Carter’s Q2 FY2026 Earnings: Sales Rise 5% as Adjusted Profit Improves

Carter’s (NYSE: CRI) reported fiscal Q2 2026 net sales of $615.5 million, up 5.2% from $585.3 million, while diluted EPS increased to $2.87 from $0.01. GAAP earnings were heavily influenced by a recovery of previously paid import duties, but adjusted operating income and adjusted EPS also improved as productivity and supply-chain benefits outweighed tariff, marketing, and inflationary pressures.

Core Earnings Data

For the quarter ended July 4, 2026, revenue increased across all three business segments. Foreign-currency translation contributed approximately $2.4 million, or 0.4%, to consolidated sales growth.

Reported gross profit and operating income included a $127.7 million benefit recorded as a reduction in cost of goods sold. Excluding specified items, adjusted operating margin increased by 0.9 percentage points to 2.9%.

Business and Segment Performance

U.S. Wholesale produced the fastest sales growth and contributed most of the company’s dollar revenue increase. Its operating margin nevertheless declined slightly, indicating that higher volume did not fully offset pressure on segment profitability.

U.S. Retail sales grew more slowly, although comparable sales increased 5.1%. International delivered the largest improvement in segment operating margin.

Profitability and Cash Flow

Selling, general, and administrative expenses decreased to $276.1 million from $281.0 million even as sales increased. Productivity and supply-chain initiatives supported adjusted operating profit, more than offsetting incremental tariff costs, demand-creation investments, and general inflationary pressure during the quarter.

Cash flow was disclosed only for the first half, not separately for Q2. First-half operating cash flow reached $202.3 million, compared with an $8.3 million use of cash in the prior-year period. The improvement came primarily from the import-duty recovery, better working capital, and favorable timing of interest payments.

Carter’s paid $9.1 million of dividends in Q2 and $18.3 million during the first half. It did not repurchase shares during the six-month period.

Tariff Recovery Lifted GAAP Results, but Adjusted Margin Also Improved

Carter’s received $132 million from the recovery of previously paid import duties and related interest. Of that amount, $127.7 million increased operating income through lower reported cost of goods sold, while the after-tax benefit was $100.1 million, equivalent to $2.73 per diluted share.

This explains most of the difference between GAAP EPS of $2.87 and adjusted EPS of $0.26. The adjusted figures also remove $4.7 million of leadership-transition costs and $1.2 million of intellectual-property litigation expenses.

The quarter still showed operational progress after these adjustments: adjusted operating income rose 54.1% and adjusted margin increased to 2.9%. However, the first-half figures remained weaker, with adjusted operating income down 1.3% to $46.5 million and adjusted EPS falling to $0.65 from $0.83. Q2’s improvement therefore did not fully reverse the pressure experienced earlier in the fiscal year.

Earnings Guidance

Carter’s updated its fiscal 2026 outlook, but the release did not provide the previous guidance ranges, so the exact revisions cannot be quantified. Fiscal 2026 contains 52 weeks, while fiscal 2025 included a 53rd week that contributed approximately $37 million in sales.

The full-year outlook assumes a lower gross margin because of incremental tariffs, partly offset by pricing, mitigation measures, and productivity savings. It also incorporates approximately $35 million of net interest expense following the Q4 2025 refinancing of senior notes, an effective tax rate of about 23%, and approximately 36 million average shares outstanding.

For Q3, management expects a higher gross margin due to a greater mix of U.S. Retail sales and the anniversary of incremental tariff costs that began in Q3 2025. SG&A expense is expected to be comparable with the prior year as restructuring savings offset demand-creation investments and other inflation.

Management Commentary

CEO and President Sharon Price John attributed the quarter’s results primarily to improved marketing, early benefits from productivity initiatives, and continued progress in the Baby segment. Management’s explanation indicates that the adjusted profit improvement came from both sales activity and cost initiatives, rather than from the tariff recovery alone.

Risks Investors Need to Watch

• Tariff pressure on gross margin: Carter’s expects its full-year gross margin to decline as incremental tariff costs exceed the combined offsets from pricing, mitigation measures, and productivity savings.
• Uneven underlying profitability: Adjusted operating profit improved in Q2, but remained lower for the first half. Sustained productivity gains are needed to offset marketing investments and inflationary costs.
• Higher financing costs: Full-year net interest expense is projected at approximately $35 million following the senior-note refinancing. This contributes to the divergence between expected adjusted operating-income growth and declining adjusted EPS.
• Cash flow includes nonrecurring and timing benefits: First-half operating cash flow was boosted by the duty recovery, working-capital improvement, and the timing of interest payments, limiting its usefulness as a direct measure of recurring quarterly cash generation.
• Revenue comparisons remain demanding: Q3 sales guidance of approximately $750 million is below the prior-year quarter’s $758 million, while the full-year comparison is affected by the extra week included in fiscal 2025.

Summary

Carter’s generated sales growth across every segment and improved Q2 adjusted operating margin as productivity and supply-chain savings offset tariffs, demand investments, and inflation. The import-duty recovery created an unusually large lift to GAAP earnings and first-half cash flow, making adjusted results more useful for evaluating ongoing performance. Investors’ next focus will be whether Q2’s adjusted profit improvement continues while Carter’s manages tariff pressure, higher interest expense, and a more restrained Q3 sales outlook.