What Carter's Cost of Goods Sold Did Not Contain

Carter's, Inc. reported cost of goods sold of $202.9 million for the thirteen weeks ended July 4, 2026, against net sales of $615.5 million.¹ That is a gross margin of 67.0 percent. In the comparable quarter of the prior year the Company reported cost of goods sold of $303.6 million on net sales of $585.3 million, a gross margin of 48.1 percent.¹ Sales grew about five percent. Gross margin expanded by roughly nineteen percentage points.

In the segment note of the same filing, the Company reports cost of goods sold for its three reportable segments—U.S. Retail, U.S. Wholesale, and International—totaling $330.6 million for the same thirteen weeks.² The two figures describe the same quarter and the same business. They differ by $127.7 million.

The segment note explains why. Carter's states that segment operating income excludes the impact of tariff refund recoveries, along with unallocated corporate expenses and several charges the Company does not attribute to segment operations.² The segment presentation is the pre-recovery figure; the income statement is the post-recovery figure. Elsewhere in the same document, the Company discloses the amount directly: approximately $128 million recorded as a reduction of cost of goods sold during the quarter.³ The disclosed figure and the derived one agree to within $332 thousand, which also establishes that nothing else of consequence sits inside that gap.⁴

The recovery is a refund of customs duties. On February 20, 2026, the Supreme Court held in Learning Resources, Inc. v. Trump that tariffs imposed under the International Emergency Economic Powers Act were unauthorized.⁵ U.S. Customs and Border Protection opened a claims process on April 20, 2026, and Carter's submitted claims seeking approximately $130 million.³ During the second quarter the Company received approximately $132 million, including interest, recognizing approximately $128 million as a reduction of cost of goods sold and $4 million as interest income.³ Roughly $2 million of unadjudicated claims remained at the quarter end, carried at nothing.³

The duties themselves were substantial enough, when paid, to move the Company's impairment testing. During the second quarter of fiscal 2025, Carter's identified a triggering event arising from the new tariffs and their unfavorable effect on its financial forecasts, together with a sustained decline in its share price, and performed a quantitative impairment test on goodwill and indefinite-lived tradenames.⁶ That test found no impairment. One year later, the same duties produced a $128 million credit to cost of goods sold.

Now go back one quarter. Carter's first fiscal quarter of 2026 ended April 4, 2026, six weeks after the Supreme Court ruled. In the Form 10-Q for that period the Company disclosed that it had received no refund payments, that uncertainty remained as to timing and amount, and that accordingly no gain had been recognized.⁷ The balance sheet as of April 4, 2026 carried no asset for the claim. Within three months the Company collected approximately $132 million in cash against it.

Nothing about the underlying entitlement changed between those two balance sheet dates. The Court had already ruled. The duties had already been paid. What changed was that a federal agency built a portal and processed the paperwork.

This is not an accounting failure by Carter's. It is what generally accepted accounting principles require, and the requirement is unusually rigid. ASC 450-30 provides that a contingency which might result in a gain generally should not be reflected in the financial statements, on the reasoning that doing so might recognize revenue before it has been realized.⁸ ASC 450-20, governing the mirror image, requires an estimated loss to be accrued when it is probable that a liability has been incurred and the amount is reasonably estimable.⁹ The two thresholds differ in kind rather than in degree. Probable is the operative test for a loss. For a gain, probable is not a test at all: a gain contingency is not recognized even where realization is considered probable, because the question the standard asks is whether the gain has been realized or is realizable, and confidence about the future does not answer that question.¹⁰

There is a serious defense of this arrangement, and it deserves to be met rather than waved past. ASC 450-30 exists to stop management from booking recoveries it has not received. Buxton Helmsley has objected to premature recognition in a great many other settings, and it would be incoherent to complain about a standard that errs in the conservative direction. Were the threshold probability rather than realization, every issuer holding a pending claim would have an invitation to construct an asset out of its own litigation optimism. The rule is defensible.

What is harder to defend is the assumption that a defensible recognition rule produces a usable income statement. Excluding the recovery, Carter's gross profit for the quarter was approximately $284.9 million on $615.5 million of sales, a gross margin of about 46.3 percent, against 48.1 percent in the prior-year quarter.⁴ On the reported basis, gross margin rose about 1,890 basis points. On the derived basis, it fell about 184. Operating income was $139.8 million as reported and approximately $12.2 million excluding the recovery, against $4.0 million a year earlier.⁴ The refund and its associated interest account for roughly 96 percent of the Company's income before income taxes for the quarter.⁴

Almost the entire quarter, measured by earnings, was a customs refund for duties paid in earlier periods.

