カーターズ（CRI）2026年度第3四半期決算説明会：マージン改善と第4四半期見通しの軟化

主なポイント

• カーターズ（Carter’s）の2026年会計年度第3四半期の売上高は前年同期比1%未満の減少となる7億5,200万ドルとなった一方、調整後営業利益は45%増の5,700万ドルとなった。
• 調整後営業利益率は、実効販売価格の上昇、米小売部門における販売ミックスの改善、生産性向上施策、不採算店舗の閉鎖などに支えられ、240ベースポイント拡大して7.6%となった。
• 調整後EPS（1株当たり利益）は40%近く増加して1.03ドルとなった。報告ベースのEPSは前年同期の0.32ドルから1.00ドルに上昇した。
• 米国の既存店売上高は0.4%増加し、9月には2桁増を記録した。ベビー事業は8四半期連続で既存店売上高の増加を達成した。
• 経営陣は、米国の小売需要の減速と卸売の補充注文の伸び悩みを受け、第4四半期の売上高見通しを引き下げた。通期の売上高は現在、29億1,000万ドル〜29億3,000万ドルと予想されている。
• 同社は当四半期末時点で5億2,500万ドルを超える現金および短期投資を保有し、在庫は前年同期比11%減の5億8,700万ドルに減少した。

主な財務データ

2026年会計年度の最初の9カ月間において、売上高は4%増加し、調整後営業利益は20%増加、調整後EPSは7%増加した。前年度の優先社債のリファイナンスに伴う利息費用の増加が、営業利益に対するEPSの伸びを抑制した。

事業および業績

米国小売

米国小売部門の売上高は前年と同水準となったが、セグメント営業利益はほぼ倍増した。実効販売価格の上昇、生産性向上策、店舗閉鎖により、営業利益率は250ベースポイント拡大した。

既存店売上高は0.4%増加した。平均販売単価（AUR）は1桁台前半のパーセンテージで上昇し、販売数量は1桁台前半のパーセンテージで減少した。8月およびレイバーデー周辺の需要軟化を経て、9月の既存店売上高は2桁増となった。

ベビー・トドラー事業は引き続き主な成長源となった。ベビーセグメントはボディスーツやスリープウェアなどのカテゴリーが牽引し、8四半期連続で既存店売上高の増加を記録した。高年齢児向け（オルダーキッズ）の売上高は、新学期向け季節商品の受け入れ伸び悩みや、消費者が需要の直前まで購入を先送りしたことを反映し、わずかに減少した。

カーターズの新しいブランドキャンペーンは、2カ月未満で16億回以上のメディアインプレッションを獲得した。ブランド名の検索数はローンチ前と比較して20%近く増加した。「Stellar Sleep」の取り組みにより、販売数量および金額ベースの売上高はいずれも2桁成長を達成し、アプリベースの「Bedtime Monster Scanner」を利用したユーザーのコンバージョン率は2桁改善した。

米国卸売

米国卸売部門の売上高は、主に出荷時期と販売数量の減少を反映して4%減少したものの、業績は経営陣の予想を上回った。年初来の売上高は約2%増加した。

セグメント営業利益は11%増加し、営業利益率は230ベースポイント拡大した。実効販売価格の上昇、良好な顧客ミックス、生産性向上によるコスト削減が、関税および製品コストの上昇を相殺して余りある効果をもたらした。

一部の秋物商品の出荷が第2四半期に前倒しされたため、当四半期の専売ブランド売上高は1桁台半ばのパーセンテージで減少した。年初来の専売ブランド売上高は、「Carter’s Child of Mine」や「Just One You」に牽引され、1桁台後半のパーセンテージで増加した。

海外

海外部門の売上高は4%増加し、カナダ、メキシコ、北米以外の卸売市場で成長した。カナダの売上高は小売既存店売上高の2%増を含めて4%増加した。メキシコの既存店売上高は、店舗、マーチャンダイジングの取り組み、新店舗に支えられて8%増加した。

カーターズは最初の9カ月間にメキシコで6店舗を開設した。海外部門の営業利益は28%増の1,200万ドルとなり、営業利益率は180ベースポイント上昇して10%となった。

組織および成長優先事項

カーターズは小売、EC、卸売業務を統合した最高商務責任者（CCO）の役職を新設し、アリソン・ピーターソン（Allison Peterson）を同職に任命した。また、最高マーケティング責任者（CMO）の役割を最高ブランド責任者（CBO）に拡張し、戦略部門の役職を最高戦略・事業開発責任者（CSBDO）へと拡大した。

経営陣は獲得可能な最大市場（TAM）を拡大するための3つの領域として、高年齢児層への対応、「Little Planet」などのブランドを通じたより高い所得層へのアプローチ、アセットライトな海外展開の推進を挙げた。2027年年初には新しい最高プロダクト責任者（CPO）が就任する予定であり、カーターズは、最高サプライチェーン責任者であるカレン・スミス（Karen Smith）の2027年第1四半期後半に予定されている退任に先立ち、最高執行責任者（COO）の選考を開始する。

業績見通し（ガイダンス）

中間値では、第4四半期の売上高は前年同期比で1桁台半ばのパーセンテージで減少することになる。通期売上高は約1%増加し、推定3,700万ドルの売上をもたらした前年度の第53週を除くと2%の増加となる。

