Welcome to Carter's Second Quarter Fiscal 2026 Earnings Conference Call. On the call are Sharon Price-John, Chief Executive Officer and President, Richard Westenberg, Chief Financial Officer and Chief Operating Officer, Allison Peterson, Chief Retail and Digital Officer, and T.C. Robillard, Vice President, Investor Relations. Please note that today's call is being recorded. I'll now turn the call over to T.C. Robillard.
Thank you. Good morning, everyone. We issued our second quarter 2026 earnings release earlier today. The release and 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, we will take questions as time allows. I will now turn the call over to Sharon.
Thank you, TC. Good morning, everyone, and welcome. I'm delighted to be here with you. The team did a great job in the second quarter, delivering solid results against the backdrop of a complex macroeconomic environment. Richard and Allison will walk you through our performance in more detail, but at a high level, we exceeded our second quarter outlook. Net sales grew for the third consecutive quarter, and adjusted operating profit increased 54%. We continued our positive momentum in U.S. retail, delivering comparable sales growth of 5%. And we continue to add new consumers, including the important Gen Z demographics, which grew mid-teens in the quarter. Having spent essentially my entire career in the children's market, I have enormous respect for Carters. I want to thank the team and the board, not only for the opportunity to lead this historic company to new heights, but for the foundational work that's been done, including research, strategic evaluations, and key transformational initiatives. While there is still more to be done as we move forward, this has allowed me to hit the ground running. In fact, over the past six weeks, I've been digging into the business and getting to know the key leaders, and it's strengthened my conviction about what initially attracted me to this role. Namely, that Carter's is a well-established, diversified company with a solid foundation for expansion. And in my view, we have significant opportunities that can contribute to generating consistent profitable growth. These opportunities include a number of powerful assets that I believe we can further leverage to continue to elevate the business as well as expand the brand promise and footprint, which in turn should create value and generate returns. These include iconic brands, great consumers, the leading market share position, a multi-channel business model. Touching on each of these briefly, first we have a number of the strongest brands in our space and a deep heritage that's been woven into the fabric of families lives for generations. We also have additions to our brand family that are filling other consumer needs such as Little Planet, which focuses on natural, sustainable fabrics. Second, we hold a unique position in their lives, sitting at the intersection of caregivers and children, while being present for every single moment through their early years. Being able to serve both moms and kids is a special responsibility and we do not take. When we can deliver products and exceptional experiences that improve their life, we create an emotional bond between our brands and our consumers, including the most important segment, essentially from their very first day. We begin our all-important journey with our families that often lasts a lifetime, even evolving into a multi-generational relationship when grandparents become gift givers. The business model has diverse revenue streams, including an emerging global footprint, multiple brand and product segments, as well as extraordinary distribution breadth. Families can buy our products at over 20,000 global points of presence that span multiple consumer tiers from department stores to mass stores to our own omni-channel solution consisting of our high-touch specialty retail stores and carters.com. Being available where, when, and how our consumers want to shop is an important competitive advantage. And finally, we have a lot of talented people located around the world at Carter, to our distribution centers, to our associates in the field. And we have a culture that's passionate about equally as important. There is a general recognition and willingness internally of the need to evolve as an organization. So we can meet our consumers where they are today, as well as adapt when their needs change. You can see this is a powerful confluence. As I mentioned earlier, this is what attracted me to Carters, and it's what gives me. At the simplest level, our objective is to deliver consistent, profitable growth. And while early, we intend to start with the following tenets. We will become a company that is consumer-centric and data-driven, recognizing that we have multiple consumers, from the caregiver to the gift giver and the child. This will be the heart of everything we do, from designing products to providing engaging, memorable shopping experiences to creating impactful marketing relationships and leveraging our asset recognition and important trust of our portfolio, especially for our namesake brand Carters. Through proper brand building, we can strengthen our relationship with consumers, increase our market share, optimize our total addressable market, and improve our profitability. To do this, we will need to consistently evolve to meet the needs of the marketplace as change is happening even faster. Given we are the market leader, it is fitting that we also lead change within our industry. In closing, it's an honor to be leading Carter's through this next chapter of In It's Story. I believe we have significant opportunities to unlock value, drive profitable growth, deliver top tier to getting to know each of you over the coming months.
