Carters Inc (CRI) Q3 2026 Earnings Call Transcript

Welcome to Carter's third quarter fiscal 2026 earnings conference call. On the call are Sharon Price-John, Chief Executive Officer and President, Richard Westenberger, Chief Financial Officer, Allison Peterson, Chief Commercial Officer, and T.C. Webillard, Vice President of Investillations. Please note that today's call is being recorded. I'll now turn the call over to T.C. Webillard.

Thank you, and good morning, everyone. Earlier today, we issued two press releases, the announcement regarding the evolution of our leadership structure in our third quarter 2026 earnings. These releases, as well as the earnings presentation materials for today's call, are available on our Investor Relations website at ir.carters.com. Note that statements on today's call about items such as the company's expectations and plans are forward-looking statements. For a discussion of factors that could cause actual results to vary from those contained in the forward-looking statements, please see our most recent SEC filings, as well as the earnings release and presentation materials posted on our website. In these materials, you will also find reconciliations of various non-GAAP financial measurements referenced during this call.

After today's prepared remarks, I'm pleased to be here with you, and while this is my second earnings call with Carters, so for the entire period, during the last four months, I've continued to learn about this remarkable company, while spending time with our talented and dedicated team. I believe we have made significant progress analyzing, clarifying, and prioritizing potential strategic initiatives by using our rich data and consumer insights. All of this work reflects a vision to drive profitable sales by leveraging our core competencies and key assets, which include the strength and equity of our branded portfolio, the trusted relationship we have with our consumers, the stability of our balance sheet and cash flow, the significant breadth of our distribution, as well as the diversity and agility of our supply chain. I look forward to sharing more with you about our Go Forward plan after the first of the year. Now regarding the business at hand. Carter's third quarter results exceeded our outlook even as we navigated continued uncertainty and choppiness in the macroeconomic environment, which has resulted in some shifts in consumer confidence and spending. As we highlighted As we noted on our last call, we believed the delivery of our third quarter would largely hinge on the month of September. September plays an important role for us even beyond Labor Day and back to school because, as you may know, it is also known as Baby Month. This is because it is historically the largest birth month of the year, which in turn makes it historically one of our biggest months. With that in mind, even as we experienced some softness in July and August, which, as we mentioned in the last call, was partially driven by the pull forward prime day. Unfortunately, as early September rolled in, that softness persisted. While the unseasonably warm weather was certainly not helpful in the marketing of back to school apparel, we quickly refocused to drive efforts through strategic investments using marketing insights, crisp promotions, and targeted merchandising. This ultimately shifted our trend for both the month and the quarter, Reversing the negative traffic and delivering improvements across numerous metrics, including net sales, retail comps, and operating income, while simultaneously increasing brand engagement. Importantly, these efforts included the multi-touchpoint introduction of Carter's new comprehensive branding initiative, marking the first reimagination of the look, feel, and promise of the brand in a quarter century. This fresh approach was developed with proprietary consumer research and insight that was designed to appeal to the changing sensibilities of today's generation of new parents. However, the execution was balanced with the understanding that we must also maintain the appeal to multiple generations, including a more nostalgic grandparent cohort who are the main drivers of our important Gifting segment. So while I would not want us to trap or narrowly define Carter's as simply a heritage brand, it is without a doubt a brand that enjoys a rich history of delivering quality and value to seven generations of parents and children, which is how we have earned high marks for arguably the most important consumer metric. With that in mind, we landed on embracing an elevated brand promise more aligned with today's parenting intentions. To let every child's light shine. This is not just a tagline. This subtly shifts Carter's positioning to more purposely be about a broadened, rightful opportunity for us to be seen as a trusted partner for parents as they navigate the beautiful, sometimes precarious journey of childhood. Versus just being seen as an apparel brand or, based on the consumer feedback, a brand that had slowly lost some of its emotional connection and relevancy with today's moms. I also am happy to share that the brand promise of allowing kids to shine, which is reflected in the shooting star element featured in our new logo treatment, is not only resonating Working with consumers, it is also inspiring our entire organization from product to merchandising to promotion and was the guiding light, if you will, for the two key initiatives that positively impacted the outcome for the quarter. One, the consumer feedback that moms find a purchasing process confusing. It is supported with dedicated long-term merchandising and We have an informative signage that is expected to drive our share in sleepwear, which is one of the largest kids apparel categories. And two, we evolved our annual baby sale offering to a branded five-star baby event, focusing on core baby items, which not only delivered a margin accretive promotion for