CRI Earnings Beat Raises Questions on Tariff Recovery and Growth Trend

Carter’s, Inc. CRI delivered a better-than-expected second-quarter fiscal 2026 performance, supported by retail gains, wholesale strength and productivity initiatives. However, investors must assess how much of the recent improvement reflects sustainable operating momentum versus temporary benefits from tariff recoveries and cost actions.

The company currently carries a Zacks Rank #2 (Buy) and a VGM Score of A. Its Style Scores include a Value Score of A, Growth Score of B and Momentum Score of A. Shares have gained 25% over the past three months, outperforming the industry. 

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Q2 Earnings Beat Driven by Sales Growth and Cost Controls

Carter’s reported adjusted earnings of 26 cents per share in the second quarter, topping the Zacks Consensus Estimate of 2 cents and increasing 52.9% year over year. Net sales rose 5.2% to $615.5 million, exceeding the consensus mark of $609 million.

Growth was broad-based across the company’s segments. U.S. Retail sales increased 1.7% year over year, with comparable sales rising 5.1% for the fifth consecutive quarter. U.S. Wholesale sales jumped 11.7%, helped by earlier fall product shipments, while International sales increased 2.7%, supported by gains in Canada and Mexico.

Adjusted operating income increased 54.1% to $18.1 million, as productivity and supply-chain initiatives offset tariff costs, marketing investments and inflationary pressures. Adjusted SG&A declined 1.1%, with store closures and efficiency actions helping generate nearly 300 basis points of expense leverage.

Tariff Recovery Boosts Liquidity but Creates Comparability Issues

A key factor behind Carter’s improved financial position was the recovery of $132 million in previously paid import duties and related interest. The benefit included $128 million recorded through gross profit and $4 million recorded as interest income.

The tariff recovery significantly increased reported earnings, but adjusted results provide a clearer view of underlying operations. Reported operating income surged to $139.8 million from $4 million in the prior-year quarter, while adjusted operating income increased to $18.1 million from $11.8 million.

The company continues to face tariff-related uncertainty. Incremental tariff costs reduced second-quarter gross profit by about $28 million before mitigation efforts. Management noted that new Section 301 tariffs represent an incremental 10% to 12.5% above Carter’s historical tariff baseline, although current rates could provide some upside versus previous assumptions if they remain unchanged.

Growth Momentum Faces Consumer and Wholesale Challenges

Carter’s improving sales trends are encouraging, but management has moderated expectations for the second half of 2026. The company revised its full-year sales outlook to 2%-3% growth, citing lighter-than-planned second-half wholesale demand and more cautious consumer behavior around pricing.

Wholesale demand remains a key variable. While second-quarter wholesale sales benefited from customers pulling forward fall merchandise, some partners adopted more conservative inventory plans for the second half. Management expects full-year wholesale sales growth in the low-single-digit range.

Consumer pricing power also remains under pressure. Carter’s noted that broader market data showed price resistance and lower unit velocity at higher prices, prompting the company to moderate its average unit retail assumptions.

Caleres CAL operates in the footwear retail space, making it a comparable name within the broader retail apparel and footwear industry, while Steven Madden, Ltd. SHOO competes in branded footwear and accessories, providing a comparison point for Carter’s valuation and retail execution.

Digital Investments and Brand Strength Provide Support

Carter’s continues to invest in its omnichannel strategy. U.S. e-commerce comparable sales increased at a double-digit rate in the quarter, supported by higher traffic, improved customer engagement and digital enhancements such as AI-optimized product reviews and improved consumer chat functionality.

The company also continues to benefit from brand recognition in children’s apparel, including Carter’s and OshKosh B’gosh. Its portfolio spans company-operated stores, e-commerce platforms, wholesale relationships and international channels.

Valuation Provides Some Downside Support

CRI trades at 12.34X forward 12-month earnings, below the Zacks sub-industry average of 19.67X and the S&P 500 multiple of 20.8X. The five-year median forward earnings multiple for the stock is 11.29X.

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The valuation reflects both the company’s improving fundamentals and the risks surrounding tariff costs, consumer spending and earnings normalization after the tariff recovery benefit.

Bottom Line

Carter’s second-quarter results demonstrated meaningful operational progress, with retail momentum, improved productivity and better liquidity supporting the business. However, investors should focus on whether earnings growth can continue after the impact of tariff recoveries fades.

The company’s ability to sustain comparable sales growth, protect margins and manage consumer sensitivity to pricing will likely determine whether recent gains represent a longer-term recovery trend or a temporary improvement.

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This article originally published on Zacks Investment Research (zacks.com).

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