Leadership team and reporting that Sharon has jumped in with both feet and is off to a strong start. Good morning everyone. I want to begin by also thanking our thousandthment and teamwork. Over the last 18 months, a period marked by a range of challenges and a significant amount of change, our team has remained focused on execution, has helped us stabilize the business, return to top-line growth, and deliver another quarter. As Sharon has already experienced, our team exhibits tremendous passion and dedication. We will give you a recap of our success, which exceeded our previous outlook. Overall, we delivered growth in approximately $130 million of previously paid tariffs in a continued challenging environment, while amid this backdrop for the first half of the year, proven resilient in the first six months of the year, with total sales up about 2 percent. In this same time period, our overall share of the age 0 to 10 market has remained stable, with share gains in baby and kid, offset by a decline in toddler. In discussing our second quarter performance and our outlook, our comments this morning will track along with the presentation posted to the investor relations portion of our website. On page two, we have our GAAP basis P&L, $15 million. Reported operating income was $140 million, inclusive of the tariff recoveries, which I'll discuss in a moment. And our reported earnings per share were $2.87. Basis P&L is on page three. First half net sales per year to $1.3 billion. Reported operating income for the first half was $168 million, which included the tariff recovery, as well as other non-recurring charges. First half reported EPS was $3.26 in 2025. On the following page, we've summarized our non-GAAP adjustments. We had no adjustments to our reported results in the first quarter. A significant adjustment to our reported results in Q2 related to our recovery. In the second quarter, we received $132 million back from the U.S. government. $128 million benefited gross profit, and $4 million was recorded as interest income. These tariff recoveries and interest or taxable tax revision in our Q2 reported results, roughly $30 million, which we will pay in September. We also recorded approximately $6 million in charges in the quarter, the majority of which related to our recent leadership transition and leadership transition costs, which reduced our report. Speak to our performance on an adjusted basis, which excludes these unusual items. On page five, we have our Q2 net sales of $615 million represented growth of $30 million, or 5%, over-last margin on these sales was 46.3%, a decrease of 180 basis points compared to prior year. Historical tariff baseline of $28 million. Investments in product make also pressure. These headwinds were partially offset by increased pricing as well as tariff mitigation actions and productivity in the mid single digits and units were up low single digits. In U.S. retail, second quarter AURs were comp, we improved realized pricing in our U.S. wholesale and international sector. $70 million decreased 1% for activity initiatives, including store closures, more than offset incremental spend on marketing and year-over-year inflationary pressures in wages and rent. On a rate basis, we achieved nearly 300 basis points of SG&A leverage. In the quarter, adjusted operating income increased 54% to $18 million, and adjusted operating margin increased 90 basis points to 2.9%. percent. More spending led to this operating income performance, which was above our previous outlook. Below the line, net interest and other expenses increased over prior year, driven by higher interest costs from last year's debt refinancing and a foreign exchange loss due to the strengthening of the U.S. dollar since the end. It was 23 percent compared to 74 percent last year. This year's tax rate was largely driven by our tariff refunds, which were taxable, as I mentioned. This Q2 effective tax rate was not comparable to last year's rate, which was negatively impacted by stock-based compensation and a lower level of pre-tech, approximately 23%. All of this netted to second quarter adjusted earnings per share of 26 cents, an increase of 53% over last year's 17. Quarter business segment results is on page 6. Second quarter net sales grew in each of our segments, with U.S. wholesale contributing the majority of year-over-year growth. Our year-over-year expansion and operating income in the quarter was pretty evenly driven by wholesale and international. That's beginning on page 7.
