Dive Brief:
- Carter’s, which runs its namesake and OshKosh B’gosh brands, will lay off about 300 corporate employees, or 15% of that workforce, by the end of the year, the company said Monday. This is expected to garner annualized savings of about $35 million, starting next year.
- The children’s apparel retailer also plans to close about 150 North American stores over the next three years — 50 more than previously planned. Carter’s runs more than 1,000 locations in the region.
- The announcements came as Carter’s reported Q3 profit declines largely due to tariffs. Net income plunged 80% year on year to $11.6 million, and operating income tumbled over 60% to $29 million.
Dive Insight:
Carter’s, in the midst of a turnaround under a new chief executive officer, this year was already focused on boosting profitability and returning to growth.
“Now almost seven months into my role as Carter's CEO, our business transformation has accelerated as core tenets of new strategies take hold,” Douglas Palladini told analysts Monday. “Consumer response to new products and stories is strong, and engagement levels are rising as a result, most notably among young Gen Z families with whom we must win.”
Tariffs have thrown a wrench into those efforts, though. The company in April pulled its guidance for the year after Q2 profits plummeted nearly 60%, also largely due to new import duties on its merchandise.
In Q3, net sales were relatively flat to last year, reaching about $758 million. U.S. retail rose 2.6%, with comps up 2%, and international rose 4.9%, per Monday’s press release. U.S. wholesale fell 5.1%.
The bottom line was a bleak story as tariffs cut deep. In addition to the major hit to profits, operating margin contracted to 3.8% from 10.2% a year ago, “reflecting higher tariff costs, investments in product make, lower unit volume, and investments in new stores, partially offset by higher pricing,” the company said Monday. Gross margin contracted by 180 basis points to 45.1%, with tariffs taking a $20 million bite, according to Chief Financial Officer and Chief Operating Officer Richard Westenberger. Tariffs also hurt wholesale profitability, he said.
Tariffs aren’t Carter’s only problem, though. Sales on Amazon have declined after the e-commerce giant — which since 2017 treated Carter’s “Simple Joys” brand as its own private label — made changes to its sales approach, Westenberger said. Department store sales also declined in the period, he said.
It was a tough quarter, yet executives “exuded confidence,” and said they expect growth in sales and earnings next year, Wells Fargo analysts led by Ike Boruchow said in a Monday client note.
“Considering top line is not growing, combined with the fact that wholesale visibility has become cloudier while store closures are set to accelerate, it's hard for us to see where the confidence comes from,” Boruchow said. “On the margin front, there's more tariff pressure coming than cost saves announced.”
