Carters Inc: Form 10-Q for the period ended Jul 4, 2026

tariff-related costs. The decrease in the SG&A rate was driven by fixed cost leverage on higher net sales, reduced costs resulting from previously implemented restructuring actions, and lower distribution costs, partially offset by incremental marketing investments and inflationary pressure in retail store-related expenses.

U.S. Wholesale

U.S. Wholesale segment net sales increased $23.9 million, or 5.4%, to $467.0 million, driven by growth in our exclusive Carter’s brands and the earlier demand for Fall product as compared to the prior comparable period, partially offset by decreased demand with certain customers and lower sales to our off-price wholesale channel customers. AUR increased by a high-single digit percentage, primarily reflecting higher realized pricing and sales leverage. Units sold decreased by a low-single digit percentage, primarily driven by lower unit volume with certain customers and with our off-price wholesale channel customers.

U.S. Wholesale segment operating income decreased $15.8 million, or 19.2%, to $66.5 million, primarily due to a decrease in gross profit of $17.8 million, partially offset by a decrease in SG&A expenses of $2.8 million. Segment operating margin decreased 440 bps to 14.2%. The drivers of the decrease in operating margin were a 530 bps decrease in gross margin, partially offset by a 130 bps decrease in SG&A rate. The decrease in gross margin was driven by a high-teens percentage increase in AUC as a result of incremental tariff-related costs and investments in product make, partially offset by increased AUR and decreased sales to low-margin off-price wholesale customers. The decrease in the SG&A rate was driven by fixed cost leverage on increased net sales, lower distribution costs, and lower bad debt expense, partially offset by incremental marketing investments.

International

International segment net sales increased $14.7 million, or 8.2%, to $192.7 million, driven by growth in Mexico and Canada, partially offset by lower sales to international partners. In Mexico, net sales growth reflected higher AUR and the contribution from new retail stores. Canadian comparable net sales, including retail stores and eCommerce, increased 2.7% driven by higher unit volume and the favorable impact of foreign currency exchange rates. International segment AUR increased by a mid-single digit percentage driven by pricing and the favorable impact of foreign currency exchange rates. International segment units sold increased by a low-single digit percentage. Changes in foreign currency exchange rates used for translation had an $8.0 million favorable effect on International segment net sales.

International segment operating income increased $6.2 million, or 182.2%, to $9.6 million, primarily due to an increase in gross profit of $12.0 million, partially offset by an increase in SG&A expenses of $5.7 million. Segment operating margin increased 310 bps to 5.0%, driven by a 280 bps increase in gross margin and a 40 bps decrease in the SG&A rate. The increase in gross margin was driven by higher AUR and channel mix, partially offset by increased AUC. AUC increased by a low-single digit percentage due to incremental tariff-related costs. The decrease in the SG&A rate was driven by fixed cost leverage on increased net sales and reduced costs resulting from previously implemented restructuring actions, partially offset by increased retail store rent and retail store employee costs.

Unallocated Corporate Expenses

Unallocated corporate expenses decreased $1.9 million, or 4.2%, to $42.8 million. Unallocated corporate expenses, as a percentage of consolidated net sales, decreased 40 bps to 3.3% driven by reduced costs resulting from previously implemented restructuring actions and lower consulting costs.

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES TO GAAP MEASURES

We have provided non-GAAP adjusted cost of goods sold, gross profit, SG&A expenses, operating income, interest income, income tax provision, net income, and diluted net income per common share measures, which exclude certain items presented below. We believe that this information provides a meaningful comparison of our results and affords investors a view of what management considers to be our core performance, and we also, from time to time, use some of these non-GAAP measures, such as adjusted operating income, as performance metrics in awards under our annual and long-term incentive compensation plans. These measures are not in accordance with, or an alternative to, generally accepted accounting principles in the U.S. (GAAP). The most comparable GAAP measures are cost of goods sold, gross profit, SG&A expenses, operating income, interest income, income tax provision, net income, and diluted net income per common share, respectively. Adjusted cost of goods sold, gross profit, SG&A expenses, operating income, interest income, income tax provision, net income, and diluted net income per common share should not be considered in isolation or as a substitute for analysis of our results as reported in accordance with GAAP. Other companies may calculate adjusted cost of goods sold, gross profit, SG&A expenses, operating income, interest income, income tax provision, net income, and diluted net income per common share differently than we do, limiting the usefulness of the measure for comparisons with other companies.

consolidated net sales. Changes in foreign currency exchange rates used for translation in the first two quarters of fiscal 2026, compared to the first two quarters of fiscal 2025, had an $8.0 million favorable effect on our consolidated net sales.

