Carter's Inc. 2026 Q3 Earnings Call

Robillard. Thank you, and good morning, everyone.

Earlier today, we issued two press releases, the announcement regarding the evolution of our leadership structure and our third quarter 2026 earnings. These releases, as well as the earnings 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, and welcome to our call. I am pleased to be here with you, and while this is my second earnings call with Carter's, it is actually the first one where I have served as the CEO for the entire period. During the last four months, I have continued to learn about this remarkable company while spending time with our talented and dedicated team. I believe we have made significant progress analyzing, clarifying, and prioritizing potential strategic initiatives by using our rich data and consumer insights.

All of this work reflects a vision to drive profitable sales by leveraging our core competencies and key assets, which include the strength and equity of our branded portfolio, the trusted relationship we have with our consumers, the stability of our balance sheet and cash flow, the significant breadth of our distribution, as well as the diversity and agility of our supply chain. I look forward to sharing more with you about our go-forward plan after the first of the year. Now, regarding the business at hand. Carter's third quarter results exceeded our outlook even as we navigated continued uncertainty and choppiness in the macroeconomic environment, which has resulted in some shifts in consumer confidence and spending. As we highlighted on our last call, we believed the delivery of our third quarter would largely hinge on the month of September.

September plays an important role for us even beyond Labor Day and back-to-school, because as you may know, it is also known as Baby Month. This is because it is historically the largest birth month of the year, which in turn makes it historically one of our biggest months. With that in mind, even as we experienced some softness in July and August, which, as we mentioned in the last call, was partially driven by the pull-forward Prime Day, unfortunately, as early September rolled in, that softness persisted. While the unseasonably warm weather was certainly not helpful in the marketing of back-to-school apparel, we quickly refocused to drive efforts through strategic investments using marketing insights, crisp promotions, and targeted merchandising.

This ultimately shifted our trend for both the month and the quarter, reversing the negative traffic and delivering improvements across numerous metrics, including net sales, retail comps, and operating income, while simultaneously increasing brand engagement. Importantly, these efforts included the multi-touchpoint introduction of Carter's new comprehensive branding initiative, marking the first reimagination of the look, feel, and promise of the brand in a quarter century. This fresh approach was developed with proprietary consumer research and insights that was designed to appeal to the changing sensibilities of today's generation of new parents. However, the execution was balanced with the understanding that we must also maintain the appeal to multiple generations, including a more nostalgic grandparent cohort who are the main drivers of our important gifting segment.

While I would not want us to trap or narrowly define Carter's as simply a heritage brand, it is without a doubt a brand that enjoys a rich history of delivering quality and value to seven generations of parents and children, which is how we have earned high marks for arguably the most important consumer metric, trust. With that in mind, we landed on embracing an elevated brand promise more aligned with today's parenting intentions, to let every child's light shine. This is not just a tagline.

This subtly shifts Carter's positioning to more purposely be about a broadened, rightful opportunity for us to be seen as a trusted partner for parents as they navigate the beautiful, sometimes precarious journey of childhood, versus just being seen as an apparel brand or, based on the consumer feedback, a brand that had slowly lost some of its emotional connection and relevancy with today's moms. I also am happy to share that the brand promise of allowing kids to shine, which is reflected in the shooting star element featured in our new logo treatment, is not only resonating with consumers, it is also inspiring our entire organization, from product to merchandising to promotion, and was the guiding light, if you will, for the two key initiatives that positively impacted the outcome for the quarter.

One, the launch of our comprehensive Stellar Sleep System, a new approach encompassing all of our ages based on consumer feedback that moms find navigating the pajama purchasing process confusing. It is supported with dedicated long-term merchandising and informative signage that is expected to drive our share in sleepwear, which is one of the largest kids apparel categories. Two, we evolved our annual baby sale offering to a branded Five-Star Baby Event, focusing on core baby items, which not only delivered a margin accretive promotion for Baby Month, but helped expand consumer interest, sales, and quarterly share in our total baby offering. Importantly, even in the brief time since the new branding launch, the results of the messaging have been impactful.

In less than two months, our campaign has generated over 1.6 billion media impressions, a meaningful shift in positive sentiment across social media, higher unaided brand awareness, and increased purchase consideration, including nearly 20% growth in branded search versus the time period before the launch. All of this, including welcomed cooler weather in the last weeks of the quarter, ultimately delivered strong sales and profitability in the month of September, which positively impacted our quarterly results. Although Richard and Allison will take you through more details of our performance, some financial highlights from the third quarter include: net sales of $752 million were essentially flat compared to prior year, inclusive of the negative revenue impact from the net closure of more than 30 locations in our North American fleet as a part of our real estate rationalization.

Adjusted operating income of $57 million, an increase of 45%, with adjusted operating margin expansion of 240 basis points, driven by healthy gross margin expansion, the benefits from our ongoing productivity improvements, as well as the closure of unprofitable store locations, and positive comparable store sales for U.S. retail, aided by the team's delivery of double-digit retail comp growth for the month of September, despite the soft start. As noted, while there were some challenges, I believe this quarter's performance reflects well on the ongoing potential of the company in both broad-based and fundamental ways, ranging from the positive early campaign proof points, noting our ability to quickly recapture brand affinity and simultaneously connect with multiple generations of caregivers, to seeing the organization's dedication and agility to turn short-term setbacks into quarter-impacting opportunities.

While agility is a critical skill that we should continue to nurture, our long-range goal is to be both agile while operating in an evolved structure to support improved processes reflecting our stated strategic intent of becoming a more consumer-centric, brand-building, data-driven company that is focused on the consistent delivery of profitable growth and the creation of value for our shareholders. With that strategic intent in mind, we are pleased to have shared earlier today an evolved organizational structure designed to better align our leadership responsibilities with both longer-range planning and business opportunities. Briefly, this includes: the previously vacant position of Chief Product Officer will be filled by Maria Gemzell, who we will welcome early next year when she joins us from her most recent position at the Swedish headquarters of one of the world's leading fashion companies, H&M, after having held multiple senior positions in relevant areas.

The Chief Marketing Officer role will be broadened to overtly incorporate a comprehensive branding function and retitled as Chief Brand Officer, led by Sarah Crockett, to reflect the importance of leveraging and monetizing our valued brand assets. The Chief Strategy Officer role will be expanded to Chief Strategy and Business Development Officer, led by Emily Evert, to create a sharper focus on identifying and driving incremental profitable business opportunities, while also consolidating our research and data areas to enable improved visibility to consumer and sales insights. We will be establishing a standalone role and conducting a search for a Chief Operating Officer in light of the expected late first quarter 2027 retirement of Karen Smith, our current Chief Supply Chain Officer.