Thank you, Richard. Our U.S. retail business continued its momentum, delivering another strong performance in the second quarter. Total U.S. retail net sales grew 2% and operating profit increased over prior year. We delivered sales growth across all of our core age segments with our baby products continuing to be the primary driver. Comparable retail sales increased 5% versus last year, the fifth consecutive quarter of comp sales growth. Comps grew in both channels during the quarter. For the first half, comp sales increased 8% over last year. Similar to the first quarter, we saw the consumer focus on value. Where we delivered the right balance of newness, style, and quality at a great price, the consumer responded well. We continued to see good returns on our marketing investments. That said, we did see a divergence in channel performance relative to Q1. Within the e-com channel, growth accelerated in the quarter. We believe this is a combination of our outsized opportunity to win with the consumer online, as well as the benefits of our investments, which I'll touch on in a moment. In our stores, traffic was comparable to prior year. While this flowed from the first quarter, we believe our marketing investments are working as our traffic performance outpaced the industry and accelerated on a two-year basis. With respect to our comp performance, the growth in the second quarter was driven by units as AUR was comparable to prior year. We experienced higher clearance in the quarter related to soft performance of select seasonal product offerings which weighed on AUR and gross margin. As we enter the second half of the year, we're comfortable with our inventory position having cleared through these seasonal goods. Conversely, we are encouraged by the consumer response and our success in driving higher realized pricing in our key destination categories within our baby business. On the following page, we highlight some recent enhancements in our e-commerce experience, which is a key part of our omnichannel portfolio. As I mentioned earlier, e-com growth accelerated in the second quarter, building on the momentum we've seen over the past several quarters. Econ comp sales increased double digits, our fourth consecutive quarter of growth. This growth was driven by strong traffic and was profitable. Our marketing investments have been very effective at bringing Gen Z families to our digital platforms. They are engaging with the website and app and they are also gravitating to our higher AUR products. We're benefiting from the investments we've made in our platform and user experience, which are delivering improvements in the consumer journey and increased site engagement. We've launched several new features, including enhanced outfitting functionality, AI-optimized product reviews, and password list login. For consumers that engage with these features, we're seeing increased visits, higher conversion, and more units per transaction. We've also enhanced the user experience with a new and improved AI consumer chat. This functionality now manages one-third of our contacts, allowing us to reinvest the productivity gains into premium, high-touch care for our best consumers. We're pleased with the response to these new capabilities and the returns they're driving. Turning to page 9. Over the first half of the year, we continue to see our marketing performance improve, driving measurable gains in marketing's contribution to the business. Our marketing investments are intentionally balanced to drive near-term performance while strengthening the long-term relevance of our brands. As I mentioned earlier, we are seeing the success of these efforts increasing customer acquisition through the partnerships we choose, the cultural moments we engage in, and the stories we tell. A great example is our collaboration with Umbro, which we launched during the second quarter to participate in the excitement surrounding the world cup this initiative was integrated throughout all of our consumer touch points and included activations like jersey personal evasion personalization events in world cup markets products associated with this cultural moment drove strong engagement with our brand and over penetrated with gen z as well as the growing multicultural market those who purchased umbro products bought higher aur items and added more units to their transaction As we move into the back half, we are excited about Q3 for several reasons. As we have previously shared, we will continue to invest in marketing given the strong returns we are seeing. This will help to increase our share of voice with the consumer. We are continuing to build new ways to improve the consumer experience across all of our And finally, we feel good about the way our assortment is positioned based on the current signals we are seeing in the business. For example, we will lean into our strength in baby, our position in opening price points, Oshkosh denim for back-to-school, and the importance of sleepwear that begins building in Q3 and increases in relevance throughout the back half of the year. I will now turn the call back to Richard.
Thank you, Allison. Turning to page 10, in U.S. wholesale, we had strong growth in the quarter. Net sales increased to 12% over last year, with growth in both AUR and units. These sales were higher than we had previously forecasted, with the upside largely driven by earlier demand for fall versus last year, driven by Carter's Child of Mine and Just One You. We also saw good growth in both Little Planet and our skip hop margin was roughly comparable. From a margin standpoint, higher realized pricing, tariff mitigation actions, and expense leverage essentially offset higher international net sales increased 3% over last year, which was also above the outlook we provided on our last currency exchange rates. on a constant currency basis, international segment net sales were... In the largest component of our international business, Canada, net sales increased 1% over prior... Movements and exchange rates, timing of shipments within the wholesale channel, and the benefit of new store... Essentially flat in Mexico in the quarter, Q2 comps were affected by the shift of Easter-related volume into March, and traffic slowed in late June, in part due to consumers focusing on the World Cup. Our year-to-date