Carter's, Inc.

Welcome to Carter's Second Quarter Fiscal 2026 Earnings Conference Call. On the call are Sharon Price-John, Chief Executive Officer and President, Richard Westenberger, Chief Financial Officer and Chief Operating Officer, Allison Peterson, Chief Retail and Digital Officer, and TC Robillard, Vice President, Investor Relations. Please note that today's call is being recorded. I'll now turn the call over to TC 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 for my first earnings call with Carter's. 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, up 5% over prior year, and adjusted operating profit increased 54%. We continued our positive momentum in U.S. retail, delivering comparable sales growth of 5%. And we continued 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 Carter's. I want to thank the team and the board, not only for the opportunity to lead this historic company to new heights, before 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. mainly 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 consistent long-term shareholder returns. These include iconic brands, great consumers, the leading market share position, a multi-channel business model, and a passionate, driven organization. Touching on each of these briefly, first, we have a number of the strongest brands in our space. Our namesake Carter's brand, as well as Oshkosh, has high awareness Consumer Trust, 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 have great consumers. 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 that earned trust lightly. When we can deliver products and exceptional experiences that improve their lives, we create an emotional bond between our brands and our consumers. Third, we're the market share leader in our industry. including the most important segment, baby. 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. Fourth, our multi-channel 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 omnichannel 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's, from our headquarters to our distribution centers to our associates in the field. And we have a culture that's passionate about our brand and our consumers. 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. As you can see, this is a powerful confluence of assets. And as I mentioned earlier, this is what attracted me to Carter's, and it's what gives me so much confidence in our future. At its 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, all aimed at building relationships and expanding the total lifetime value. We will be brand building, leveraging our assets in a manner designed to monetize the enormous equity, name recognition, and important trust of our portfolio, especially for our namesake brand, Carter's. 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 its storied history. I believe we have significant opportunities to unlock value, drive profitable growth, Deliver top-tier shareholder values, and I look forward to getting to know each of you over the coming months. With that, I'll turn the call over to Richard.