経営陣は、第4四半期の売上総利益率が前年同期比で拡大すると予想しているが、第3四半期に記録した200ベースポイントの改善幅を下回ると見込んでいる。米国小売価格は1桁台前半のパーセンテージで引き上げられる計画である。またカーターズは、前年と比較した総関税負担の軽減により、第4四半期に約1,000万ドル〜1,100万ドルの恩恵を受けると予想している。

リスクおよび注視すべき点

• 第4四半期累計（現時点）の既存店売上高は減少しているが、経営陣は11月と12月が同社にとって最も売上規模の大きい月であることを強調した。
• 消費者は引き続き、持続的なインフレ、ガソリン価格の上昇、自由裁量支出への圧迫に直面している。
• カーターズは11月と12月にホリデーシーズンのプロモーション活動が激化すると予想しており、より積極的なプロモーション環境を業績予想に織り込んでいる。
• 港湾混雑やコンテナ不足により一部の製品配送が遅延したが、経営陣はこれまでのところ事業に重大な影響は出ていないと述べた。
• 市場における綿花価格は約20%上昇した。経営陣は、この影響が2027年年初の商品構成よりも、2027年後半の製品コストにより大きく関連すると予想している。
• 同社は原油高に伴い、2026年会計年度に追加で400万ドル〜500万ドルの運賃サーチャージが発生すると見込んでいる。
• 経営陣は引き続き、関税変更の可能性、地政学的混乱、選挙イヤーによる消費需要への圧迫、メディアコストの上昇を注視している。

アナリスト質疑応答の要点

経営陣は、新たな商業組織体制がカーターズの店舗、EC、および約20,000箇所の卸売拠点にわたる連携を改善することを目的としていると述べた。同社は、共有された消費者インサイト、より明確なブランドセグメンテーション、より統合されたショッピング体験を活用し、来店客数（トラフィック）と顧客生涯価値（LTV）を支える計画である。

卸売について経営陣は、売上高見通しの引き下げの大部分は卸売ではなく米国小売に関連していると説明した。2027年春向け卸売商品の事前出荷は第4四半期に約30%増加する見込みで、2027年年初からの売上高の一部が前倒しされる。

カーターズは2026年会計年度に、前年比で約2,000万ドル多く需要喚起費用を投じている。経営陣は有料メディア（ペイドメディア）が測定可能なトラフィックを創出し、引き続き効率的であると述べたが、メディアコストの上昇がリターンを圧迫し始めている。

価格設定に関して経営陣は、担当チームが主要なベビー、スリープウェア、デスティネーションカテゴリーで厳選して値上げを行っていると述べた。2027年春の価格設定は大体決定しているものの、2027年後半の価格設定および製品コストについては不確実性が残っている。

決算説明会（トランスクリプト）全文

決算説明会の完全なトランスクリプト

経営陣による説明

Operator

Welcome to Carter's Third Quarter Fiscal 2026 Earnings Conference Call. On the call are Sharon Price John, Chief Executive Officer and President; Richard Westenberger, Chief Financial Officer; Allison Peterson, Chief Commercial Officer; and T.C. Robillard, Vice President of Investor Relations. Please note that today's call is being recorded. I'll now turn the call over to T.C. Robillard.

Thomas 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.

Sharon John

Thank you, T.C. Good morning, everyone, and welcome to our call. I'm 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've served as the CEO for the entire period. During the last four months, I've 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 the 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 believe 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 of 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-touch point 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.

So 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 7 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 suddenly 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 has 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 promotions and was the guiding light, if you will, for the 2 key initiatives that positively impacted the outcome for the quarter.

#1, 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. And #2, we evolved our annual baby sale offering to a branded 5-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.

And 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 stand-alone 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.

And we are creating a new Chief Commercial Officer role to bring together the power and synergy of our more than 1,000 door vertical retail business, e-commerce channel and 20,000 location wholesale division, which will be led by Allison Peterson, who most recently has been successfully driving our North American retail organization. The overall goal is to effectively position the company across our brands, relationships, scale and infrastructure to service today's multigenerational consumers with seamless shopping experiences that are enhanced by continuous engagement opportunities across channels, ages and markets to create an emotional connection and increase lifetime value.

We believe this structure, in conjunction with improved processes will be conducive to identifying synergies across consumer and market data, product innovation and design, brand and marketing initiatives as well as merchandising and promotional planning with the goal of driving profitable outcomes. Although we are energized by our future with the early success of this brand relaunch and the emerging strategy, along with the anticipated organizational changes and the delivery of a solid third quarter, we also remain cognizant of the continued uncertainty in the macro market environment, especially with some of the softness we have seen in our fourth quarter-to-date sales.

Considering this as well as the historical tendency for amplified consumer concerns in election years, we have decided to take a prudent approach with a slight downward adjustment to our fourth quarter revenue outlook, which Richard will speak to in his remarks. Even with this adjustment, however, our full year 2026 numbers will continue to deliver from an expectations perspective, improvements on numerous key metrics, including net sales growth, inclusive of last year's 53rd week and our store rationalization, a positive U.S. retail comp and expansion of our operating margin.

The team, therefore, remains highly focused on successfully delivering the year, especially given how overweight the impact of the fourth quarter and the holiday season are on both our top and bottom line. In the meantime, we also expect to continue to make progress on our growth strategy, improving our processes and identifying new opportunities, inclusive of the expansion of the total addressable market, ranging from age expansion to socioeconomic expansion to asset-light global expansion, and we look forward to sharing more with you in the coming months. Now I'll turn the call over to Richard.