The obvious response is that the periods should be corrected rather than the current quarter credited. If the duties were never lawfully owed, the fiscal 2025 cost of goods sold that absorbed them was overstated, and the honest remedy is to restate fiscal 2025 rather than to flatter fiscal 2026. This is where the analysis has to be careful, because that remedy is not available, and the reasons it is not available are more interesting than the conclusion.

ASC 250-10-20 defines an error in previously issued financial statements as one arising from mathematical mistakes, from mistakes in the application of generally accepted accounting principles, or from oversight or misuse of facts that existed at the time the financial statements were prepared.¹¹ None of those describes what happened. Carter's calculated the duties correctly. It applied the correct principle, treating them as inventoriable costs that flow through cost of goods sold when the related goods are sold—the same treatment the Company applies in reverse to the refund.³ And the fact that the statute did not authorize the tariffs, while true in some sense from the beginning, was not a fact available to the preparer: it was a contested question of federal law under active litigation, resolved only by a judicial determination that had not yet been made. A change arising from information that was not reasonably knowable at the prior reporting date is not an error.¹² Restating fiscal 2025 would not merely be unnecessary; it would itself be a departure from GAAP.

The second door is no better. A change in accounting estimate is defined as one having the effect of adjusting the carrying amount of an existing asset or liability, and such changes result from new information.¹¹ There was no estimate here to revise. The duty was assessed at a determinable amount, paid in cash, and expensed. Nothing remained on the balance sheet to re-measure. Even if the classification were available, it would not help: ASC 250-10-45-17 accounts for a change in estimate in the period of change and in future periods, never retrospectively.¹³ Only the correction of an error carries prior periods with it, under ASC 250-10-45-23.¹³

What remains is the third door, and it is the one the Company walked through. ASC 450-30-20 defines a gain contingency as an existing condition or set of circumstances involving uncertainty as to a possible gain, resolved when one or more future events occur or fail to occur.¹⁴ That is precisely the shape of an unlawful exaction awaiting a judicial ruling and an administrative refund. And contingencies, by construction, resolve forward.

So no single standard is at fault. The inventory rules were right to capitalize the duty when it was paid, because it was a legally enforceable exaction and the goods could not clear without it. ASC 250 is right to refuse restatement, because nobody made a mistake. ASC 450-30 is right to withhold the gain until realization, because the alternative invites abuse. Each rule, examined alone, is sound. Their intersection guarantees that a cost recognized in one period will be reversed in another, and it offers no mechanism by which the two can ever be brought back together.

The government itself has taken the opposite view of the same facts. Of the approximately $132 million Carter's received, about $4 million was interest.³ Interest is compensation for the use of money the payer was not entitled to hold, running from the date it was collected. In paying it, the United States acknowledged that it had held Carter's money without entitlement since 2025. The law treats the duty as never properly owed. The accounts treat it as a cost of fiscal 2025 and a credit of fiscal 2026. Both statements are correct within their own systems, and they cannot be reconciled.

Because the trigger is realization rather than the underlying event, the fiscal calendar decides whether any of this becomes visible. NIKE, Inc., whose fiscal 2026 ended May 31, 2026, disclosed that during its fourth quarter it deemed recovery of IEEPA tariffs probable and recognized a benefit of $986 million in cost of sales, of which $965 million was classified within North America.¹⁵ Nike states that the benefit largely offset the IEEPA tariffs recognized during the same fiscal year.¹⁵ Its cost and its recovery fell inside one annual reporting period and cancelled. Carter's, whose fiscal 2025 ended January 3, 2026, took the cost in one fiscal year and the credit in the next, and the two will never appear in the same column. The legal entitlement was identical. The year end was not.

The models differ as well, and the difference is visible on the balance sheet. Nike recognized on a probability assessment and carried $684 million as an outstanding receivable at May 31, 2026, having received $302 million in cash by that date.¹⁵ Carter's, applying ASC 450-30, carried nothing until the cash arrived.³ Two of the largest apparel importers in the United States, holding the same class of claim against the same agency under the same Supreme Court decision, reported one balance sheet with a $684 million asset and one with none.