Thank you, Sharon, and welcome to Carter's. We're very happy to have you here with us. I'll speak for the rest of our leadership team in 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 thousands of employees for their resilience, commitment, 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 of strong performance. As Sharon has already experienced, our team exhibits tremendous passion and dedication, and we're very grateful. This morning, we will give you a recap of our second quarter performance, which exceeded our previous outlook. Overall, we delivered growth in both sales and earnings in the quarter. and our balance sheet and liquidity strengthened significantly through the recovery of approximately $130 million of previously paid tariffs and related interest. Consumer and retail businesses like ours are operating in a continued challenging environment. Overall, our business has performed well amid this backdrop for the first half of the year. The children's apparel market has proven resilient in the first six months of the year with total sales up about 2%. 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. Turning to our presentation materials, on page two, we have our GAAP basis P&L. Net sales in the second quarter were $615 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. Our first half gap basis P&L is on page three. First half net sales increased 7% over the prior 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 compared to 43 cents in 2025. On the following page, we summarized our non-GAAP adjustments. We had no adjustments to our reported results in the first quarter, so our second quarter and first half 2026 adjustments are the same. A significant adjustment to our reported results in Q2 related to our recovery of previously paid tariffs and related interest. In the second quarter, we received $132 million back from the US government. $128 million benefited gross profit and $4 million was recorded as interest income. These tariff recoveries and interest are taxable. As such, we recorded a 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. Last year, we had adjustments related to operating model improvement costs and leadership transition costs, which reduced our reported profitability. Our comments today will speak to our performance on an adjusted basis, which excludes these unusual items. On page 5, we have our second quarter adjusted P&L. Our Q2 net sales of $615 million represented growth of $30 million or 5% over last year. Adjusted gross margin on these sales was 46.3%, a decrease of 180 basis points compared to prior year. As expected, tariffs pressured our gross margin rate in the quarter with a gross impact incremental to our historical tariff baseline of $28 million. Investments in product make also pressured gross margin compared to prior year. These headwinds were partially offset by increased pricing as well as tariff mitigation actions and productivity initiatives. On a consolidated basis, AURs improved in the mid single digits and units were up low single digits. In U.S. retail, second quarter AURs were comparable to prior year and we improved realized pricing in our U.S. wholesale and international segments. Allison will comment further on U.S. retail pricing trends in a moment. Second quarter adjusted SG&A of $270 million decreased 1% versus prior year as the benefits from our productivity 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. Second quarter adjusted operating income increased 54% to $18 million and adjusted operating margin increased 90 basis points to 2.9%. Higher sales and lower 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 of the first quarter. The effective tax rate for the second quarter was 23% compared to 74% 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-tax income. For the full year, we're forecasting an effective tax rate of 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 cents. A summary of our second quarter business segment results is on page six. In the 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 in operating income in the quarter was pretty evenly driven by wholesale and international. Allison will now provide some additional perspective on our U.S. retail business, 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 eCom 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 passwordless 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 nine. 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 personalization events in World Cup markets. The 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 channels. 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 are positioned 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 for a summary of our U.S. wholesale and international segment performance. In U.S. wholesale, we had strong growth in the quarter. Net sales increased 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 product, primarily with mass channel customers. Exclusive wholesale brand sales grew in total 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 business. Wholesale operating profit increased 10% over prior year, while segment operating margin was roughly comparable. From a margin standpoint, higher realized pricing, tariff mitigation actions, and expense leverage essentially offset higher tariff and product costs. Turning to international, total reported international net sales increased 3% over last year, which was also above the outlook we provided on our last call. Reported sales growth in the quarter benefited from favorable movements in currency exchange rates. On a constant currency basis, international segment net sales were comparable to last year. Within our international segment, we had sales growth in Canada and Mexico, which offset lower sales in our international partners business. In the largest component of our international business, Canada, net sales increased 1% over prior year in the second quarter, driven by a 1% increase in comp sales. Net sales in Mexico increased 22% over last year, driven by favorable movements in exchange rates, timing of shipments within the wholesale channel, and the benefit of new store openings. Comp sales were 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 5.7%. The improved profitability was driven by productivity savings as well as lower product costs resulting from favorable changes in FX rates. On page 11, we have some balance sheet and cash flow highlights. Our balance sheet is in very good shape. We ended the quarter with significant liquidity with cash on hand of over $650 million. Our cash balance was boosted by the receipt of the tariff recoveries, as mentioned earlier. 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% compared to prior year to $578 million. Inventory units were 9% lower at quarter end, and our inventory quality is strong heading into the second half of the year. For the first half, 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 by the tariff recoveries, improved working capital, including a lower inventory balance, as well as favorable timing of interest payments versus the prior year. We've continued to return capital to shareholders in 2026 and have paid $18 million in dividends in the first half. Pages 12 and 13 summarize our first half adjusted P&L and segment results. This information is provided for your reference. Turning to our outlook for the balance of the year beginning on page 15 of our materials, It's worth a reminder that fiscal 2025 included a 53rd week, which does not repeat this year. This additional week contributed an estimated $37 million in net sales. Our 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 year. We've incorporated our learnings from the first half and our best read 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. Turning to our outlook for the top line, we've narrowed our outlook for full year net sales a bit from low to mid single digit growth previously to a revised projection of 2% to 3% growth. This revision reflects two key factors. First, we expect second 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. We're expecting full year wholesale net sales growth in the low single digit range, with growth in our flagship Carter's brand, the Carter's exclusive wholesale brands, and Skip Hop. Second, we've moderated our AUR assumptions for the second half a bit. We're still planning for improved year-over-year realized pricing in US retail, which would build on the gains we've made in pricing in the second half last year. Data from the broader market in second quarter indicated some price resistance from consumers with an accompanying loss of unit velocity. We think it's prudent to plan for a more value-conscious consumer. 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 range. These are obviously planning assumptions at this point. We aren't deep into fall 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 growth over last year. On profitability, as indicated in our press release this morning, we have reiterated our previous guidance for adjusted operating income growth in the low to mid single digits over 2025. In maintaining our operating profit outlook, we've assumed that our higher than planned clearance activity in the second quarter and our more modest outlook for second half wholesale demand and retail AUR will be offset by lower than planned tariff costs. Last week brought additional news on the tariff front. The Section 122 tariffs, which implemented an incremental 10% above our historical tariff baseline, had been in place since the Supreme Court's February ruling, which invalidated 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 upside to our earnings outlook. It is possible the administration will raise these new tariff rates. For instance, some of our sourcing countries are currently subject to ongoing Section 301 overcapacity reviews. 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. Below the line, we have improved our outlook for interest income based on our better than planned cash balance. This has allowed us to improve our expected adjusted EPS outlook to a more modest decline of down high single digits to low double digits as compared to last year. As discussed on previous calls, higher interest costs from our senior notes refinancing will weigh on full-year EPS by approximately 30 cents per share. Also, with 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. We've also revised our expectation for CapEx downward slightly and are expecting to spend approximately $50 million this year, mostly on enhancements to our distribution centers and on strategic technology initiatives. Our outlook for the third quarter is summarized on page 16. Third quarter net sales are expected to be approximately $750 million, comparable with a year ago. By segment, we're expecting U.S. wholesale sales down high single digits, in part due to the earlier demand for fall product, which benefited this year's second quarter, low single digit growth in U.S. retail, and mid to high single digit growth in international segment net sales. We're expecting third quarter gross margin 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. We're forecasting adjusted operating income of approximately $50 million compared to $39 million a year ago and adjusted EPS of approximately 85 cents compared to 74 cents in Q3 last year. It's worth noting that the historical significance of September in our business. September is expected to represent the majority of third quarter sales and is typically one of our largest volume months of the year. We expect that September will be similarly significant to this year's third quarter and annual sales. With our first half performance in the books and these updated guidance elements for Q3 in the full year, it's possible to infer our assumptions for the fourth quarter. Again, fourth quarter comparisons will be affected by the absence of the extra week we had last year. Adjusting for the 53rd week, our outlook implies low to mid single-digit growth and consolidated net sales for the fourth quarter. Risks we're monitoring include the level of promotional activity across the marketplace, especially during the upcoming holiday season. The level of consumer sentiment, particularly in the context of sustained higher gas prices and persistent inflation across many important consumer purchase categories. And with these remarks, we're ready to take your questions.