comp in Mexico is up 9%, and we've seen demand rebound strongly post-World Cup in July. International operating income increased 50% over last year to more than $5 million, while segment operating margin increased 180 basis points to $5 million. The improved profitability was driven by productivity savings as well as lower product costs, resulting from favorable changes in FX rates. The balance sheet is in very good shape, with cash on hand of over $650 million. Our cash balance was boosted by the receipt of the tariff recoveries, as mentioned earlier. year. We're projecting good liquidity over the balance of the year. Our cash balance is expected to decrease in coming months as we purchase inventory for the second half, pay taxes including those due on the tariff recoveries, and make the first accrued interest payment on the senior notes which we issued last year. Net inventories declined 7.78 million dollars. Inventory units were 9 percent lower at quarter end, and our inventory quality is strong heading into the second half of the year. We generated operating cash flow of over $200 million, compared to a use of cash of $8 million last year. This improved cash flow was driven to working capital, including a lower inventory balance, as well as favorable timing of interest payments. We've continued to return capital to shareholders in 2026 and have paid $18 million in dividends in the first half. Pages 12, adjusted P&L and segment results. This information is provided for your balance of the year beginning on page 15 of our materials. It's worth a reminder that fiscal change does not repeat this year. This additional week contributed an estimated $37 million in net sales. Plans for 2026 reflect growth in net sales and operating profit on top of this 53-week performance in the prior year. While there have been puts and takes relative to our expectations, we've had a good start overall to the end on the market environment in updating our outlook for Q3 and Q4. The second half has historically represented the majority of our annual sales and earnings, and we expect the balance of the year will be equally significant this year. The top line, we've narrowed our outlook for full-year net sales a bit, from low- to mid-single-digit growth previously. This revision reflects two-half wholesale demand will be a bit lighter than we had originally planned. Q2 wholesale sales included some pull-forward of sales initially planned to occur in the third quarter. Additionally, certain customers have adopted a more conservative outlook on second-half inventory commitments. Expecting full-year wholesale net sales growth in the low single-digit range, with growth in our flagship Carter's brand, wholesale brands, and skip high. We're still planning for improved year-over-year realized pricing in U.S. retail, which would build on the gains we've made in pricing, price resistance from consumers with an accompanying loss of unit velocity. We think it's prudent to plan for a more. We continue to plan for growth in U.S. retail with full-year sales up in the low single-digit range and full-year comparable sales up in the mid-single-digit. We aren't deep into false selling yet. We'll continue to read the business, evaluate our performance, and adjust accordingly. In international, our outlook for full-year net sales is unchanged at mid-single-digit As indicated in our press releases, adjusted operating income growth in the low to mid-single digits over two years. In maintaining our operating profit and our more modest outlook for second-half wholesale demand and retail AUR will be offset by additional news on the tariff front, the Section 122 tariffs, which implemented an incremental 10% above our historical tariff baseline compared to the previous IEPA tariffs. These Section 122 tariffs expired last Friday and were replaced with new Section 301 tariffs, which reflects an incremental 10% to 12.5% tariff above our historical baseline. If these new tariff rates remain unchanged on our balance of year imports and all other factors remain constant, we may have some upsides. It is possible the Administration, for instance, some of our sourcing countries are currently subject to ongoing Section 301 overcompensation. As we've discussed in the past, changes in tariff rates do not have an immediate impact on the P&L. Tariffs become part of inventory cost on the balance sheet and flow into cost of goods sold when items are sold. For interest income, based on our better than planned adjusted EPS outlook to a more modest decline of down high single digit to low double digits, as from our senior notes refinancing, will weigh on full year EPS. By approximately our net tariff recovery and an improved outlook for year-end inventory, we have increased our expectation for operating cash flow to a range of $230 to $240 million, only $50 million this year, mostly on enhancements to our distribution centers and on strategic technology initiatives. As summarized on page 6, approximately $750 million comparable with a year ago. Single digits, in part due to the earlier demand for fall product, which benefited this year's second quarter, growth in U.S. retail, and mid to high single digit growth in international Expansion, driven by a greater mix of higher margin U.S. retail sales and the anniversary of higher tariffs which began in the third quarter of 2025 adjusted operating income of approximately 50 million dollars compared to 39 million dollars a year ago and adjusted eps of approximately 85 cents compared to 74 cents in q3 last year it's worth noting that the historic the historical significance of september the majority of third quarter volume months of the year we expect that september will be similarly significant to this year's third quarter with our first half performance in the books and these updated guidance elements for q3 in the full year it's possible to To infer our assumptions for the fourth instance of the extra week for the 53rd week, our outlook implies low to mid-single-digit growth and consolidated net sales include the level of promotion, especially during the upcoming holiday season, the level of consumer sentiment, particularly in the context of and persistent inflation across many important consumer purchase categories. And with these remarks, we're ready to take your questions.