Richard Westenberger

Thank you, Sharon. Good morning, everyone. We're looking forward to updating you on the business today. We will recap our third quarter performance and share our latest outlook for Q4 and how we think the year may finish up. As always, our objective is to provide a balanced update. We'll share what's working and where perhaps we have some reasons for caution. For the quarter, we achieved our net sales forecast and exceeded our expectations on profitability.

Our teams are continuing to do a good job navigating the various challenges across the marketplace. We're grateful for their resilience and resourcefulness and their openness to change as we continue to transform and strengthen the company for the long term. Our comments this morning on our third quarter performance and our outlook will track along with the presentation posted to the Investor Relations portion of our website.

Turning to our presentation materials. On Page 2, we have our GAAP basis P&L. As Sharon mentioned, net sales in the third quarter were $752 million. Reported operating income was $56 million and reported earnings per share were $1 compared to $0.32 last year. On Page 3, we have our GAAP basis P&L for the first nine months of the year. On year-to-date net sales of more than $2 billion, reported operating income was $224 million, which included the benefit of the tariff recovery in the second quarter as well as the impact of several other nonrecurring charges. Year-to-date reported earnings per share were $4.27 compared to $0.75 in 2025.

On the following page, we summarized our non-GAAP adjustments. In the third quarter, we recorded approximately $1 million in charges related to intellectual property litigation. Year-to-date, our results included several nonrecurring items, the most significant of which was the roughly $130 million recovery of previously paid tariffs and related interest. We also recorded approximately $7 million in charges year-to-date related to costs associated with leadership transition and litigation. Last year, both our third quarter and year-to-date adjustments primarily related to operating model improvement costs, organizational restructuring and leadership transition costs.

Today, our comments will speak to our performance on an adjusted basis, which excludes these unusual items. Our third quarter adjusted P&L is on Page 5. As mentioned, our Q3 net sales were $752 million, down less than 1% versus last year. Sales were roughly comparable year-over-year in our U.S. Retail segment, down in U.S. wholesale, and we posted growth in International. Adjusted gross margin expanded 200 basis points in Q3 over last year to 47.1%.

The improvement in gross margin was driven by a higher year-over-year mix of U.S. retail sales and higher realized pricing, which offset higher tariff costs and investments in product make. On a consolidated basis, AURs increased mid-single digits, while units decreased mid-single digits. In U.S. Retail, third quarter AURs were up low single digits over last year, and we also improved realized pricing in our U.S. Wholesale and International segments. Allison will comment further on U.S. retail and wholesale trends in a moment.

For the quarter, adjusted SG&A decreased nearly 2% versus prior year to $303 million, with benefits from our productivity initiatives, including store closures, more than offsetting incremental investments in marketing and year-over-year inflationary pressures in wages and rent. Spending is an area we've managed well throughout the year. Year-to-date adjusted SG&A is essentially flat with the prior year, and we've achieved 150 basis points of leverage. On a rate basis on roughly comparable sales in the third quarter, we achieved 30 basis points of SG&A leverage.

Our third quarter adjusted operating income was $57 million at an adjusted operating margin of 7.6%, an improvement of 240 basis points over last year. Below the line, net interest and other expenses increased over prior year, driven by higher interest costs from last year's refinancing of our senior notes. Our effective tax rate for the third quarter was 24% compared to 22% last year. The higher rate this year was the result of a higher proportion of U.S.-based income, which included the tariff recovery. For the full year, we're forecasting an effective tax rate of approximately 23%.

The net of all this to the bottom line, third quarter adjusted earnings per share were $1.03, an increase of nearly 40% over last year's $0.74. On Page 6, we have a summary of our third quarter performance by business segment. As I mentioned earlier, net sales were roughly comparable year-over-year in our U.S. Retail segment, down in U.S. wholesale, and we posted growth in International. Of particular note, each of our business segments posted improvement in operating income and operating margin in the third quarter. Now our newly named Chief Commercial Officer, Allison Peterson, will provide some additional perspective on our retail and wholesale businesses, beginning on Page 7.

Allison Peterson

Thank you, Richard. I'm thrilled to be stepping into this expanded role of Chief Commercial Officer at such an exciting time for our business. The structure we announced today creates an important opportunity to build on our strong foundation, accelerate growth and strengthen our position as the market leader. Together, we plan to advance our go-to-market strategy, deepen our connections with customers and consumers and deliver elevated experiences at every touch point. I believe in our ability to translate these opportunities into sustained growth, driving meaningful value for our business.

Now turning to our U.S. Retail segment results. Third quarter net sales were comparable to prior year, while operating profit nearly doubled. Higher realized pricing and the benefits from our productivity initiatives, including store closures, drove a 250 basis point increase in our operating margin for the quarter. Comparable retail sales increased 0.4% over last year, with AUR up low single digits. This built on last year's 2% comp growth and mid-single-digit AUR increase. For the quarter, units were down low single digits versus prior year.

We saw continued growth in our baby and toddler business with our most important baby segment delivering its eighth consecutive quarter of comp sales growth, driven by destination categories like body suits and sleepwear. Our older kids business was slightly down versus last year. Performance across both stores and e-commerce was comparable to prior year. We saw continued strength in average transactions driven by growth in both AUR and UPTs.

While traffic continues to be strong on a 2-year basis, and we are pleased with the returns of our paid media investments, traffic decelerated from Q2 due to uneven product acceptance of our older kids back-to-school seasonal assortment. Additionally, we saw a softening of traffic to our stores as the average consumer continued to face higher gas prices as well as other inflationary pressures, a trend that is in line with other reported retail traffic trends in the industry.