Fluctuations in exchange rates between the U.S. dollar and other currencies may affect our results of operations, financial position, and cash flows. Transactions by our foreign subsidiaries may be denominated in a currency other than the entity’s functional currency. Foreign currency transaction gains and losses also include the impact of intercompany loans with foreign subsidiaries that are marked to market. In our condensed consolidated statement of operations, these gains and losses are recorded within Other expense (income), net. Foreign currency transaction gains and losses related to intercompany loans with foreign subsidiaries that are of a long-term nature are accounted for as translation adjustments and are included in Accumulated other comprehensive loss.

Interest Rate Risk

Our operating results are subject to risk from interest rate fluctuations on our ABL facility, which carries variable interest rates. As of July 4, 2026, there were no variable rate borrowings outstanding under the ABL facility. As a result, the impact of a hypothetical 100 bps increase in the effective interest rate would not result in a material amount of additional interest expense over a 12-month period.

Other Risks

We enter into various purchase order commitments with our suppliers. We can cancel these arrangements, although in some instances we may be subject to a termination charge reflecting a percentage of work performed prior to cancellation.

Evaluation of Disclosure Controls and Procedures

Our principal executive officer and principal financial officer have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures are effective as of July 4, 2026.

Changes in Internal Control over Financial Reporting

The principal executive officer and principal financial officer also conducted an evaluation of the Company’s internal control over financial reporting (“Internal Control”) to determine whether any changes in Internal Control occurred during the fiscal quarter ended July 4, 2026 that have materially affected, or which are reasonably likely to materially affect, Internal Control.

There were no changes in the Company’s Internal Control that materially affected, or were reasonably likely to materially affect, such control over financial reporting during the fiscal quarter ended July 4, 2026.

Except as set forth below, there have been no material changes to the risk factors described in our Form 10-K for the 2025 fiscal year ended January 3, 2026.

Our business could be negatively impacted by political and economic risks, including from the conflict between the United States, Israel, and Iran and related geopolitical instability, that we are exposed to as a result of our global operations.

We are subject to general political and economic risks in connection with our global operations, including political instability (both in the United States and globally, including the ongoing conflict between Russia and Ukraine and the related economic and retaliatory measures), frequent hostilities between Israel and Hamas, persistent conflict in the Red Sea region, terrorist attacks, and changes in diplomatic and trade relationships, any of which may have a significant adverse effect on our business, financial condition, and results of operations. Economic uncertainty in the United States and abroad has led to growing concerns about the systemic impact of rising energy costs, geopolitical issues, or the availability and cost of credit and higher interest rates, which could further lead to increased market volatility, decreased consumer confidence, and diminished growth expectations in the U.S. economy and abroad. As our customers react to global economic conditions, we have seen and may see customers reduce spending on our products and take additional precautionary measures to limit or delay expenditures and preserve capital and liquidity, thereby adversely affecting our customers’ ability or willingness to purchase our products.

In addition, in late February 2026, the United States and Israel launched coordinated military strikes against Iran, which retaliated with missile attacks across the region. Although we do not have material operations in the Middle East, the ongoing conflict and any further escalation, including additional military actions, retaliatory measures, sanctions, disruptions to trade or transportation routes, cyberattacks, or other governmental or market responses, has caused, and could continue to cause, significant disruptions of global energy supplies and increases in global energy prices, heightened inflationary pressures on our input costs and supply chain, negative effects on global supply chains, energy markets, commodity prices, currency exchange rates, financial markets and overall macroeconomic conditions, and adversely impact customer spending patterns in markets in which we operate. While we expect the impacts of conflict between the United States, Israel, and Iran to continue to have an effect on our business, financial condition, and results of operations, we are unable to predict the extent or nature of these impacts at this time.