baby months, but helped expand consumer interest, sales, and quarterly share in our total baby offering. Importantly, even in the brief time since the new brand Since the branding launch, the results of the messaging have been impactful. In less than two months, our campaign has generated over 1.6 billion media impressions, a meaningful shift in positive sentiment across social media, higher unaided brand awareness, and increased purchase consideration including nearly 20% growth in branded search versus the time period before the launch. All of this, including welcomed cooler weather in the last weeks of the quarter, ultimately delivered strong sales and profitability in the month of September, which positively impacted our quarterly results. Although Richard and Allison will take you through more details of our performance, some financial highlights from the third quarter include net sales of $752 million were essentially flat compared to prior year, inclusive of the negative revenue impact from the net closure of more than 30 locations in our North American fleet as a part of our real estate rationalization. Adjusted operating income of $57 million, an increase of 45%, with adjusted operating margin expansion of 240 basis points, driven by healthy gross margin expansion, the benefits from our ongoing productivity improvements, as well as the closure of unprofitable store Aided by the team's delivery of double-digit retail comp growth for the month of September, despite the soft start. As noted, while there were some challenges, I believe this quarter's performance reflects well on the ongoing potential of the company in both broad-based and fundamental ways, ranging from the positive early campaign proof points noting our ability to quickly recapture brand affinity and simultaneously connect with multiple generations of caregivers, To seeing the organization's dedication and agility to turn short-term setbacks into quarter-impacting opportunities. And while agility is a critical skill that we should continue to nurture, our long-range goal is to be both agile while operating in an involved structure to support improved processes reflecting our stated strategic intent of becoming a more consumer-centric, brand-building, data-driven company That is focused on the consistent delivery of profitable growth and the creation of value for our shareholders. With that strategic intent in mind, we are pleased to have shared earlier today an evolved organizational structure designed to better align our leadership responsibilities with both longer-range planning and business opportunities. Briefly, this includes the previously vacant position of Chief Product Officer will be filled by Maria Gemzell, Who we will welcome early next year when she joins us from her most recent position at the Swedish headquarters of one of the world's leading fashion companies, H&M, after having held multiple senior positions in relevant areas. The Chief Marketing Officer role will be broadened to overtly incorporate a comprehensive branding function and retitled as Chief Brand Officer, led by Sarah Crockett, to reflect the importance of leveraging and monetizing our valued brand assets. The Chief Strategy Officer role will be expanded to Chief Strategy and Business Development Officer, led by Emily Everett, to create a sharper focus on identifying and driving incremental profitable business opportunities, while also consolidating our research and data areas to enable improved visibility to consumer and sales insights. We will be establishing a standalone role and conducting a search for a chief operating officer in light of the expected late first quarter 2027 retirement of Karen Smith, fly chain officer. We are creating a new chief commercial officer role to bring together the power and synergy of our more than 1,000-door vertical retail business, e-commerce channel, and 20,000 location wholesale division, which will be led by Allison Peterson. Who most recently has been successfully driving our North American retail organization. The overall goal is to effectively position the company across our brands, relationships, scale, and infrastructure to service today's multi-generational consumers with seamless shopping experiences that are enhanced by continuous engagement opportunities across Channels, ages, and markets to create an emotional connection and increase lifetime value. We believe this structure in conjunction with improved processes will be conducive to identifying synergies across consumer and market data, product innovation and design, brand and marketing initiatives, as well as merchandising and promotional planning with the goal of driving Prop strategy along with the anticipated organizational changes and the delivery of a solid third quarter. We also remain cognizant of the continued uncertainty in the macro market environment, especially with some of the softness we have seen in our fourth quarter-to-date sales. Considering this, as well as the historical tendency for amplified consumer concerns in election years, we have decided to take a prudent approach with a slight downward adjustment to our fourth quarter Order Revenue Outlook, which Richard will speak to in his remarks. Even with this adjustment, however, our full year 2026 numbers will continue to deliver, from an expectations perspective, improvements on numerous key metrics, including net sales growth, inclusive of last year's 53rd week and our store rationalization, a positive U.S. retail comp, and expansion of our operating market. The team, therefore, remains highly successfully delivering the year, especially given how overweight the impact of the fourth quarter and the holiday season are on both our top and bottom line. In the meantime, we also expect to continue to make progress on our growth strategy, improving our processes and identifying new opportunities, inclusive of the expansion of the total addressable Thank you, Sharon.