Ladies and gentlemen, we ask that you please limit yourself to one question and one follow-up. You may get back in the queue as time allows. Our first question for today comes from the line of Paul Leshway from Citi. Your question, please.
Hey, thanks, guys. First one, I wanted to understand the wholesale dynamic a little bit better. I'm curious just if you could help connect the dots between wholesale partners wanting product earlier and your comments, Richard, about them being more conservative. So if you could maybe just help with that. And then second, I wanted to understand just the tariff refund, what the accounting for that was. Was there a reduction in inventory that was tied to that tariff refund? I know that I saw in your slide that you had $18 million in inventory from higher tariffs. What was that $18 million from? Is that the 10% or was there still something in there in the inventory balance tied to AIPA tax?
Yeah, sure. The accounting did not reduce inventory since late February, a portion of year-over-year balance in inventory. As your question on wholesale, I would say in general a few things are at work. One was improved over the spring assortment, so we were encouraged by that. And given our broad businesses and their outlook for the second half, so it's not unusual for us to have some puts and takes in terms of demand. I think that's what we're seeing here. I feel good about the forward demand. Fall bookings were up year over year. Winter bookings were up even more than that. And then the demand for early spring 27 demand was notably above. Forward profile looks good. I think as a starting point coming into the year, we had an aggressive plan, and we've just not seen all of that demand materialize. But we're still going to have good growth. We're planning very good growth in the fourth quarter in particular. And full year growth will be up, as I said, in that low single-digit range. So I think the outlook for wholesale is good overall. You just have some puts and takes by customers.
Got it. And then maybe, Sharon, just one for you. Just kind of curious what your first order of business would be. What's first on your list? Something you can get done this year to impact the organization? And same question for 27.
Yeah, thank you so much. You know, clearly there's still quite opportunities are for carters. I tried to outline much of what we'll be focusing on from a strategic perspective in the remarks, and we'll be sharing a lot more about what our expectations are and how we plan to look toward the future and monetizing so much of this extraordinary brand equity that Carter's has and all of these assets that we have available to us on future calls and as we go. But clearly, you know, my first order of business is outlined as I spoke to get to know the leadership team, understand what's going on from a financial perspective, understand our customer base and, you know, where we stand and look to where our core competencies are, our brand that assists from a consumer perspective, and find those intersections and build a strategy to be able to optimize those opportunities.
And our next question comes from the line of Jason from UBS. Your question, please.
Thank you so much, John. I'd love to ask you more about what you just said. Can you sort of define what you think success will look like for yourself, for the organization, as you've come in as CEO? Give us a little bit of an idea of what your ambition is, why you took the job in terms of some financial outlook and just goals that you have even more qualitatively.
Yeah, thanks so much. Well, one of the reasons I took the job and I tried to cover some of that in the remarks is, you know, I've spent basically my entire career youth and kid and consumer base. It's my favorite consumer base, I'd have to say, and in my opinion, the most important consumer base, the service of kids and their caregivers. So I believe there's a tremendous amount of opportunity, and when you combine that with the enormous brand awareness and, more importantly, in some ways, Barters has and Oshkosh has, there's a lot of value to working on a lot of other historic story brands with high brand awareness and trust. When you can get the business model, which, by the way, the operational structures here are very strong. I've been very pleased to see some of that. But when you can get the company to operate on multiple cylinders, understanding, putting the consumer in the sense, difficult sometimes because the consumer evolves so rapidly in this particular type of marketplace and different generational aspects of the way the consumers work, and that we're dealing with multiple generations in the way we have to think about things. I mentioned this on the call as well, from the new mom to the mom of second and third kids to the grandparents, as well as, in some ways, shifting a little more kid focus, we have multiple ways to engage with this consumer, leveraging this trust, leveraging this operational expertise. So all of that is to say, back to your original question, clearly our objective is to drive shareholder value. We're going to focus on profitable growth, both for growth's sake, but it's also So not always focused, you know, entirely focused on the bottom line because we believe that market share is going to be a very important part of how we win in the long run, not just in the markets that we're in, but even at some point when it's right and we're ready to look at this on a more global basis.
