Carter’s reported a dramatic increase in second-quarter operating income, but approximately 91% of the total came from the recovery of previously paid import duties.
Reported operating income reached $139.8 million, compared with $4 million during the prior-year quarter.
The company recorded a $127.7 million operating benefit from the tariff refund, representing approximately 91% of reported operating income.
Reported operating margin increased to 22.7% from 0.7%.
After removing the tariff recovery, leadership-transition costs, and intellectual-property litigation expenses, adjusted operating income was only $18.1 million.
Adjusted operating margin reached 2.9%, compared with 2% during the prior-year period.
The tariff recovery also accounted for most of Carter’s reported earnings per share.
Reported diluted EPS increased to $2.87 from $0.01, but $2.73 of the latest result came from the tariff recovery. Adjusted diluted EPS was $0.26, compared with $0.17.
Net sales increased 5.2% to $615.5 million, with growth across each of Carter’s operating segments.
U.S. Retail sales increased 1.7% to $304.7 million, and comparable retail sales increased 5.1%.
U.S. Wholesale sales increased 11.7% to $215.6 million, while International sales rose 2.7% to $95.3 million.
U.S. Retail operating margin remained narrow at 1.4%, compared with 1.3% a year earlier.
U.S. Wholesale operating margin declined to 13.8% from 14%, while International margin improved to 5.7% from 3.9%.
Adjusted operating income increased 54% during the quarter as productivity and supply-chain improvements outweighed incremental tariffs, demand-creation investment, and inflation.
The first-half picture was weaker.
First-half adjusted operating income declined 1.3% to $46.5 million, while adjusted EPS fell to $0.65 from $0.83.
First-half adjusted margin contracted to 3.6% from 3.9%.
Operating cash flow improved to $202.3 million during the first half, compared with an $8.3 million cash outflow a year earlier.
Carter’s attributed the improvement to receiving the import-duty refund, better working capital, and the timing of interest payments.
The company returned $18.3 million to shareholders through dividends during the first half.
For the third quarter, Carter’s expects approximately $750 million in sales, compared with $758 million a year earlier.
Adjusted operating income is expected to increase to approximately $50 million from $39 million, while adjusted EPS is projected to rise to approximately $0.85 from $0.74.
Management expects earnings to be weighted toward the second half as tariff pressure and investment spending become less severe.
Carter’s also expects gross margin to remain below the prior-year level for the full year because of incremental tariffs, partly offset by pricing, productivity, and additional mitigation efforts.
The second-quarter results demonstrate meaningful sales and adjusted-profit improvement, but the company’s reported earnings substantially overstate the recurring economics of the business.
Once the import-duty refund is removed, Carter’s produced a 2.9% adjusted operating margin and $0.26 of adjusted earnings per share.
KEY QUOTES:
“The company posted positive results for the second quarter as net sales increased 5% and adjusted operating profit increased 54%, exceeding the prior outlook.”
“We believe these results are largely reflective of improved marketing efforts, the early benefit of productivity initiatives, and continued progress in the critical Baby segment.”
Sharon Price John, Chief Executive Officer And President Of Carter’s