Good morning, everyone. We're looking forward to updating us and share our latest outlook for Q4 and how we think the year may finish up. We'll share what's working and where perhaps we have some reasons for caution. For the quarter, we achieved our net sales force. Our teams are continuing to do a good job navigating the various challenges We're grateful for their resilience and resourcefulness and their openness to change as we continue to transform and strengthen the company for the long term. And our outlook will track along with the presentation posted to the investor relations portion of our website. Turning to our presentation materials, on page two, we have our GAAP basis P&L. As Sharon mentioned, net sales in the third quarter were $752 million. Reported operating income was $56 million, and reported earnings per share were $1 compared to $0.32, The first nine months of the year, on year-to-date net sales of more than $2 billion, reported operating income was $224 million, as well as the impact of several other non-recurring charges, $0.07 compared to $0.75 in 2025. On the following page, we've summarized our non-GAAP adjustments. In the third quarter, we recorded approximately $1 million in charges and $30 million in charges year-to-date related to costs associated with leadership transition and litigation. We have a quarter in year-to-date adjustments primarily related to operating model improvement costs, organizational restaurant, and adjusted basis, which excludes these unusual items. As mentioned, our Q3 net sales were down less than 1% versus last year. Year-over-year in our U.S. retail segment, down in U.S. wholesale, adjusted gross margin expanded 200 basis points in Q3. The improvement in gross margin was single digits, while units in U.S. retail were up low single digits over last year. And we also improved realized pricing in our U.S. Wholesale and Wholesale Trends in $3 million in marketing, and year-over-year inflation are actually flat with the prior year, and we've achieved 150 basis points of leverage. Basis on roughly comparable sales in the third quarter, we achieved 30 basis points of SG&A leverage. It was $57 million at an adjusted operating margin of our senior notes. The rate this year was the result of a higher proportion of U.S.-based income, which includes currently 23%. To the bottom line, third quarter adjusted earnings per share, a increase of nearly 40% Thank you, Richard.