Got it. That's very helpful. Maybe if I can just follow up on that one other one. What's the biggest thing you think you can do different, you know, from what maybe Carter's was in the past? Where is an opportunity, maybe an out-of-the-box idea that you have that you think can really work and unlock some of that profitable growth you're talking about?
Well, I think that what's going to be a little bit interesting here is some of the words that we're going to say, like consumer-centric, brand building, data driven, are going to be similar words because there's absolutely nothing wrong with that strategy. In fact, when you can find the appropriate convergence of these things and you can understand not just where the consumer is but where we expect to see them going, if you can find the interlink of what our brand means and what it can mean to the consumer. Find a way to service their needs as well as relationship. The engagement piece is important. I'm not so certain that we've optimized that opportunity. Some of that has to do with the advancements that we've made in our communication strategy, our marketing strategy, our loyalty program, and always thinking about that what's next, the anticipatory aspect of being a great brand, as well as the fact that we have, again, this great infrastructure and organizational structure, I believe that we have to look at that intersection of all three of those things. So where's the big idea? Although a lot of that language is there, it's not just the what from a strategy, it's the how. And the magic is often in the how. And just five weeks in, haven't sat with the board yet. I'm going to be a little bit reticent to sit and start laying out my very next step. But we definitely have some great ideas on how to work with all of these extraordinary assets, as I mentioned, to drive this business.
Thank you. And our next question comes from the line of Ike Boruchow from Wells Fargo. Your question, please.
Hey, good morning. Welcome, Sharon. Can I ask about the gross margin specifically? Can you quantify the clearance activity that you guys took in the second quarter? Just how much of a drag was that to either the retail gross margin or the total gross margin of the company? And then for Q3, you said gross margins up. Could you give any more detail there and what the drivers are? And then kind of similar question to 4Q. Like, should there be a lot of variability? Should they both be up by a decent amount? Just kind of curious if you could kind of give us a little bit more detail there.
Good morning. I'll give you some generalize. I've been here five weeks, but, you know, obviously, like many, many companies going into the quarter, we still are holding on to some pricing increases, and as we were responding to the marketplace, we did modify some of that in certain sectors of the business not across the board this is a very scalped approach including some seasonal items that Allison mentioned so that that of course would impact our gross margin in the quarter but I'll hand that over to both Richard and Allison to give you a little more color I think that I think that's a good overview yeah there are a lot of moving pieces in gross margin in second quarter
it was probably 80 or so basis points worse than our than our forecast I think the additional discounting in U.S. retail was a portion of that. I think also just having a higher balance of wholesale sales given the pull forward of volume we saw there. So some portion of those two factors drove, you know, some portion of that 80 basis points. I don't know that I'll parse it out beyond that. We do have gross margin expansion planned in Q3, I'd say a considerable amount, just under 200 basis points by our forecast. That has a lot to do with anniversaring the tariffs which began, the IEBA level tariffs which began in Q3 of last year. We're lapping that now, obviously with the plus 10-ish percent tariffs versus what was put in place a year ago. That's a major benefit. We're forecasting improved contribution from retail, continued gains in pricing, as Allison said in her remarks in Q3. We do have expansion planned in fourth quarter, I would say, much less than what I did. And again, mix has a major element of that as well. So you have a bit of a mix.
Thanks, Richard. If I can just sneak one more in there. We've heard a lot about volatility across retail in the month of July. Obviously, you guys have been comping very nicely for the last year plus. Can you just comment quarter to date, anything that stands out at you? Any more detail there might be helpful. Thank you.
Hi, it's Allison. Thanks for the question. I would say that we are seeing flat comps on the month of July, which is very much in line with our expectations and weighted quarter for us.
July is difficult to make any reasonable projections. So September has an over-weighted position fee kind of thing, and it's usually a discount month, and all of you guys know it.
Thank you. And our next question comes from the line of Tom Nickick from Needham. Your question, please.