Certainly. 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 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 on 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 IEPA tariffs? Thanks.

Yeah, sure. So I'll start with the tariffs. The accounting did not reduce inventory. At this point, we have sold through the goods that were brought into the country and tariffed at the higher level of tariff rates. So since late February, we have been importing product at primarily the plus 10% rates. And so at this point, our assumption is that we have sold through those previous goods. So there is some portion of year-over-year balance in inventory that relates to higher than historical tariffs, and that would be related to the plus 10% tariffs that were put in place after IEPA left. As your question on wholesale, I would say in general a few things are at work. One, we have had good reception for fall product. The reception to the fall line was improved over the spring assortment, so we were encouraged by that. And given our broad customer portfolio, different customers are at different points in terms of how they feel on their own 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 a year ago. So I think the 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 a bit to sort through on what all the opportunities are for Carter's. 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, 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 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.

Thank you. And our next question comes from the line of Jason from UBS. Your question, please.

Great. 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, you know, success will look like for yourself, for the organization? You know, as you come in as CEO, give us a little bit of an idea of what your ambition is, you know, why you took the job, you know, in terms of like some financial outlook and just goals that you have even more qualitatively. Thank you.

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 in the youth and kids business, and that's, I almost hate to say it, 30 years at this point. and it is an extremely important 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 the trust that Carter's has and Oshkosh has, there's a lot of value to unlock and at least what I found in the past 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, when you can get the company to operate on multiple cylinders understanding, putting the consumer in the center, which it's 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 kids' 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. And that's not growth for growth's sake. but it's also not always 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? from what maybe Carters was in the past. Where's 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 drive ongoing 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 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.

All right, thanks. Good morning. I'll give you some generalized feedback, given that I've only been here five weeks, but I'm going to let the experts in the area answer that question. But, you know, obviously, like many, many companies going into the quarter, we still were holding on to some of the increase, some pricing increases. And as we were responding to the marketplace, we did modify some of those, 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, 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's a good overview. There are a lot of moving pieces in gross margin in the second quarter. It was probably 80 or so basis points worse 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 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. Report casting 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 just articulated for Q3. And again, mix has a major element of that as well. We'll have a bigger proportion of wholesale volume that typically happens in the fourth quarter, so you have a bit of a mixed dynamic shift between Q3 and Q4.

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 just don't forget, though, when you think about the quarter, you know, it's a back-end weighted quarter for us. July is a difficult month in retail to make any reasonable projections, so September has an overweighted position, so I wouldn't really, you know, we just, this is a wait-and-see kind of thing, and it's usually discount months, and all of you guys know that.

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.

Thank 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, you know, the inflation and gas prices and people, you know, kind of trying to not wanting to kind of hop in their car and, you know, make a trip to the mall or a trip to the outlet center or whatever and then, you know, just kind of staying home and Shopping Online, and I'm just wondering if that dynamic is 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 decel in stores quarter over quarter. Even though we saw that decel in stores, as I mentioned in my remarks, We did outpace the industry pretty significantly from a traffic perspective in stores. 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 omnichannel 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 omnichannel 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-comm organization allows us to be there if the consumer wants to shift the way they want to shop. Also, as 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. 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, This category tends to be pretty resilient. I mean, clearly there isn't a category that's completely resistant to economic volatility, but kids need clothes. They just keep growing. So we're here for them.

Very helpful. 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. Thanks.

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. We often hear that from folks when we comment on it that they're surprised by it, but we have Typically, it's a bigger basket size online than it is in store. People are buying multiples to leverage the shipping. Also, we have a very low return rate and a very highly automated efficient distribution operation, so all of which combine to give us, I think, a better than average operating margin profile for the e-commerce business.

Thanks, that's helpful. And then also just to follow up, I'm 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.

Well, I have. I'm not going to share with you, Kendall, what I think the upside is. It's just too early in the year, and we've given ourselves some room here. There is clearly some upside relative to the original tariff assumptions that we entered the year with. I think we articulated that the gross tariff amount was something like $200 million over our historic baseline. We think that's probably lower to the extent of something along the lines of $75 million. 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 upside to the year, hopefully all other things being equal. As it relates 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, though, that we have to consider. Certainly from 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 IEPA 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 a lot of 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.