I'm thrilled to be stepping into this expanded role of chief commercial officer at such an exciting time for our business. The structure we announced today creates an important opportunity to build on our strong foundation, accelerate growth, and strengthen our position as the market leader. Together, we plan to advance our go-to-market strategy, deepen our connections with customers and consumers, and deliver elevated experiences at every touchpoint. I believe in our ability to translate these opportunities into sustained growth, driving meaningful value for our business. Now, turning to our U.S. retail segment results, third quarter net sales were comparable to prior year, while operating profit nearly doubled. Higher realized pricing and the benefits from our Our productivity initiatives, including store closures, drove a 250 basis point increase in our operating margin for the quarter. Comparable retail sales increased 0.4% over last year, with AUR up low single digits. This built on last year's 2% comp growth and mid-single digit AUR increase. For the quarter, units were down low single digits versus prior year. We saw continued growth in our baby and toddler business, with our most important baby segment delivering its eighth consecutive quarter of comp sales growth, driven by destination categories like bodysuits and sleepwear. Our older kid business was slightly down versus last year. Performance across both stores and e-commerce was comparable to prior year. We saw continued strength in average transactions, driven by growth in both AUR and UPTs. While traffic continues to be strong on a two-year basis, and we're pleased with the returns of our paid media investments, traffic decelerated from Q2 due to uneven product acceptance of our older kids' back-to-school seasonal assortment. Additionally, we saw a softening of traffic to our stores as the average consumer continued to face higher gas prices as well as other inflationary pressures, a trend that is in line with other reported retail traffic trends in the industry. As Sharon mentioned, Q3 sales were expected to be weighted to the month of September, and that's exactly how the quarter unfolded. In July, comps were largely on plan, reflecting typical seasonal clearance activity. August trends were weaker than plan as warmer weather impacted much of the U.S. Although key back-to-school categories like denim and uniform showed strength, our older kids' seasonal assortment fell short of our expectations as consumers were being more strategic with their spending and delaying purchases closer to need, a trend we believe has continued into the fourth quarter. While Labor Day was softer than expected, as reported across much of the retail industry, we quickly pivoted our marketing and merchandising efforts from focusing on the entire collection to where now key items that were resonating with the consumer and saw the back-to-school business rebound. Knowing September was a must-win month, we also positioned the Carters brand to resonate with new and existing families in a differentiated way. We took this important commercial time frame to lean into our most iconic baby products and create relevancy with the next generation of families. Through elevated storytelling, updated merchandising, personalized experiences, and compelling value, September comps were up double digits and exceeded our plan. During this time frame, we saw outsized growth in our baby segment, where we hold the number one market share position and acquired new consumers to the brand, including Gen Z. Another driver of our strong September performance was the launch of our new branding campaign, which can be seen on page 8. For the first time in 25 years, we reimagined the Carters brand. As you can see, the brand has a new look and feel, a new logo, and an elevated brand promise. Let every child's light shine. On page 9, you can see some of the other ways we are bringing the new Carters branding to life. Our intention is to increase the appeal and relevance of this great brand to a new generation of parents while maintaining a nod to Carter's rich, 160-year heritage. While this is a multi-year strategy, we are encouraged with the early results as unaided awareness and consideration are increasing. Engagement is also meaningfully up across our website and social media platforms, signaling that the content is resonating with our target consumers. We'll continue to build on our momentum with new brand moments in Q4. As we move through the key holiday period, turning to page 10, we have reimagined the way consumers shop sleepwear, launching our stellar sleep shop featuring our Not-So-Scary Monsters collection. We saw a big opportunity to gain share in the important sleepwear category and connect with a new generation of consumers through new products, updated merchandising, and enhanced marketing. This category, which historically generates a high lifetime value, delivered double-digit unit and dollar sales growth in the quarter. We expanded the role Carters plays in sleep by moving beyond product and into bedtime routines as a way to keep Carters top of mind and be of service to our consumers. In Q3, we launched our free Bedtime Monster Scanner as part of the Carters app to help parents and kids quell the anxiety we know is associated with the bedtime routine. Not only did we see great adoption within the app, but it drove double-digit conversion improvements to users who engaged with this feature. Finding new ways to expand the role Carters can play in families' lives continues to be a focus for us as we elevate our brands in the minds of our consumers. Turning to the performance of our U.S. wholesale segment on page 11. Third quarter net sales for our wholesale segment decreased 4% versus prior year, which was better than expected driven by earlier demand for fall products from key customers. As many of you know, our wholesale business can vary quarter to quarter due to shipment timing, and that has This has certainly been the case this year. On a year-to-date basis through Q3, net sales are up approximately 2% over prior year. For the third quarter, pricing increased over prior year due in part to higher product costs. However, this is more than offset by a decline in units. Sales of our exclusive brands decreased mid-single digits versus last year in the quarter, driven by earlier fall shipments that benefited our Q2 results. Year-to-date exclusive brand sales are up high single digits over last year, driven by Carter's Child of Mine and Just One You. Wholesale operating profit for the third quarter increased 11% over a prior year, and operating margin expanded 230 basis points. From a margin standpoint, higher realized pricing, favorable customer mix, and productivity initiatives more than offset higher tariff and product costs. I'll now turn the call back to Richard. ...outside

