Why Carter’s (CRI) Dropped -21%: A Solid Holiday Quarter Buried Under a Bleak 2026 EPS Outlook

Why Did Carter’s (CRI) Stock Fall Over 21% Today?

Carter’s (CRI) dropped more than 21% today because, even though it beat Q4 expectations on both sales and earnings, management issued a much weaker 2026 earnings outlook, highlighted ongoing margin pressure from tariffs and product costs, and guided to a sharp near‑term EPS drop that jarred investors.

Key Takeaways

• Q4 2025 sales were about 925 million dollars, beating estimates and up mid‑single digits year over year (helped by an extra week), and adjusted EPS of 1.90 dollars topped the roughly 1.55–1.60 dollar consensus.

• Despite this beat, adjusted EPS fell 20.5% from last year, and operating margin compressed by about 50 basis points to 9.2% as higher tariffs, product costs, and incentives ate into profitability.

• For 2026, management guided to a low double‑digit to mid‑teens decline in adjusted EPS from 3.47 dollars in 2025 and forecast Q1 EPS of just 0.02–0.08 dollars versus 0.66 dollars last year, far below Wall Street expectations.

• Higher tariffs, mix shifts, weaker cash flow (2025 operating cash flow dropped to 122 million dollars from 299 million), and lingering wholesale and retail pressures fed worries that Carter’s earnings power is structurally lower than before.

Q4 Looked Good on the Surface

Carter’s delivered a headline beat in Q4 2025. Revenue came in around 925 million dollars, up roughly 7–8% year over year and above consensus near 904 million dollars, with growth across U.S. retail, international, and wholesale. Part of that growth reflected a 53rd week in the fiscal year, which management said added about 37 million dollars of sales, so underlying growth was closer to 3–4%.

Adjusted EPS was 1.90 dollars, handily beating expectations of roughly 1.55–1.60 dollars. Operating income ticked up about 1.8% to roughly 84.7 million dollars, but the operating margin slipped to 9.2% from 9.7% as the company absorbed higher input costs and tariffs. On a full‑year basis, revenue rose to about 2.9 billion dollars, yet GAAP diluted EPS dropped to 2.53 dollars from 5.12, and adjusted EPS fell to 3.47 dollars, underscoring how much profitability has compressed even as sales held up.

Guidance Shock: 2026 EPS Set to Fall

The real problem was what Carter’s said about the future. Management guided 2026 adjusted EPS to about 2.91 dollars, implying a low double‑digit to mid‑teens percentage decline from 3.47 dollars in 2025, even though they expect low‑ to mid‑single‑digit net sales growth. In practical terms, that means revenue may inch up, but rising costs and tariffs will continue to squeeze profits.

The near‑term outlook was even more jarring. For Q1 2026, Carter’s projected adjusted EPS of just 0.02–0.08 dollars, compared with 0.66 dollars in the prior‑year quarter and consensus near 0.36 dollars—one of the largest negative EPS guide gaps in the consumer space this season. Management cited higher tariffs, elevated product costs as they invest in product “make,” promotional intensity, and deleverage in both U.S. retail and wholesale as key headwinds.

Investors had already been wrestling with conflicting analyst views: some saw Carter’s as a value play, while others warned that longer‑term forecasts point to flat‑to‑down revenue and significantly lower earnings by 2028. Today’s guidance effectively endorsed the more pessimistic camp, confirming that margin and EPS pressures are not just a 2025 blip.

Margin Pressure, Tariffs, and Weak Cash Flow

Beyond EPS guidance, several underlying trends raised red flags. Adjusted operating income for 2025 fell by about 26 million dollars, and the adjusted operating margin dropped from roughly 13.4% to 9.7%, driven largely by lower profitability in U.S. retail and wholesale segments. Management highlighted the “lion’s share” of the decline came from higher tariffs and product costs, along with wage and incentive pressures.

Cash flow also deteriorated meaningfully. Operating cash flow fell to roughly 122 million dollars in 2025 from about 299 million dollars the year before, mainly due to higher inventories and reduced earnings. That weaker cash generation, combined with refinancing activity and a new 750‑million‑dollar asset‑based revolver, reinforced the sense that Carter’s is operating with less financial flexibility than in the past.

Although management is executing productivity actions—cutting about 300 office jobs, planning roughly 150 store closures over three years, and targeting 35 million dollars in annual savings plus more than 10 million dollars in SG&A cuts—those benefits will take time to fully materialize and may be partially offset by ongoing cost and tariff headwinds.

Why the Stock Fell Over 21% Today

When you combine a Q4 beat with:

• A 20% year‑over‑year drop in adjusted EPS,

• A big decline in operating and cash‑flow margins, and

• A 2026 EPS outlook that calls for another low‑teens percentage decline,

you get a classic “good quarter, bad future” setup.

Traders quickly repriced CRI to reflect structurally lower earnings power. The stock slid from the mid‑40s into the low‑30s, a drop of more than 20%, putting it near its 52‑week lows despite what appears, at first glance, to be solid holiday‑quarter results. In short, Carter’s didn’t fall because Q4 was weak; it fell because management confirmed that profits are likely to keep shrinking in 2026, and the market is no longer willing to ignore that reality.

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