Below them, the treatment fragments further. Terex Corporation elected ASC 450-30, filed $51 million of claims in the quarter ended June 30, 2026, received $29 million, recognized $26 million as a reduction of cost of goods sold, and recorded $3 million of cash actually in hand as a liability on the ground that it was not yet realized.¹⁶ Topgolf Callaway Brands recognized $10.8 million on approved claims deemed realizable, and received a further $6.7 million after the quarter end that will be recognized in the following quarter.¹⁷ Mettler-Toledo International submitted claims of approximately $53 million, recognized none as of March 31, 2026, and disclosed that it expects to refund a significant portion of any recovery to customers while recording no provision for those refunds.¹⁸ ADTRAN Holdings evaluated the refund as a loss recovery under ASC 410-30 rather than as a gain contingency, and then concluded that recovery was not probable.¹⁹ PVH Corp. recorded no receivable as of May 3, 2026, and Kohl's Corporation concluded in its annual report that recovery was not yet probable or reasonably estimable.²⁰ Culp, Inc. received the full $7.0 million it claimed and then disclosed uncertainty as to whether it may retain it.²¹

The scale is not small. Penn Wharton Budget Model, drawing on International Trade Commission, Customs and Border Protection, and Treasury data, put cumulative IEEPA collections at roughly $165 billion through January 2026.²² In a May 2026 filing with the Court of International Trade, the Administration indicated that Customs had begun refunding approximately $85 billion, which the government characterized as more than half of the total collected.²³ Against that, a survey of annual reports filed by large importers after February 20, 2026 shows the ruling disclosed in subsequent-events notes and nothing recognized: Lowe's, Ross Stores, Best Buy, The Gap, The Buckle, Vince Holding, Cricut, Dorman Products, and National Presto each described the decision and declined to estimate its effect.²⁴ Those financial statements recognized the full duty cost in operating results and, in the same document, disclosed that the duty had been held unlawful before the statements were issued.

For an investor, the consequences are procedural before they are conceptual. Buxton Helmsley now reconciles segment cost of goods sold to consolidated cost of goods sold each quarter for every import-exposed holding, because that bridge is the only route to the pre-recovery figure, and it exists only where an issuer has chosen both to exclude the recovery from segment results and to disclose segment cost of goods sold. Where an issuer does neither, the adjustment cannot be made from outside the company, and that absence is itself a finding. We read the recognition threshold before the numbers, since a probability threshold and a realization threshold place the same claim in different years and produce balance sheets that are not comparable. We look for the mirror obligation, because Mettler-Toledo and ADTRAN both disclose that some portion of any refund may be owed onward to customers, and a recovery recognized ahead of that obligation is gross of a liability that has not yet arrived. We treat the unadjudicated claim balance as a valuation input rather than as footnote furniture, since it is an asset the issuer holds and the balance sheet omits. We rebuild the cash flow series: Carter's generated $202.3 million of operating cash flow in the first two quarters of fiscal 2026 against negative $8.3 million in the comparable prior-year period, and income taxes payable rose to $27.0 million on the incremental tax the refunds carried.²⁵ And we check when the year's incentive compensation targets were set relative to when the credit landed, because a target established against a tariff-burdened forecast and measured against a tariff-refunded result is not a target that management had to meet.

The general form outlasts the tariffs. Any issuer holding an affirmative claim—an antitrust recovery, a contract claim, an insurance receivable, a refund of an exaction later held unlawful—carries that claim at nothing while carrying at full value the cost that created it. The claim is absent from the balance sheet, and when it resolves it arrives in the results of a period that had nothing to do with it. Investors have long practice at searching financial statements for assets worth less than stated. This is the reverse exercise, and it runs through the same footnotes most readers skip.

Carter's second quarter is a clean specimen because the amounts are large, the disclosure is complete, and the reconciliation closes to within a third of a million dollars. Most cases will not be that clean. That is the reason to look.

Referenced Sources:

[1] Carter's, Inc., Quarterly Report on Form 10-Q for the fiscal quarter ended July 4, 2026, Condensed Consolidated Statements of Operations (primary; supports net sales of $615,490 thousand and cost of goods sold of $202,891 thousand for the quarter ended July 4, 2026, and net sales of $585,313 thousand and cost of goods sold of $303,553 thousand for the quarter ended June 28, 2025). Gross margin percentages of 67.0 percent and 48.1 percent are Buxton Helmsley calculations from those figures.

[2] Id., Note 14, Segment Information (primary; supports total segment cost of goods sold of $330,559 thousand for the quarter ended July 4, 2026, the identification of U.S. Retail, U.S. Wholesale, and International as the three reportable segments, and the Company's statement that segment operating income excludes unallocated corporate expenses and the impact of tariff refund recoveries, as well as specified charges not directly attributable to segment operations).

[3] Id., Note 2, Basis of Presentation and Summary of Significant Accounting Policies, under the caption IEEPA Tariff Recovery (primary; supports the Company's election of the ASC 450-30 gain contingency model, submission of claims of approximately $130 million following the April 20, 2026 launch of the Customs and Border Protection Consolidated Administration and Processing of Entries process, receipt of approximately $132 million including interest during the second quarter, recognition of approximately $128 million as a reduction of cost of goods sold and $4 million as interest income, approximately $2 million of remaining unadjudicated claims at July 4, 2026, and the Company's statement that any recovery is reflected as a reduction of cost of goods sold for goods already sold or as a reduction of inventory to the extent goods remain on hand).