the United States continued to perform well in the third quarter. National net sales increased 4% over last year with Canada, Mexico. In Canada, the largest component, which was led by our stores, our team in Mexico drove a nice lift in units per transaction through some creative new merchandising and promotional initiatives, which resonated well with consumers in the quarter. From new store openings, in the first nine months, we've opened six new stores in Mexico. We continue to see strong momentum in the performance of these new store investments in this market. 28% over last year to $12 million, and segment operating margin increased. The improved profitability was driven by with significant liquidity, including cash on hand and short-term investments of over $525 million. The great position at quarter-end was a bit of port congestion and container availability issues. The options have not had a meaningful impact on the business, but our supply chain team is monitoring this. To date, we've generated operating cash flow of more than $100 million compared, including lower inventory, $72 million versus negative free cash flow of nearly $180 million in the first nine months of last year, first nine months of the year. Balance sheet and free cash flow generation are differentiating and strategic advantages. Our adjusted PNN information has provided quarters net sales increased 4% with growth in all three of our business segments. Q3 year-to-date adjusted operating and adjusted EPS, and we will recall the difference between operating income growth and EPS growth, reflected higher net Get interest expense from last year's refinancing of our senior notes. Look, beginning with the fourth quarter on page 16, not just in retail, but also in wholesale, where we have significant shipments planned, including products for the upcoming spring 2027 selling. Historically been the largest month of the fourth quarter, and of the entire year for that matter. So we have some big weeks and months ahead of us. Our teams are focused on finishing the year strong, continuing the progress we've achieved this year. In the discussion of Q3 results, we have to acknowledge some slowing of demand relative for more moderate demand than in our previous forecast. U.S. retail business to reflect current trends. In U.S. wholesale, we've also moderated our forecast. We've seen a compression in the Q4 shopping period as consumers shopped much closer to the holidays. This has resulted in a corresponding acceleration in our business in the last six weeks or so of the year. It seems possible we may see a similar this year as well, approximately $37 million in net sales, $30 million to $880 million, or mid-single-digit lower sales than last year's fourth quarter, using the midpoint of the $74 million to $910 million, approximately 1% of the year's 53rd week. Over the past few quarters, we've been able to offset lower-than-planned demand and additional promotional cadence to manage through some underperforming products, full-year adjusted operating income growth in the low single-digit to mid-single digits to lowest operating income growth, and lower adjusted EPS is the higher. Even with the moderated outlook for the top-line, achievement of our forecast would cap a good year for Carter's closure of nearly 40 and posting meaningful improvements. Summarized here on page 17, we expect to have a good year on cash flow. of $240 million to $250 million, reflecting the net tariff recovery and favorable movements in working capital. As we finish the year, risks we're monitoring include consumer sentiment and spending, given the ongoing pressures of persistent inflation, including the price of gas. We've also seen some impact on demand in past election cycles, including related inflation and the cost of media, so the upcoming midterms are on our radar. Given geopolitical If possible, there may be some additional disruption to the supply chain and the delivery of product. And finally, we'll be carefully monitoring and reacting to the overall promotional intensity of the market. With these remarks, we're ready to take your questions.

Thank you, ladies and gentlemen. To ask a question at this time, you will need to press star one-one on your telephone and wait for your name to be announced. To withdraw your question, simply press star one-one again. As I remind you, in the consideration of time, please limit yourself to one question and one follow-up. Please stand by while we compile to any of Now, first question coming from the line of JSO with UBS, Yolanus Malvin.

Great. Thank you so much. Sharon, as you've had a chance to really dig into the business over the last quarter, can you just maybe just talk about how you feel about the interplay between the wholesale channel for Carters and the U.S. retail channel? Is there one channel you need to prioritize, and what's the best way you think you have to improve the traffic into the U.S. retail stores? Thank you.

Yeah, thanks, Jason. That really leads back to some of the organizational changes that we just spoke about. You just heard Allison speak, and she's been leading very strong results over the quarters at this point in U.S. retail, And we also saw an opportunity, therefore, to combine the entire commercial area under her as the chief commercial officer, inclusive of both wholesale, retail, and then e-comm. So the first thing that I would note is what we see is an opportunity to drive synergy over that entire area, recognizing trends more quickly, recognizing consumer insights, pushing them across all the different areas. And then working much closely with now a branded organization, not just a marketing organization, to create proper segmentation on how consumers see, particularly the Carter's brand, from our own retail channels, through our partners, through our exclusive brands, with some of our biggest customers. And that segmentation is going to be critical for us to maintain a position that separates us from our own inner brands, including Little Planet or, as I say, some of the exclusive brands that we have across some of our largest retailers and the experience that you would have at Carter. So in a Carter store, you'll likely see us to start working toward, as we've mentioned, higher engagement experiences to drive traffic with not only an elevated brand promise, as we spent some time on, but then delivering on that promise through more integrated solutions, like I just mentioned on the Stellar Sleep Program, where we also had a free app for the Monster Scanner, which everybody needs, by the way. If you don't have a monster scanner, you should get it. I haven't found a monster yet. We have no monsters reported. But it helps integrate us into the bedtime process. This is just a singular example of how Carter's, as I mentioned, is elevating itself beyond, quote, unquote, an apparel brand. We have every right to do that with 160 years of heritage and the highest trust numbers in the space. So that's the story we're looking through. We're looking at testing and management and insights on how to arrange that store in a way that highlights our businesses, our brands, as well as gives us that permission to stretch into the older consumer, which we have also mentioned, and the gift-giving grandma, grandpa. So look for the Carter's business, and it'll take us a minute. We have over 1,000 locations, but I think you're going to start to see a different kind of approach on the integration between e-com and the stores and the elevation of the experience inside of a Carter's store to drive that lifetime value. Now, the good thing about that, it's a little bit of a long answer, but that was a very mentioned 20,000 doors that we have. And so we see that that kind of approach then can be executed in partnership with our retailers, sort of like one partner at a time, building that relationship. And that partnership more than a buyer-buyee kind of relationship or purchasing-buying kind of relationship to assure that the company that owns the number one market share in baby with such an iconic brand is positioned in a way that it should be in every location where a consumer can find children's apparel.

