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Carter’s reported stronger-than-expected first-quarter fiscal 2026 sales and earnings, with growth across its retail, wholesale and international businesses. However, management said tariffs, higher spending and interest costs continued to weigh on profitability. Interim CEO and President, CFO and COO Richard Westenberger said the year was “off to a good start,” noting that first-quarter sales and earnings exceeded the expectations the company had provided on its prior earnings call.
Westenberger also addressed leadership changes, saying Doug Palladini has departed as CEO and that Carter’s expects to welcome Sharon Price John as its new CEO next month.
Carter’s first-quarter net sales were $681 million, up 8% year over year. Reported operating income was $28 million, compared with $26 million in the prior-year quarter.
Reported earnings per share (EPS) were $0.39, down from $0.43 a year earlier. On an adjusted basis, Carter’s reported no adjustments for the first quarter of 2026, while the prior-year quarter included adjustments related to operating model improvement costs and leadership transition costs. Adjusted EPS was $0.39 versus $0.66 in the prior-year quarter.
Gross margin was 43.1%, down by more than 300 basis points from the prior year. Westenberger said the decline was expected and was pressured by tariffs, including a gross incremental impact of roughly $50 million in the quarter. He said the pressure was partially offset by improved pricing, supply chain mitigation efforts, a higher mix of U.S. retail sales and productivity initiatives.
Adjusted SG&A expense increased 3% to $270 million, driven by investments in demand creation and inflationary pressure in wages and rent, partly offset by productivity savings. Westenberger said productivity initiatives delivered about $6 million in cost reductions during the quarter across cost of goods sold and SG&A.
Allison Peterson, Chief Retail and Digital Officer, said Carter’s U.S. retail business delivered “strong performance” and continued momentum from recent periods. Total U.S. retail net sales increased nearly 13%, while comparable retail sales rose more than 10% year over year and nearly 5% on a two-year basis.
Peterson said this marked the fourth consecutive quarter of comparable sales growth for the U.S. retail business, with strength across both stores and e-commerce. She said the baby assortment remained the primary driver, though toddler and kid categories also grew. She estimated that the earlier and stronger Easter selling period contributed about 2 percentage points to the quarter’s comparable sales.
Peterson said comparable sales were supported by higher traffic and higher average transaction values, including increased penetration of opening price point products and higher clearance sales, which she said likely reflected a more price-focused consumer. She linked the value focus to higher gas prices and volatile consumer confidence amid persistent inflation and an unsettled global situation.
Despite the value focus, Carter’s increased U.S. retail average unit retail prices by low single digits while units rose double digits. Peterson also said the company continued to grow its active customer file and added new Gen Z consumers, including through collaborations such as the OshKosh and Disney Winnie the Pooh product launch. She said the collaboration was not a material contributor to sales but helped bring new consumers into the brand portfolio with a Gen Z skew.
U.S. wholesale net sales were up slightly versus the prior year. Westenberger said improved pricing in response to tariffs was offset by lower unit volume. Exclusive brand sales grew, led by Child of Mine and Just One You, while Simple Joys sales were comparable to the prior year, which he described as an improvement from recent trends.
Wholesale profitability declined from a year earlier, which Westenberger attributed almost entirely to the net negative impact of incremental tariffs. He said the wholesale business has been more exposed to tariff pressure because Carter’s has less direct control over pricing and other levers than it does in its direct-to-consumer business.
International net sales rose 14% on a reported basis and 8% on a constant-currency basis, driven by Canada and Mexico. Westenberger said Canada posted strong total and comparable sales growth, similar to the U.S. business, while Mexico demand was “particularly strong” around Easter.
Mexico net sales grew more than 40%, including $3 million from favorable exchange rates, and comparable sales increased 21%. Carter’s plans to open 12 new stores in Mexico this year. International operating income was about $4 million, compared with roughly breakeven performance in the prior year, helped by productivity savings and lower product costs from favorable exchange rates.
Westenberger spent significant time discussing tariffs, describing the topic as complicated and citing uncertainty around court developments and potential administration actions. He said Carter’s historically paid a little over $100 million annually in import duties, representing an effective tariff rate of roughly 13%.
He said additional IEEPA tariffs had been estimated to add more than $200 million to that baseline, taking the effective tariff rate above 35%. Carter’s original 2026 plan assumed those higher tariffs would remain in place for the full year. Following what he described as the Supreme Court’s recent decision, the company’s guidance now reflects a lower 10% incremental tariff rate on imports through the second quarter and the elimination of an India-related tariff tied to Russian oil purchases for the balance of the year.
Carter’s continues to assume higher IEEPA-level tariff rates return for imports in the second half of the year. Westenberger said the benefit of lower tariff rates and the eliminated India tariff would be about $30 million, all else equal, but the company is not flowing that upside through its full-year guidance due to marketplace uncertainty and potential pricing actions by competitors.
During the question-and-answer session, Westenberger also said Carter’s has filed for refunds of about $130 million in incremental IEEPA tariffs paid between last year and early this year. He said the company will not recognize the refunds until the cash is received.
Carter’s reaffirmed its full-year fiscal 2026 outlook. The company expects net sales growth in the low- to mid-single-digit range, adjusted operating income growth in the low- to mid-single-digit range, and earnings per share down low double digits to down mid-teens from 2025 adjusted EPS of $3.47.
Carter’s also maintained its operating cash flow forecast of $110 million to $120 million and capital expenditure plan of approximately $55 million, with spending focused on new stores in Mexico, distribution center upgrades and technology initiatives.
For the second quarter, Carter’s expects net sales to increase in the low single digits, adjusted operating income of $11 million to $13 million, and adjusted EPS of $0.02 to $0.06. The company expects second-quarter gross margin to decline by about 100 basis points, primarily due to the net unfavorable impact of tariffs.
Westenberger said Carter’s expects U.S. retail comparable sales to rise in the mid-single digits in the second quarter, despite a nearly 4% decline in April comps following the stronger March Easter period. He said March and April combined comps rose in the high single digits, and early May trends had turned “solidly positive.”
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