Hey, everyone. Thanks for taking my question. And Sharon, welcome aboard. Looking forward to working with you. So I want to ask about U.S. retail. So it sounds like e-commerce accelerated while store traffic decelerated. Do you think that's a function of the inflation and gas prices and people kind of trying to – not wanting to kind of hop in their car and make a trip to the mall or a trip to the outlet center or whatever and then just kind of staying home and shopping online? and I'm just wondering if you know that's that dynamic is you know part of your thinking for 2-H as well yeah thanks for the question I think we are as we mentioned in our remarks we are seeing growth in both channels and we are feeling good about the traffic outcomes even though we did see a D cell in stores quarter over quarter even though we saw that D cell in stores in
as I mentioned in my remarks we did outpace the industry pretty significantly from a traffic perspective in stores. So we definitely saw there was something happening with the consumers more broadly in terms of where they were choosing to shop, which I think is kind of the crux of your question. I do think we believe that part of inflation and some of those pressures are people wanting the convenience of e-commerce and the ability to, yes, just order it online, pick it up in a store, have it shipped directly to them. So yes, I think that is part of what we're thinking. We also see that in some of our omni-channel metrics, which is buy online and pick up in store was up from a year-over-year perspective. So I do think that there is some consumer behavior to the convenience of the online channel and potentially not needing to get in their cars and drive. Now, that being said, we still saw very strong performance in our outlet stores, which are generally those stores that people are driving the farthest to get to.
I think it's important to understand that part of this is reflective of the underlying power of having an omni-channel strategy. We are, as I mentioned in the remarks, our objective is to be there with the consumer when they want it, how they want it, under the circumstances that they want it. And having a robust e-com organization allows us to be there if the consumer wants to shift the way they want to shop. We work on this with our enhancements on the loyalty program and some of the things that we've done. We know that the consumer that shops in both of those channels, both of our high-touch retail as well as Omni, those are more valuable consumers to us. So it's great when we see somebody that may have originally engaged in a store and then wants to shop online, does that because we're going to end up in statistically greater lifetime value and greater AUR with that particular consumer. So it's good for us when consumers move from one channel to the other, and basically we're fairly agnostic on how they shop from the direct perspective. On the macro front, it seems to be pretty resilient. I mean, clearly there isn't a category that's completely resistant to economic volatility.
Thanks very much, and best of luck in the second half of the year.
Thank you.
Thank you. And our next question comes from the line of Kendall Toscano from Bank of America. Your question, please.
Hi. Thanks for taking my question. I'm curious if you could just remind us how margin is compared between stores and e-commerce and how sales shifting to e-commerce would impact your overall margin rate.
Well, I would say they tend to be lower gross margin sales because you've got the shipping cost to the end consumer, but it's a very good operating margin business for us. When we comment on it, it's a bigger basket size online than it is in store. People are buying multiples to leverage the shipping.
And also, we have a very low return rate and a very highly automated, efficient distribution operation so all of which combined to to give us I think for the e-commerce business thanks that's helpful and then also just follow-up curious if you haven't already quantified this just how much potential DPS upside exists if tariff rates remain unchanged through the year-end and also what the plans are for using the cash you're getting from tariff refunds thanks some upside
relative to the original tariff assumptions that we entered the year with we i think we articulated that the gross tariff amount was something like 200 million dollars over our historic baseline we think that's probably lower to the extent of something along the lines of 75 million dollars now we've used some portion of that with the lower wholesale volume that we're projecting and the additional discounting that we've done to clear some inventory but beyond that there is still some portion of that that we've not flowed through yet that would be the amount that's that's upside to the year hopefully all other things being equal as it relates to to the cash we're certainly happy to receive the refunds back there was some speculation in the market that the government was going to resist that and not return that money, so we're thrilled to have it back on our balance sheet. I think there is still continued uncertainty. A tariff point of view, as I mentioned, senior administration officials multiple times have said that their intention is to return the tariff rates to that IEVA level, if not higher, so we're cautious that we're out of the woods as it relates to tariffs. Second, the lion's share of our business is ahead of us. It's a very uncertain market, and I think to maintain more liquidity in this environment is absolutely the prudent thing to do. We have a long record of, I think, maintaining a very efficient balance sheet. I have no interest in having an inefficient balance sheet. We are also in our planning season with a new leader, and so as we go through the coming months here and lay out our plans for the coming years, and we'll have a better line of sight to the investment needs for the business, I think that's the time to perhaps do something with the cash. But at the moment, running with a bit more liquidity, I think, makes sense.
Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Sharon Price-John for any further remarks.
Thank you all so much for joining us today on this morning's call, and we look forward to giving you an update on our progress on the next call.
Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.