That's helpful. If I can follow up, you announced a new organizational structure. I'm interested in the position of chief strategy and business development officer. Can you just talk about, I know it's early, but just some high-level ideas that you may have for finding new revenue streams for cars. I mean, you touched on becoming a bigger part of the sleep time, I think, moment with parents and children. And just give us a sense. Where can this brand go beyond, you know, what we're used to seeing from just, you know, baby and young children's apparel?

Well, first, thank you for that, because I think with information about what are we doing with it, how are we executing, how are we pushing it across the organization to find continued value and new opportunities? Yes, Seller Sleep is one of those. As I noted, it was proprietary research that provided the insights that were confusing, and we're like, wow, first of all, as a very high, whatever might be the challenge for, generally going to stick with you, right? We've come up with, of course, we've also spoken with this, to our institution being pushed out across numerous retail outlets, where we've stripped today and have spoken to some of you guys at the most recent Goldman Conference. We're looking at the purposeful expansion of the addressable market across three different vectors. That first vector is aging up the consumer. And I know you've heard this over and over again, but we have a lot more data now and a lot more insights about how to do that in a meaningful way, not just from design and development, but all the way through how our stores look and how engaging those stores are for a – and when I say an older consumer, I'm talking about a 6-, 7-, 8-, 9-, 10-year-old, right? So don't get too old on me, but that type of consumer, as well as aging up the, excuse me, pushing up the socioeconomic strata, which we've been able to prove our ability to do so with our sub-brand Little Planet. So while early, it's showing us that to be engaged and involved in a sub-brand of Carter's for a much more elevated look, feel, and approach with a bigger promise that's linked to sort of a more of an international approach. We're already a global brand. We have just not on how we're rolling out and we have a lot of good touch points and a lot of good success in some of the markets that we are looking at an asset light approach to a very systematic execution as we looked for that. And in fact, one of the reasons we've created this role beyond pulling together all of our consumer insights, which will drive this across many of our categories and consumers, The international team will report into the evolving in that area.

Thank you. Our next question in queue coming from the line of Kelly Crago with BMO Capital Market. Sion is now open.

Hi. Thank you for taking our question. I just want to dig into the U.S. wholesale business a little further. You're guiding it down quite Quite meaningfully versus prior expectations in the fourth quarter. So, you know, in last quarter, you started very positive on the retail reception of your product and pricing. So just curious if you could dig into what's really changed there and provide us with any sort of color on how you are seeing order books shaping up for U.S. wholesale into next Next year. And then secondly, on pricing, obviously taking a lot of price this year. Just curious what you're thinking on the pricing dynamics into next year, given some of the cost headwinds we're anticipating. Thanks.

Hi, Kelly. I'll start and my colleagues may want to add some thoughts. As it relates to the revision in revenue outlook, I would say the majority of that relates more to the replenishment demand, which is a component of the wholesale revenue stream. So the more significant component would be U.S. retail. Wholesale, on balance, there's lots of moving pieces, as Allison said in her remarks. And so we had some volume that had been previously planned for the fourth quarter that moved forward and benefited Q3. That happens all the time in this business. I think if you look at our revised forecast, it implies kind of flattished it down slightly for the full year segment results for wholesale. So I think we're going to cap a good year in wholesale overall. We had good demand for the spring 2027. The challenge with that is not all that comes next season. So we actually have more of that going in the fourth quarter. Spring pre-ships are up about 30% in the fourth quarter. That will benefit the fourth quarter versus early next year. We haven't done sell-ins yet for fall. That will take place as we exit the year here. So on our next call, we'll probably have better line of sight to that.

