrificing some near-term profitability to invest in growth and market share, a crucial effort given the secular headwind of declining U.S. birth rates.

The Rising Cost of Capital

Compounding the pressure from tariffs and investments is a notable increase in the company's financing costs. In the fourth quarter of 2025, Carter's successfully refinanced its long-term debt, a move that strengthened its balance sheet and provided $1.2 billion in total liquidity. This included issuing $575 million in new senior unsecured notes and securing a new $750 million asset-based revolving credit facility.

However, this financial stability comes at a price. The new senior notes carry a 7.375% coupon, higher than the debt they replaced. As a result, Carter's is projecting net interest expense to be approximately $40 million in fiscal 2026. This higher interest burden is a key factor behind the forecasted decline in earnings per share, accounting for an estimated reduction of about $0.30 to 2026 EPS.

As Carter's moves into 2026, it faces a delicate balancing act. The company is projecting low to mid-single-digit growth in both net sales and adjusted operating income, demonstrating confidence in its product and marketing strategies. Yet, this growth will be weighed down by the trifecta of persistent tariff costs, ongoing strategic investments, and higher interest expenses, culminating in the projected decline in shareholder earnings. For investors, the year ahead will be a test of patience as they wait to see if these short-term pains will lead to the long-term sustainable, profitable growth the company is determined to achieve.