Gen Z Demand And Store Rationalization Will Drive Strong Long Term Apparel Momentum

Catalysts

About Carter's

Carter's is a leading designer, marketer, and retailer of young children's apparel and related products across retail, wholesale, and international channels.

What are the underlying business or industry changes driving this perspective?

• Repositioning Carter's, OshKosh, Little Planet and Otter Avenue as primary brands on Amazon and other key wholesale platforms is expected to expand digital reach and mix toward higher value assortments, supporting stronger revenue growth and Wholesale segment earnings.
• Elevated demand from young Gen Z families, reflected in double digit growth in consumer counts and increasing brand awareness, should sustain traffic gains in stores and e-commerce, driving higher D2C revenue and more resilient net margins over time.
• Rationalizing 150 underperforming North American stores while leveraging sales transfer to e-commerce, remaining stores and wholesale partners should lift fleet productivity and SG&A efficiency, supporting operating margin expansion despite modest top line pressure.
• Eliminating 20% to 30% of product choices and unifying global assortments, combined with a shorter product development calendar, is improving regular price sell through and inventory quality, supporting gross margin rate and working capital efficiency.
• Planned $45 million in annual productivity savings, alongside targeted reinvestment in high return demand creation and digital capabilities such as AI enabled design and cloud platforms, should offset a meaningful portion of tariff headwinds and underpin earnings growth in 2026.

Assumptions

This narrative explores a more optimistic perspective on Carter's compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Carter's's revenue will grow by 1.4% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 3.1% today to 3.7% in 3 years time.
• The bullish analysts expect earnings to reach $108.2 million (and earnings per share of $3.25) by about December 2028, up from $86.7 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $80.2 million.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 16.4x on those 2028 earnings, up from 13.9x today. This future PE is lower than the current PE for the US Luxury industry at 22.3x.
• The bullish analysts expect the number of shares outstanding to grow by 1.21% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.45%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Persistently elevated global tariffs on Carter's major sourcing countries, with the effective duty rate already rising into the high 30% range from about 13% historically and an annualized gross impact estimated at $200 million to $250 million, may not be fully offset by price increases and vendor mitigation. This could pressure the gross margin rate and operating income over the long term and limit earnings growth.
• Carter's strategy to raise average unit retail in the mid to high single digits across channels, while industry peers are also lifting prices in a weaker macro backdrop with softening consumer confidence and potential employment deterioration, risks eroding unit volumes and share in value-sensitive baby and toddler categories. This would constrain revenue growth and dampen net margins.
• The structural decline in U.S. Wholesale, including ongoing pressure on the Simple Joys brand at Amazon, reduced department store bookings and an expected drag from Simple Joys into next year, may not be fully offset by the planned shift toward core brands on Amazon and other key accounts. This could result in a smaller, less profitable wholesale mix that weighs on consolidated revenue and segment operating income.
• Planned structural changes, including the closure of about 150 North American stores and a roughly 15% reduction in office-based roles, while intended to simplify operations and save $45 million annually, carry execution risk. If sales transfer to e-commerce, remaining stores and wholesale partners underdelivers the historical 20% benchmark or if organizational complexity is not truly reduced, this could limit SG&A leverage and compress operating margins.
• The simultaneous push to reinvest savings into higher media and demand-creation spend, digital capabilities, AI-enabled design and cloud migration during a period of lower gross margins and heightened macro uncertainty creates a dependency on high marketing return and flawless execution in new formats and assortments. If these investments fail to consistently drive traffic, mix up to better and best product and sustain Gen Z customer growth, Carter's long-term earnings and free cash flow could fall short of expectations.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Carter's is $34.0, which represents up to two standard deviations above the consensus price target of $28.8. This valuation is based on what can be assumed as the expectations of Carter's's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $34.0, and the most bearish reporting a price target of just $25.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be $3.0 billion, earnings will come to $108.2 million, and it would be trading on a PE ratio of 16.4x, assuming you use a discount rate of 11.4%.
  
• Given the current share price of $33.06, the analyst price target of $34.0 is 2.8% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.