Thank you. Our next question in queue coming from the lineup. I'm Boricah with Wells Fargo. Your line is now open.

Hey, guys. Good morning. Was hoping you could talk about AUR and gross margins specifically for the fourth quarter, what your expectation is, and how you kind of see the trajectory of AUR into next year?

Sure. Again, I'll start out there. So we had a nice lift in AUR in the third quarter. I think that's a testament to how the retail team came together and developed that compelling late September promotional drive, which was a creative overall to margins and profitability. So we do have pricing planned up. I'd say low-single-digit in the U.S. retail business in what we achieved in Q3, but Q4 is naturally a bit more of a promotional period than Q3 is, so to maintain those reasonably well. I think we've sold in, at this point, spring 2027 to sell in the fall assortment for the second half of the year.

We noted in the remarks, we recognized and actually shared in the last call the importance of September and had that soft start in Labor Day, which apparently from some of our research was reflected in a lot of different sectors of the marketplace. But I'm going to come back with a double-digit comp in September that clearly positively impacted the quarter overall, and it was a very scalpel approach to the way they attached this opportunity, and ultimately, I think there was a single-digit AUR increase in the quarter, and that was on top of a mid-single-digit AUR increase last year. So the teams are definitely taking price where they can, and that is even with us considering, you know, some of the product headwinds that we talked about. So we are really seeing the teams lean in in a very strong way and taking price and realizing price in our destination categories, in our most important baby business, in our sleep business, and we're really seeing the benefits of that flow through to our gross margin, as Richard mentioned.

Got it. And as a follow-up, on the gross margins, can you just quantify what was the lower tariff rate benefit to gross margin in the third quarter, and what kind of a benefit do you have baked in on the fourth quarter, just so we can kind of separate the core versus the tariff rate noise?

Yeah, I would say in the third quarter gross margin expanded, expansion had to do with just higher mix in fourth quarter from tariffs. From memory, it's 10 or more.

Thank you. Our next question in the queue, coming from the lineup, Jim Cartier with Manus Crespi Hard & Company, Yolanus Nelson.

Good morning. Thanks for taking my question. I want to talk about the marketing spend. How does this year's marketing spend compare to years past? Given the strong response that you've seen to the initial brand relaunch, is there an opportunity in the near term to lean into marketing in a bigger way to drive the business? And then where do you see kind of total marketing spend going over time?

It's clearly been an area of investment, of course, Jim, and one that we're really indicated that we are $20 million more on demand creation this year versus – but paid media in particular has proven to be – one of the things I like about our colleagues in marketing, they're very rigorous in measuring the return on that investment. So we'll continue to do that, and I don't think we're at the point of inefficiency yet with spending.

I would also add that our marketing investment is intentionally balanced across really two priorities, which is delivering results today while investing in the long-term relevance of our brands. And you'll see that show up in the work we're doing around reimagining the brands, and that is a strategy that we expect to pay off over a longer-term horizon. We do continue to see, as Richard mentioned, marketing contribution to retail sales grow year over year, and our increased spend is proving effective and efficient, and although we are starting to feel, as the team mentioned, more pressure in our efficiency due to rising media costs, we're very pleased with the efficiencies we're seeing and the effectiveness we're seeing in terms of marketing's contribution to our total business.

Yeah, and I would want to note that the change of the Chief Marketing Officer to Chief Branded Officer is not just in name. It's a very important concept of how we feel we can drive value across the organization with our iconic brand, and that combination of upper funnel marketing with a branded engagement to push us up in a top-of-mind awareness and a high to drive that affinity Promotions and occasionally, you know, marking down versus marketing in its most specific approach is a very dynamic way to drive business over time. And I hope to see much more of that as we move forward, particularly with the positive impact of this branded initiative that we've launched. So while our marketing is a percent of sales, as Richard mentioned, has been comparatively low and, frankly, still is comparatively low to like companies, we will likely, as long as that ROI maintains some consistency, we will likely see a greater expense in marketing.

Thank you. Our next question in queue coming from the lineup, John Keeper with Goldman Sachs, Yelena Smelvin.