As Sharon mentioned, Q3 sales were expected to be weighted to the month of September, and that's exactly how the quarter unfolded. In July, comps were largely on plan, reflecting typical seasonal clearance activity. August trends were weaker than planned as warmer weather impacted much of the U.S. Although key back-to-school categories like denim and uniform showed strength, our older kids seasonal assortment fell short of our expectations as consumers are being more strategic with their spending and delaying purchases closer to need, a trend we believe have continued into the fourth quarter.

While Labor Day was softer than expected, as reported across much of the retail industry, we quickly pivoted our marketing and merchandising efforts from focusing on the entire collection to wear-now key items that were resonating with the consumer and saw the back-to-school business rebound. Knowing September was a must-win month, we also positioned the Carter's brand to resonate with new and existing families in a differentiated way. We took this important commercial time frame to lean into our most iconic baby products and create relevancy with the next generation of families.

Through elevated storytelling, updated merchandising, personalized experiences and compelling value, September comps were up double digits and exceeded our plan. During this time frame, we saw outsized growth in our Baby segment, where we hold the #1 market share position and acquired new consumers to the brand, including Gen Z. Another driver of our strong September performance was the launch of our new branding campaign, which can be seen on Page 8. For the first time in 25 years, we've reimagined the Carter's brand. As you can see, the brand has a new look and feel, a new logo and an elevated brand promise, let every child's light shine.

On Page 9, you can see some of the other ways we are bringing the new Carter's branding to life. Our intention is to increase the appeal and relevance of this great brand to a new generation of parents while maintaining a nod to Carter's rich 160-year heritage. While this is a multiyear strategy, we are encouraged with the early results as unaided awareness and consideration are increasing. Engagement is also meaningfully up across our website and social media platforms, signaling that the content is resonating with our target consumers. We'll continue to build on our momentum with new brand moments in Q4 as we move through the key holiday period.

Turning to Page 10. We have reimagined the way consumers shop sleepwear, launching our Stellar Sleep shop featuring our Not-So-Scary Monsters collection. We saw a big opportunity to gain share in the important sleepwear category and connect with a new generation of consumers through new products, updated merchandising and enhanced marketing. This category, which historically generates a high lifetime value, delivered double-digit unit and dollar sales growth in the quarter.

We expanded the role Carter's plays in sleep by moving beyond product and into bedtime routines as a way to keep Carter's top of mind and be of service to our consumers. In Q3, we launched our free Bedtime Monster Scanner as part of the Carter's app to help parents and kids quell the anxiety we know is associated with the bedtime routine. Not only did we see great adoption within the app, but it drove double-digit conversion improvements to users who engage with this feature. Finding new ways to expand the role Carter's can play in families' lives continues to be a focus for us as we elevate our brand in the minds of our consumers.

Turning to the performance of our U.S. Wholesale segment on Page 11, third quarter net sales for our Wholesale segment decreased 4% versus prior year, which was better than expected, driven by earlier demand for fall products from key customers. As many of you know, our wholesale business can vary quarter-to-quarter due to shipment timing, and that has certainly been the case this year. On a year-to-date basis through Q3, net sales are up approximately 2% over prior year.

For the third quarter, pricing increased over prior year due in part to higher product costs. However, this is more than offset by a decline in units. Sales of our exclusive brands decreased mid-single digits versus last year in the quarter, driven by earlier fall shipments that benefited our Q2 results. Year-to-date, exclusive brand sales are up high single digits over last year, driven by Carter's Child of Mine and Just One You. Wholesale operating profit for the third quarter increased 11% over prior year, and operating margin expanded 230 basis points. From a margin standpoint, higher realized pricing, favorable customer mix and productivity initiatives more than offset higher tariff and product costs. I'll now turn the call back to Richard.

Richard Westenberger

Thank you, Allison. Turning to our International segment. Our businesses outside the United States continued to perform well in the third quarter. Total reported international net sales increased 4% over last year with growth in all parts of our international business, Canada, Mexico and with our wholesale partners outside of North America. In Canada, the largest component of our international business, net sales increased 4% over prior year in the third quarter, driven by a 2% increase in retail comp sales and growth in the Canadian wholesale channel.

In Mexico, comparable sales increased 8% over the prior year, which was led by our stores. Our team in Mexico drove a nice lift in units per transaction through some creative new merchandising and promotional initiatives, which resonated well with consumers in the quarter. Third quarter sales in Mexico also benefited from new store openings. In the first nine months, we've opened 6 new stores in Mexico. We continue to see strong momentum in the performance of these new store investments in this market.

International operating income increased 28% over last year to $12 million, and segment operating margin increased 180 basis points to 10%. The improved profitability was driven by higher realized pricing, productivity savings and FX benefits, partially offset by higher product costs. Turning to Page 12. We have some balance sheet and cash flow highlights. Our balance sheet remains very strong. We ended the quarter with significant liquidity, including cash on hand and short-term investments of over $525 million. Net inventories at quarter end were $587 million, 11% lower than prior year.

Our inventory position at quarter end was a bit lower than we had planned, in part due to some delayed delivery of product from port congestion and container availability issues. To date, these disruptions have not had a meaningful impact on the business, but our supply chain team is monitoring the situation closely. Year-to-date, we've generated operating cash flow of more than $100 million compared to a use of cash of $136 million last year. Our improved cash flow was driven by tariff recoveries and improved working capital, including lower inventories.

