Tariffs And Store Closures Will Pressure Margins And Constrain Long Term Performance

Catalysts

About Carter's

Carter's designs, sources, markets and sells young children's apparel across retail, wholesale and international channels.

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

• Escalating global tariff regimes on apparel imports are structurally lifting Carter's effective duty rate into the high 30 percent range. Even with partial supplier mitigation, this risks permanently compressing gross margins and constraining earnings growth.
• Reliance on broad based price increases to offset higher tariffs and input costs, while competitors face the same pressures, raises the risk of unit volume erosion in a price sensitive young family demographic. This may limit sustainable revenue growth and potentially deleverage SG&A.
• Planned closure of roughly 150 North American stores and a pause in traditional new store expansion signal a shrinking physical footprint at a time when traffic is increasingly fragmented. This may cap top line growth and impair operating leverage despite some sales transfer to e commerce.
• Shifts in major digital platforms, including Amazon's evolving brand strategy, are undermining legacy exclusive label volume. Newer initiatives with core brands remain unproven at scale, creating execution risk for wholesale revenue and mix driven margin pressure.
• Large scale restructuring, headcount reduction of about 15 percent in office based roles and assortment rationalization are intended to drive $45 million of savings. If transformation and technology investments do not deliver productivity fast enough, Carter's may face structurally higher complexity per employee and weaker net margins.

Assumptions

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

• The bearish analysts are assuming Carter's's revenue will decrease by 1.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 3.1% today to 4.2% in 3 years time.
• The bearish analysts expect earnings to reach $115.5 million (and earnings per share of $3.26) by about December 2028, up from $86.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 11.4x on those 2028 earnings, down from 13.3x today. This future PE is lower than the current PE for the US Luxury industry at 19.9x.
• The bearish 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 11.58%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Carter's is seeing sustained positive comparable sales in U.S. Retail, with two consecutive quarters of comp growth and mid single digit AUR increases that consumers are accepting, which could support resilient revenue and stabilizing earnings despite tariff headwinds.
• Growth in higher tier, better and best assortments, coupled with improved regular price sell throughs and reduced clearance inventory, suggests stronger brand health and pricing power that may lift gross margin rate over time.
• Structural cost actions, including a 15 percent reduction in office based roles and an estimated 45 million dollars in annual productivity savings beginning in 2026, could more than offset part of the tariff burden and drive higher operating margin and net income.
• International momentum, with solid growth in Mexico, international partners and a high single digit operating margin, alongside a strategic shift on Amazon toward core Carter's brands, may create new long term growth vectors that support higher consolidated revenue and earnings.
• Increased and better targeted demand creation spend, growing unaided brand awareness and rising engagement from young Gen Z families indicate strengthening long term brand equity that could translate into higher traffic, market share gains and improved earnings power.

Valuation

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

• The assumed bearish price target for Carter's is $25.0, which represents up to two standard deviations below 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 more bearish 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 bearish analyst cohort, you'd need to believe that by 2028, revenues will be $2.7 billion, earnings will come to $115.5 million, and it would be trading on a PE ratio of 11.4x, assuming you use a discount rate of 11.6%.
  
• Given the current share price of $31.68, the analyst price target of $25.0 is 26.7% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
  
• 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.