Hey, good morning, everybody. Thank you for the question. Just a quick bookkeeping to start. If you could give us the quarter-to-day comp, please.

It's down, John. We're actually going to move away from providing the inter-quarter data point. We had a lot of lessons in this last quarter about how that can move around as you get to the higher running down month today.

Okay, totally. Thank you. And then if we could just talk about SG&A a bit and maybe – actually, let's start with gross margin. If you could give us a picture of what you're expecting in terms of freight and cotton and how the tariff laps should influence margins next year.

Yeah, so I'll start near end. Gross margin for the fourth quarter, we are expecting expansion again year over year in Q4, not to the same extent that we saw in Q3. You don't have quite the same mixed benefit. You do get a bit more of a tariff benefit in Q4, as I just mentioned. Cotton is clearly up about 20%. Just a reminder, we don't time continuum on our behalf. An issue for our second half product costing in 2027. At this point, we've costed our assortments for the first part of next year. So I don't expect cotton itself is a huge inflationary pressure. I do think we're seeing other sources of inflation in transportation costs with the cost of oil being what it is. This year, we're probably incurring another $4 or $5 million of incremental freight surcharges just from our carriers. To probably be more specific on 2027, I do think that we're seeing a trend towards inflation in our product input costs, probably more second-half phenomenon. And then tariffs, your question, I think that's anybody's guess. I don't think we're out of the woods as it relates to tariffs. The administration clearly has a preference for this as a policy matter. I think the more recent tariffs have obviously been much more benign than the IEPA-level tariffs, but personal opinion is we're…

Thank you. And our last questioner will come from the line of Tom Niggins with Needham & Company. Your line is now open.

Hey, good morning, everyone. Thanks for taking my question. I want to ask about the leadership changes and obviously a lot of folks moving into new roles and things like that. Sharon, can you give us any sort of timeline as to how long it will take for the new leadership structure to really impact the business and to kind of get operating at the level that you're hoping to see?

Yeah, thanks for that. This is a cheap product vacant, and the time period of that vacancy has been since August of last year, not August of 2025. So when you think about the kind of coming, I mean, like H&M, who's managed across multiple, that could have quite a strong impact on the way we think about the business. And in regards to many of the strategic initiatives that I've mentioned, particularly expansion of the addressable market. So we expect her to be able to start in January-ish, after the first of the year. We'll see. And the other opportunity is with the Chief Operations Officer, which we will be searching for, so that's really hard to say. But I'm quite hopeful that a company like Carter's with a Fortune 1000 organization with 160 years of history and iconic brands in a situation where we have so much opportunity ahead of us, I certainly hope that that will attract the top talent, as I have in other areas. So we'll be done of creating more synergy across the organization and pulling up consumer insights and brand earlier into the process of the development of our products and driving insights across the entire organization all the way to the execution of the stores. The strategic insights of that will happen fairly rapidly, I would assume, but the ongoing execution of that will hit the market in different phases as we move forward. Even with that note that we have already, in the first four months, launched an entirely new brand look, feel, and logo for Carters, which we've already driven 101.6 and a very positive response from the consumer. So some things can go fast and some things might take a minute.

Very helpful, and if I could squeeze one in before the call ends here. There was a comment about monitoring and reacting to the promotions in the marketplace. Have you seen anything from the competitors out there that gives you any concern heading into the holidays?

Thank you for the question. You know, we saw competitors raise prices on fall products until Labor Day when they pivoted to deeper discounts and increased their promotionality for the month, kind of given what Sharon spoke to, which is a challenging Labor Day period, which we perceive happened across the market. Coming out of September, we have seen competitors pull back on promotions, but we are absolutely anticipating the promotional environment will intensify with heavy discounting in November and December, as many brands and retailers are talking about taking their tariff relief and potentially repurposing it back into price. So we have considered and contemplated a more aggressive promotional environment in our forecast.

Thank you.

And that being said, just recall the last two months of the year are the most important months, constantly monitoring the competitive environment and the consumer. But as Richard noted earlier, this compressed timeline as we approach holidays is something to just keep in mind as we have positive results across all of the key metrics. And with that, we'd like to thank you very much for Thank you for joining us today and look forward to updating you and our progress in the next call.

Thank you, ladies and gentlemen, at the FNWAC conference for today. Thank you for your participation. You may now disconnect.