We've also had good performance on a free cash flow basis, generating $72 million versus negative free cash flow of nearly $180 million in the first nine months of last year. On returning capital to shareholders, we paid $27 million in dividends through the first nine months of the year. Overall, we believe our strong balance sheet and free cash flow generation are differentiating and strategic advantages for Carter's. Pages 13 and 14 summarize our adjusted P&L and segment results for the first 3 quarters. This information is provided for your reference.

Year-to-date through the first 3 quarters, net sales increased 4% with growth in all 3 of our business segments. Q3 year-to-date adjusted operating profit increased 20% and adjusted EPS increased 7%. As you will recall, the difference between operating income growth and EPS growth reflected higher net interest expense from last year's refinancing of our senior notes. Turning now to our outlook, beginning with the fourth quarter on Page 16. Fourth quarter is obviously very important in our business, not just in retail, but also in wholesale, where we have significant shipments planned, including product for the upcoming spring 2027 selling season.

November and December have historically been the largest months of the fourth quarter and of the entire year for that matter. So we have some big weeks and months ahead of us. Our teams are focused on finishing the year strong, continuing the progress we've achieved this year. As we said in our discussion of Q3 results, we have to acknowledge some slowing of demand relative to earlier in the year. Given the various pressures which our target consumers are facing, this isn't overly surprising.

As such, we've updated our outlook for net sales for the balance of the year prudently, we believe, to reflect an expectation for more moderate demand than in our previous forecast. Specifically, we've adjusted our assumption in our U.S. retail business to reflect current trends. In U.S. wholesale, we've also moderated our forecast for replenishment demand to better align with trends in the business. Over the past several years, we've seen a compression in the Q4 shopping period as consumers shopped much closer to the holidays.

This has resulted in a corresponding acceleration in our business in the last 6 weeks or so of the year. It seems possible we may see a similar consumer behavior this year as well. It's also worth a reminder that last year included an extra week, which we've estimated contributed approximately $37 million in net sales. For the fourth quarter, we're forecasting net sales in the range of $860 million to $880 million or mid-single-digit lower sales than last year's fourth quarter using the midpoint of the range. For adjusted operating income, we're forecasting a range of $74 million to $83 million, which compares to $89 million a year ago. And for adjusted fourth quarter EPS, we're forecasting a range of $1.37 to $1.55 versus $1.90 in Q4 last year.

Our outlook for the full year is included on Page 17. We're now expecting full year net sales in the range of $2.910 billion to $2.93 billion. At the midpoint of the range, this represents growth of approximately 1% versus prior year or 2% growth, excluding last year's 53rd week. Over the past few quarters, we've been able to offset lower-than-planned demand and additional promotional cadence to manage through some underperforming products with the benefit of lower-than-planned tariff costs and prudent expense management.

As such, we're maintaining our previous outlook for full year adjusted operating income growth in the low single-digit to mid-single-digit range. We're also maintaining our outlook for adjusted EPS to decline in the high single digits to low double digits. Again, as a reminder, the delta between our forecast for adjusted operating income growth and lower adjusted EPS is the higher interest costs related to last year's debt refinancing. Even with the moderated outlook for the top line, achievement of our forecast would cap a good year for Carter's, delivering growth in net sales despite the net closure of nearly 40 stores in last year's 53rd week and posting meaningful improvement in operating profit.

As also summarized here on Page 17, we expect to have a good year on cash flow with an outlook for operating cash flow in the range of $240 million to $250 million, reflecting the net tariff recovery and favorable movements in working capital. As we finish the year, risks we're monitoring include consumer sentiment and spending given the ongoing pressures of persistent inflation, including the price of gas. We've also seen some impact on demand in past election cycles, including related inflation in the cost of media.

So the upcoming midterms are on our radar. Given geopolitical uncertainty around the world, it's possible there may be some additional disruption to the supply chain and the delivery of product. And finally, we'll be carefully monitoring and reacting to the overall promotional intensity of the market, particularly around the holidays. With these remarks, we're ready to take your questions.

Operator

[Operator Instructions] Our first question is coming from the line of Jay Sole with UBS. Your line is now open.

質疑応答

Jay Sole

Sharon, if you had a chance to really dig into the business over the last quarter, can you just maybe just talk about how you feel about the interplay between the wholesale channel for Carter's and the U.S. retail channel? Is there one channel you need to prioritize? And how do you think you're going to -- what's the best way you think you have to improve the traffic into the U.S. retail stores?

Sharon John

Yes. Thanks, Jason. Appreciate the question. That really leads back to some of the organizational changes that we just spoke about. You just heard Allison speak, and she's been leading very strong results over the past few -- well, quite a few quarters at this point in U.S. retail. And we also saw an opportunity, therefore, to combine the entire commercial area under her as the Chief Commercial Officer, inclusive of both wholesale, retail and e-com.

So the first thing that I would note is what we see is an opportunity to drive synergy over that entire area, recognizing trends more quickly, recognizing consumer insights pushing them across all the different areas and then working much closely with now a branded organization, not just a marketing organization to create proper segmentation on how consumers see, particularly the Carter's brand from our own retail channels through our partners, through our exclusive brands with some of our biggest customers.

And that segmentation is going to be critical for us to maintain a position that separates us from our own inner brands, including Little Planet or, as I say, some of the exclusive brands that we have across some of our largest retailers and the experience that you would have at Carter's. So in a Carter's store, you'll likely see us to start working toward, as we've mentioned, higher engagement experiences to drive traffic with not only an elevated brand promise as we spent some time on, but then delivering on that promise through more integrated solutions, like I just mentioned on the Stellar Sleep program, where we also had a free app for the Monster Scanner, which everybody needs, by the way.

