Carter's 2026 Q2 Earnings Call

Robillard. Thank you. Good morning, everyone.

We issued our second quarter 2026 earnings release earlier today. The release and presentation materials for today's call are available on our investor relations website at ir.carters.com. Note that statements on today's call about items such as the company's expectations and plans are forward-looking statements. For a discussion of factors that could cause actual results to vary from those contained in the forward-looking statements, please see our most recent SEC filings, as well as the earnings release and presentation materials posted on our website. In these materials, you will also find reconciliations of various non-GAAP financial measurements referenced during this call. After today's prepared remarks, we will take questions as time allows. I will now turn the call over to Sharon.

Thank you, T.C. Good morning, everyone. Welcome. I'm delighted to be here with you for my first earnings call with Carter's. The team did a great job in the second quarter, delivering solid results against the backdrop of a complex macroeconomic environment. Richard and Allison will walk you through our performance in more detail. At a high level, we exceeded our second quarter outlook. Net sales grew for the third consecutive quarter, up 5% over prior year, adjusted operating profit increased 54%. We continued our positive momentum in U.S. retail, delivering comparable sales growth of 5%. We continue to add new consumers, including the important Gen Z demographic, which grew mid-teens in the quarter. Having spent essentially my entire career in the children's market, I have enormous respect for Carter's.

I want to thank the team and the board, not only for the opportunity to lead this historic company to new heights, but for the foundational work that's been done, including research, strategic evaluations, and key transformational initiatives. While there is still more to be done as we move forward, this has allowed me to hit the ground running. In fact, over the past six weeks, I've been digging into the business and getting to know the key leaders, and it's strengthened my conviction about what initially attracted me to this role. Namely, that Carter's is a well-established, diversified company with a solid foundation for expansion. In my view, we have significant opportunities that can contribute to generating consistent, profitable growth.

These opportunities include a number of powerful assets that I believe we can further leverage to continue to elevate the business as well as expand the brand promise and footprint, which in turn should create value and generate consistent long-term shareholder returns. These include iconic brands, great consumers, the leading market share position, a multi-channel business model, and a passionate, driven organization. Touching on each of these briefly, first, we have a number of the strongest brands in our space. Our namesake Carter's brand, as well as OshKosh, have high awareness, consumer trust, and a deep heritage that's been woven into the fabric of families' lives for generations. We also have additions to our brand family that are filling other consumer needs, such as Little Planet, which focuses on natural, sustainable fabrics. Second, we have great consumers.

We hold a unique position in their lives, sitting at the intersection of caregivers and children while being present for every single moment through their early years. Being able to serve both moms and kids is a special responsibility, and we do not take that earned trust lightly. When we can deliver products and exceptional experiences that improve their lives, we create an emotional bond between our brands and our consumers. Third, we're the market share leader in our industry, including the most important segment, baby. Essentially from their very first day, we begin our all-important journey with our families that often lasts a lifetime, even evolving into a multi-generational relationship when grandparents become gift-givers. Fourth, our multi-channel business model has diverse revenue streams, including an emerging global footprint, multiple brand and product segments, as well as extraordinary distribution breadth.

Families can buy our products at over 20,000 global points of presence that span multiple consumer tiers, from department stores to mass stores to our own omni-channel solution, consisting of our highest touch specialty retail stores and carters.com. Being available where, when, and how our consumers want to shop is an important competitive advantage. Finally, we have a lot of talented people located around the world at Carter's, from our headquarters to our distribution centers to our associates in the field. We have a culture that's passionate about our brands and our consumers. Equally as important, there is a general recognition and willingness internally of the need to evolve as an organization. We can meet our consumers where they are today, as well as adapt when their needs change. As you can see, this is a powerful confluence of assets.

As I mentioned earlier, this is what attracted me to Carter's, and it what gives me so much confidence in our future. At its simplest level, our objective is to deliver consistent, profitable growth. While early, we intend to start with the following tenets. We will become a company that is consumer centric and data-driven, recognizing that we have multiple consumers, from the caregiver to the gift giver and the child. This will be the heart of everything we do, from designing products, to providing engaging, memorable shopping experiences, to creating impactful marketing, all aimed at building relationships and expanding the total lifetime value. We will be brand building, leveraging our assets in a manner designed to monetize the enormous equity, name recognition, and important trust of our portfolio, especially for our namesake brand, Carter's.

Through proper brand building, we can strengthen our relationship with consumers, increase our market share, optimize our total addressable market, and improve our profitability. To do this, we will need to consistently evolve to meet the needs of the marketplace as change is happening even faster. Given we are the market leader, it is fitting that we also lead change within our industry. In closing, it's an honor to be leading Carter's through this next chapter of its storied history. I believe we have significant opportunities to unlock value, drive profitable growth, deliver top-tier shareholder values, and I look forward to getting to know each of you over the coming months. With that, I'll turn the call over to Richard.

Thank you, Sharon, and welcome to Carter's. We're very happy to have you here with us. I'll speak for the rest of our leadership team in reporting that Sharon has jumped in with both feet and is off to a strong start. Good morning, everyone. I want to begin by also thanking our thousands of employees for their resilience, commitment, and teamwork. Over the last 18 months, a period marked by a range of challenges and a significant amount of change, our team has remained focused on execution, has helped us stabilize the business, return to top-line growth, and deliver another quarter of strong performance. As Sharon has already experienced, our team exhibits tremendous passion and dedication, and we're very grateful. This morning, we will give you a recap of our second quarter performance, which exceeded our previous outlook.

Overall, we delivered growth in both sales and earnings in the quarter, and our balance sheet and liquidity strengthened significantly through the recovery of approximately $130 million of previously paid tariffs and related interest. Consumer and retail businesses like ours are operating in a continued challenging environment. Overall, our business has performed well amid this backdrop for the first half of the year. The children's apparel market has proven resilient in the first six months of the year, with total sales up about 2%. In this same time period, our overall share of the age 0 to 10 market has remained stable, with share gains in baby and kid offset by a decline in toddler. In discussing our second quarter performance and our outlook, our comments this morning will track along with the presentation posted to the investor relations portion of our website.

Turning to our presentation materials, on page two, we have our GAAP basis P&L. Net sales in the second quarter were $615 million. Reported operating income was $140 million, inclusive of the tariff recoveries, which I'll discuss in a moment. Our reported earnings per share were $2.87. Our first half GAAP basis P&L is on page three. First half net sales increased 7% over the prior year to $1.3 billion. Reported operating income for the first half was $168 million, which included the tariff recovery as well as other non-recurring charges. First half reported EPS was $3.26, compared to $0.43 in 2025. On the following page, we summarize our non-GAAP adjustments. We had no adjustments to our reported results in the first quarter, so our second quarter and first half 2026 adjustments are the same.

A significant adjustment to our reported results in Q2 related to our recovery of previously paid tariffs and related interest. In the second quarter, we received $132 million back from the U.S. government. $128 million benefited gross profit, and $4 million was recorded as interest income. These tariff recoveries and interest are taxable. As such, we recorded a tax revision in our Q2 reported results, roughly $30 million, which we will pay in September. We also recorded approximately $6 million in charges in the quarter, the majority of which related to our recent leadership transition. Last year, we had adjustments related to operating model improvement costs and leadership transition costs, which reduced our reported profitability. Our comments today will speak to our performance on an adjusted basis, which excludes these unusual items. On page five, we have our second quarter adjusted P&L.