Carter's (CRI)

Children’s apparel manufacturer Carter’s (NYSE:CRI) fell short of the market’s revenue expectations in Q3 CY2025, with sales flat year on year at $757.8 million. Its non-GAAP profit of $0.74 per share was in line with analysts’ consensus estimates.

Company Overview

Rumored to sell more than 10 products for every child born in the United States, Carter's (NYSE:CRI) is an American designer and marketer of children's apparel.

Thanks to social media and the internet, not only are styles changing more frequently today than in decades past but also consumers are shifting the way they buy their goods, favoring omnichannel and e-commerce experiences. Some apparel and accessories companies have made concerted efforts to adapt while those who are slower to move may fall behind.

Carter's primary competitors include The Children's Place (NASDAQ:PLCE), Gap (NYSE:GPS), Gymboree (owned by Hanesbrands NYSE:HBI), and Zara Kids (owned by Inditex BME:ITX).

A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Carter's struggled to consistently generate demand over the last five years as its sales dropped at a 2% annual rate. This was below our standards and suggests it’s a low quality business.

We at StockStory place the most emphasis on long-term growth, but within consumer discretionary, a stretched historical view may miss a company riding a successful new product or trend. Carter’s annualized revenue declines of 2.8% over the last two years align with its five-year trend, suggesting its demand has consistently shrunk.

We can dig further into the company’s revenue dynamics by analyzing its same-store sales, which show how much revenue its established locations generate. Over the last two years, Carter’s same-store sales averaged 5.1% year-on-year declines. Because this number is lower than its revenue growth, we can see the opening of new locations is boosting the company’s top-line performance.

This quarter, Carter's missed Wall Street’s estimates and reported a rather uninspiring 0.1% year-on-year revenue decline, generating $757.8 million of revenue.

Looking ahead, sell-side analysts expect revenue to grow 1% over the next 12 months. While this projection suggests its newer products and services will fuel better top-line performance, it is still below the sector average.

Carter’s operating margin has been trending down over the last 12 months and averaged 7.9% over the last two years. The company’s profitability was mediocre for a consumer discretionary business and shows it couldn’t pass its higher operating expenses onto its customers.

This quarter, Carter's generated an operating margin profit margin of 3.8%, down 6.3 percentage points year on year. This contraction shows it was less efficient because its expenses increased relative to its revenue.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Sadly for Carter's, its EPS and revenue declined by 2.5% and 2% annually over the last five years. We tend to steer our readers away from companies with falling revenue and EPS, where diminishing earnings could imply changing secular trends and preferences. Consumer Discretionary companies are particularly exposed to this, and if the tide turns unexpectedly, Carter’s low margin of safety could leave its stock price susceptible to large downswings.

In Q3, Carter's reported adjusted EPS of $0.74, down from $1.64 in the same quarter last year. This print was close to analysts’ estimates. Over the next 12 months, Wall Street expects Carter’s full-year EPS of $3.96 to shrink by 43.3%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Carter's has shown weak cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 5.9%, subpar for a consumer discretionary business.

Carter's burned through $179 million of cash in Q3, equivalent to a negative 23.6% margin. The company’s cash burn increased from $95.69 million of lost cash in the same quarter last year. These numbers deviate from its longer-term margin, indicating it is a seasonal business that must build up inventory during certain quarters.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Although Carter's hasn’t been the highest-quality company lately because of its poor revenue and EPS performance, it historically found a few growth initiatives that worked out well. Its five-year average ROIC was 19.8%, impressive for a consumer discretionary business.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Carter’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Carter's reported $184.2 million of cash and $1.18 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $255 million of EBITDA over the last 12 months, we view Carter’s 3.9× net-debt-to-EBITDA ratio as safe. We also see its $9.42 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

Same-store sales narrowly outperformed Wall Street’s estimates, but revenue missed. Operating margin was also down year on year. Zooming out, we think this quarter could have been better. The stock traded down 10.4% to $29 immediately following the results.

Updated: December 3, 2025 at 10:06 PM EST

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Carter's.

Carter's falls short of our quality standards. For starters, its revenue has declined over the last five years. On top of that, Carter’s same-store sales performance has disappointed, and its declining EPS over the last five years makes it a less attractive asset to the public markets.

Carter’s P/E ratio based on the next 12 months is 14.6x. While this valuation is reasonable, we don’t see a big opportunity at the moment. There are better investments elsewhere.

Wall Street analysts have a consensus one-year price target of $29.50 on the company (compared to the current share price of $32.14).