If you don't have a Monster Scanner, you should get it. I haven't found a monster yet. We have no monsters reported. But it helps integrate us into the bedtime process. This is just a singular example of how Carter's, as I mentioned, is elevating itself beyond an apparel brand. We have every right to do that with 160 years of heritage and the highest trust members in the space. So that's the store experience. And we'll be looking through.

We're looking at testing and management and insights on how to arrange that store in a way that highlights our businesses, our brands as well as gives us that permission -- discretion to the older consumer, which we have also mentioned and the gift-giving grandma and grandpa. So look for the Carter's business, and it will take us a minute. We have over 1,000 locations. But I think you're going to start to see a different kind of approach on the integration between e-com and the stores and the elevation of the experience inside of a Carter's store to drive that lifetime value.

Now the good thing about that, it's a little bit of a long answer, but that was a very broad question. That will also -- we understand basically that our consumers also co-shop all over the place. So that is not -- would not be an exclusive advantage to just the Carter's world, that also benefits our very valued big retail partners and all of our retail partners, we mentioned 20,000 doors that we have.

And so we see that, that kind of approach then can be executed with -- in partnership with our retailers, sort of like one partner at a time, building that relationship and that partnership more than a buyer-buyee kind of relationship or purchasing buying kind of relationship to assure that the company that owns the #1 market share in baby with such an iconic brand is positioned in a way that it should be in every location where a consumer can find children's apparel.

Jay Sole

Got it. That's helpful. If I can follow up. You announced a new organizational structure. I'm interested in the position of Chief Strategy and Business Development Officer. Can you just talk about -- I know it's early, but just some high-level ideas that you may have for finding new revenue streams for Carter's. I mean you touched on becoming a bigger part of the sleep time, I think, moment with. Just give us a sense, where can this brand go beyond what we're used to seeing from just baby and young children's apparel?

Sharon John

Well, first, thank you for that because I think that it's important to focus on not just strategy, but then how do you execute that strategy, right? It's great to have all this information, but what are we doing with it? How are we executing? How are we pushing it across the organization? To find continued value and new opportunities. Yes, Stellar Sleep is one of those. As I noted, it was a proprietary research that provided the insight that moms just find the whole -- how you buy for sleep confusing.

And we're like, wow, first of all, sleep it stretches across all the ages. It has a very high lifetime value connection. And if you -- if we solve whatever might be the challenge for the parents with that type of thing where you're like engaged in an experience, they're generally going to stick with you, right? So you go from a 1 child household to a multi-child household. So sleep was a really great place for us to start. And that solution that we've come up with, of course, we've also spoken with to our key customers about this.

You can actually see that solution being pushed out across numerous retail outlets where we've started and tested and proven the concept in our own stores. So that's a really important model to keep in the back of your mind as we move forward, consumer insights driven into broader consumer touch points. That's #1. #2, as I mentioned at the tail end of my script today and have spoken to some of you guys at the most recent Goldman conference, we're looking at the purposeful expansion of the addressable market across 3 different vectors.

That first vector is aging up the consumer. And I know you've heard this over and over again. But we have a lot more data now and a lot more insights about how to do that in a meaningful way, not just from design and development, but all the way through how our stores look and how engaging those stores are for a -- and when I say an older consumer, I'm talking about a 6-, 7-, 8-, 9-, 10-year old, right? So don't get too old on me, but that type of consumer as well as aging up the -- excuse me, pushing up the socioeconomic strata, which we've been able to prove our ability to do so with our sub-brand Little Planet.

So while early, it's showing us that, that consumer is absolutely willing to be engaged and involved in a sub-brand of Carter's for a much more elevated look, feel and approach with a bigger promise that's linked to sort of the environmental concepts of some of the things that, that particular consumer is looking for today. And then finally, on the third vector is the expansion into an -- more of an international approach. We're already a global brand. We have just not really had a consistent strategy on how we're rolling out across the globe.

And we have a lot of good touch points and a lot of good success in some of the markets that we're in. So we are looking at an asset-light approach to a very systematic execution as we look toward that. And in fact, one of the reasons we've created this role beyond pulling together all of our consumer insights, which will drive this across many of our categories and consumers. The international team will report into the Chief Strategy and Business Development Officer as we work toward a strategic approach to evolving in that area.

Operator

Our next question in queue coming from the line of Kelly Crago with BMO Capital Markets. Your line is now open.

Kelly Crago

I just want to dig into the U.S. wholesale business a little further. You're guiding it down quite meaningfully versus prior expectations in the fourth quarter. So in last quarter, you sounded very positive on the retailer reception of your product and pricing. So just curious if you could dig into what's really changed there and provide us with any sort of color on how you are seeing order books shaping up for U.S. wholesale into next year?

And then secondly, on pricing, obviously, taken a lot of price this year. Just curious what you're thinking on the pricing dynamics into next year given some of the cost headwinds we're anticipating.

Richard Westenberger

Kelly, I'll start and my colleagues may want to add some thoughts. As it relates to the revision in revenue outlook, I would say the majority of that relates more to the U.S. retail business than it does to wholesale. We had revised wholesale down in our previous forecast. I think we've further refined our outlook for replenishment demand, which is a component, obviously, of the wholesale revenue stream. So the more significant component would be U.S. retail as opposed to wholesale.

So wholesale on balance, there's lots of moving pieces, as Allison said in her remarks. And so we had some volume that had been previously planned for the fourth quarter that moved forward and benefited Q3. That happens all the time in this business. I think if you look at our revised forecast, it implies kind of flattish to down slightly for the full year segment results for wholesale. So I think we're going to cap a good year in wholesale overall.

We had good demand for the order book for spring 2027. The challenge with that is not all that comes next season. So we actually have more of that going in the fourth quarter. Spring preships are up about 30% in the fourth quarter. So that will benefit the fourth quarter versus early next year. We haven't done sell-ins yet for fall. That will take place as we exit the year here. So on our next call, we'll probably have better line of sight to that.

Operator

Our next question in queue coming from the line of Ike Boruchow with Wells Fargo. Your line is now open.

Irwin Boruchow

I was hoping you could talk about AUR and gross margin specifically for the fourth quarter, what your expectation is and how you kind of see the trajectory of AUR into next year?

Richard Westenberger

Sure. Again, I'll start out there. So we had a nice lift in AUR in the third quarter. I think that's a testament to how the retail team came together and developed that compelling late September promotional drive, which was accretive overall to margins and profitability. So we do have pricing planned up, I'd say, low single digit in the U.S. retail business in fourth quarter as well, a little less than perhaps what we achieved in Q3, but Q4 is naturally a bit more of a promotional period than Q3 is.

So sequentially, you lose a little bit of that. So still planning higher prices. I think we've been able to maintain those reasonably well. I think we've sold in at this point, spring 2027. So that pricing is kind of known at this point. We have yet, as I mentioned, to sell in the fall assortment for the second half of the year. So more to come on that.

Sharon John

And I'd like Allison to add color to this. But as we noted in the remarks, we recognized and actually shared in the last call the importance of September and had that soft start in Labor Day, which apparently from some of our research was reflected in a lot of different sectors of the marketplace. But I was really proud to see the team double down on how to approach September and come back with a winning strategy to end up with a double-digit comp in September that clearly positively impacted the quarter overall. And it was a very scaffolded approach to the way they attacked this opportunity. And ultimately, that too was a protectant of the AUR being positive for the quarter.

Richard Westenberger

Yes, absolutely.

Allison Peterson

I think the team has done an excellent job surgically optimizing price across the assortment to deliver a low single-digit AUR increase in the quarter, and that was on top of a mid-single-digit AUR increase last year. So the teams are definitely taking price where they can.

And that is even with us considering some of the product headwinds that we talked about. So we are really seeing the teams lean in, in a very strong way and taking price and realizing price in our destination categories in our most important baby business, in our sleep business, and we're really seeing the benefits of that flow through to our gross margin, as Richard mentioned.

Irwin Boruchow

Got it. And as a follow-up, on the gross margins, can you just quantify what was the lower tariff rate benefit to gross margin in the third quarter? And what kind of a benefit do you have baked in on the fourth quarter, just so we can kind of separate the core versus the tariff rate noise?

Richard Westenberger

Yes, I would say in the third quarter, gross margin expanded by about 200 basis points. About half of that expansion had to do with just higher mix of the gross margin-rich U.S. retail business. So we had a higher proportion of U.S. retail sales. The balance would be improved pricing largely. Tariffs were not as meaningful of a year-over-year driver in the third quarter. We get more of a benefit, Ike, in fourth quarter from tariffs. From memory, it's $10 million or $11 million of lower gross tariff burden in the fourth quarter because last year, we were selling through product that we had imported under the much higher IEEPA tariff schemes.

Operator

Our next question in the queue coming from the line of Jim Chartier with Monness, Crespi, Hardt & Company. Your line is now open.

James Chartier

I wanted to talk about the marketing spend. How does this year's marketing spend compare to years past? Given the strong response that you've seen to the initial brand relaunch, is there an opportunity in the near term to lean into marketing in a bigger way to drive the business? And then where do you see kind of total marketing spend going over time?

Richard Westenberger

Well, this has clearly been an area of investment for us, Jim, and one that we're really pleased by. We felt like the benchmarking that we had done indicated that we under-indexed other good branded companies in terms of what we spend on marketing overall. So we're spending about $20 million more on demand creation this year versus a year ago, and that's across a range of areas. But paid media, in particular, has proven to be a very good area for investment. One of the things I like about our colleagues in marketing, they're very rigorous in measuring the return on that investment. We do believe it's driving traffic for us. We'll continue to do that. And I don't think we're at the point of inefficiency yet with spending. So we're going to -- we're kind of stepping our way into more spending over time.

Allison Peterson

Yes. I would also add that our marketing investment is intentionally balanced across really two priorities, which is delivering results today while investing in the long-term relevance of our brands. And you'll see that show up in the work we're doing around reimagining the brands, and that is a strategy that we expect to pay off over a longer-term horizon. We do continue to see, as Richard mentioned, marketing contribution to retail sales grow year-over-year, and our increased spend is proving effective and efficient. And although we are starting to feel, as the team mentioned, more pressure in our efficiency due to rising media costs, we're very pleased with the efficiencies we're seeing and the effectiveness we're seeing in terms of marketing contribution to our total business.

Sharon John

Yes. And I would want to note that the change of the Chief Marketing Officer to Chief Brand Officer is not just in name. It's a very important concept of how we feel we can drive value across the organization with our iconic brands. And that combination of upper funnel marketing with a branded engagement to push us up in the top-of-mind awareness and high to drive that affinity, combined with the scaffolded approach to promotions and occasionally marking down versus marketing and its most specific approach is a very dynamic way to drive business over time.

And I would suggest that we're would hope to see much more of that as we move forward, particularly with the positive impact of this branded initiative that we've launched. So while our marketing as a percent of sales, as Richard mentioned, has been comparatively low and frankly, still is comparatively low to like companies. We will likely -- as long as that ROI maintains some consistency, we will likely see a greater expense in marketing. But of course, that's with the objective to drive profitable sales.

Operator

Our next question in queue coming from the line of John Keypour with Goldman Sachs. Your line is now open.

Jonathan Keypour

Just a quick bookkeeping question to start. If you could give us the quarter-to-date comp, please?

Richard Westenberger

It's down, John. We're actually going to move away from providing the intra-quarter data point. We had a lot of lessons in this last quarter about how that can move around as you get to the higher volume periods. And so we are running down month-to-date, but the bigger volume periods, November and December are still ahead of us. So we're focused on delivering those.

Jonathan Keypour

Okay. Totally. And then if we could just talk about SG&A a bit and maybe, actually, let's start with gross margin. If you could give us a picture of what you're expecting in terms of freight and cotton and how the tariff lapse should influence margins next year?

Richard Westenberger

Yes. So I'll start near end. Gross margin for the fourth quarter, we are expecting expansion again year-over-year in Q4, not to the same extent that we saw in Q3. You don't have quite the same mix benefit. You do get a bit more of a tariff benefit in Q4, as I just mentioned. Cotton is clearly up in the marketplace. It's up about 20%. Just a reminder, we don't buy raw cotton. We buy finished goods. And so our vendors buy cotton on our behalf. They're buying all across the time continuum on our behalf. So the more expensive cotton is really more an issue for our second half product costing in 2027.

At this point, we've costed our assortments for the first part of next year. So I don't expect cotton itself is a huge inflationary pressure. I do think we're seeing other sources of inflation in transportation costs with the cost of oil being what it is. This year, we're probably incurring another $4 million or $5 million of incremental freight surcharges just from our carriers because of the price of oil.

So too early to probably be more specific on 2027. I do think that we're seeing a trend towards inflation in our product input costs, probably more second half phenomenon. And then tariffs to your question, I think that's anybody's guess. I don't think we're out of the woods as it relates to tariffs. The administration clearly has a preference for this as a policy matter. I think the more recent tariffs have obviously been much more benign than the IEEPA-level tariffs. But my personal opinion is we're not out of the woods as it relates to potential further changes there. So we're mindful of what may happen.

Operator

And our last question will come from the line of Tom Nikic with Needham & Company. Your line is now open.

Tom Nikic

I want to ask about some of the leadership changes and obviously, a lot of folks moving into new roles and things like that. Sharon, can you give us any sort of time line as to how long it will take for the new leadership structure to really impact the business and to kind of get operating at the level that you're hoping to see?

Sharon John

Yes. Thanks for that. And well, we do have a lot of the key executives already in place. It's just an elevation and expansion of certain roles. So this is a really concerted approach to some consistency in key seats while adding newness in other areas, inclusive of the Chief Product Officer, which, as I noted, had been vacant and the time period of that vacancy has been since August of last year, not August of this year, August of 2025.

So when you think about the kind of impact of someone coming to us from such an iconic company like H&M, who's managed across multiple areas of apparel, including kids, of course, that could have quite a strong impact on the way we think about the business. And in regards to many of the strategic initiatives that I've mentioned, particularly expansion of the addressable market. So we expect her to be able to start in January-ish after the first of the year, we'll see.

And the other opportunity is with the Chief Operations Officer, which we will be searching for. So that's really hard to say. But I'm quite hopeful that a company like Carter's, a Fortune 1000 organization with 160 years of history and iconic brands in a situation where we have so much opportunity ahead of us, I certainly hope that, that will attract the top talent as it has in other areas. So we -- it will come in phases to be truthful.

And in some cases, the work that will be done of creating more synergy across the organization and pulling up consumer insights and brand earlier into the process of the development of our products and driving insights across the entire organization all the way to the execution of the stores. The strategic insights of that will happen fairly rapidly, I would assume, but the ongoing execution of that will hit the market in different phases as we move forward.

Even with that note that we have already in the first four months, launched an entirely new brand, look, feel and logo for Carter's, which we've already driven 1.6 billion impressions and a very positive response from the consumer. So some things can go fast and some things might take a minute.

Tom Nikic

All right. Very helpful. And if I could squeeze one in before the call ends here. There was a comment about monitoring and reacting to the promotions in the marketplace. Have you seen anything from the competitors out there that gives you any concern heading into the holidays?

Allison Peterson

Thank you for the question. We saw competitors raise prices on all products until Labor Day when they pivoted to deeper discounts and increase their promotionality for the month kind of given what Sharon spoke to, which is a challenging Labor Day period, which we perceive happened across the market.

Coming out of September, we have seen competitors pull back on promotions, but we are absolutely anticipating the promotional environment will intensify with heavy discounting in November and December as many brands and retailers are talking about taking their tariff relief and potentially repurposing it back into price. So we have considered and contemplated a more aggressive promotional environment in our forecast.

Sharon John

And that being said, just recall the last two months of the year are the most important months. We are completely focused on driving profitable sales through the end of the quarter. And we are constantly monitoring the competitive environment and the consumer. But as Richard noted earlier, this compressed time line between those holidays is something to just keep in mind as we completed 2026 with an expectation of positive results across all of the key metrics. And with that, we'd like to thank you very much for joining us today and look forward to updating you on our progress in the next call.

Operator

Thank you, ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.