[4] Buxton Helmsley calculation, derived and not reported by the Company. The recovery of $127,668 thousand is total segment cost of goods sold of $330,559 thousand less consolidated cost of goods sold of $202,891 thousand; it agrees with the approximately $128 million the Company discloses at note [3] to within $332 thousand. Gross profit excluding the recovery of approximately $284.9 million is net sales of $615,490 thousand less $330,559 thousand, yielding a margin of approximately 46.3 percent against 48.1 percent in the prior-year quarter. Operating income excluding the recovery of approximately $12.2 million is reported operating income of $139,826 thousand less $127,668 thousand. The refund and associated interest represent approximately 96 percent of reported income before income taxes of $136,645 thousand. Buxton Helmsley does not present an earnings-per-share figure excluding the recovery, because the Company's effective tax rate of 23.2 percent for the quarter cannot reliably be applied to a materially smaller pre-tax base; the Company reported an effective rate of 73.8 percent in the prior-year quarter on a small base, which illustrates the point.

[5] Hubbell Incorporated, Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2026 (primary; supports the case name Learning Resources, Inc. v. Trump, the February 20, 2026 decision date, the invalidation of certain tariffs imposed under IEEPA, and the April 20, 2026 launch by Customs and Border Protection of a system to process refund claims). See also Kohl's Corporation, Annual Report on Form 10-K for the fiscal year ended January 31, 2026, Note 8 (primary; independently naming the case and date). Buxton Helmsley has not reviewed the slip opinion and states no proposition here about the vote, the authoring Justice, or the Court's reasoning beyond the holding as described in these filings.

[6] Carter's, Inc., Form 10-Q for the fiscal quarter ended July 4, 2026, Note 2 (primary; supports that during the second quarter of fiscal 2025 the Company identified a triggering event related to the new tariffs and their unfavorable impact on its financial forecasts, together with a sustained decrease in its stock price, performed a quantitative impairment test on goodwill and indefinite-lived tradenames, and recorded no impairment).

[7] Carter's, Inc., Quarterly Report on Form 10-Q for the fiscal quarter ended April 4, 2026 (primary; supports that as of April 4, 2026 the Company had received no refund payments, that uncertainty remained regarding timing, amount, and ultimate receipt, that accordingly no gain had been recognized for that quarter, and that the claims were submitted subsequent to April 4, 2026).

[8] FASB Accounting Standards Codification 450-30-25-1, paraphrased (supports that a contingency which might result in a gain generally should not be reflected in the financial statements because doing so might recognize revenue before its realization). Buxton Helmsley does not hold a Codification license; this paragraph was verified against Deloitte's Roadmap: Contingencies, Loss Recoveries, and Guarantees, Chapter 3, PwC's Financial statement presentation guide, Section 23.5, and Wiley GAAP, each of which reproduces it.

[9] FASB Accounting Standards Codification 450-20-25-2, paraphrased (supports that an estimated loss from a loss contingency is accrued when it is probable that an asset has been impaired or a liability incurred at the balance sheet date and the amount is reasonably estimable). Verified against Deloitte's Roadmap, Section 2.3.

[10] Deloitte, Roadmap: Contingencies, Loss Recoveries, and Guarantees, Sections 3.1 and 3.3 (secondary interpretive guidance from a major accounting firm; supports that a gain contingency is not recognized even where realization is considered probable, that the notion of probable is not relevant to gain contingencies, and that recognition occurs at the earlier of realized or realizable).

[11] FASB Accounting Standards Codification 250-10-20, quoted definitions (supports that an error in previously issued financial statements is one resulting from mathematical mistakes, mistakes in the application of generally accepted accounting principles, or oversight or misuse of facts that existed at the time the financial statements were prepared; and that a change in accounting estimate is one having the effect of adjusting the carrying amount of an existing asset or liability, resulting from new information). Verified against Deloitte's Roadmap: Income Taxes, Section 12.6.1, and KPMG's Handbook: Accounting Changes and Error Corrections, each of which reproduces the Master Glossary definitions.

[12] PwC, Income taxes guide, Section 6.3, and Deloitte, Roadmap: Income Taxes, Section 12.6.1 (secondary interpretive guidance; supports that an adjustment resulting from new information, a change in facts and circumstances, or later identification of information that was not reasonably knowable or readily accessible as of the prior reporting period is a change in estimate rather than the correction of an error). The application of this principle to a judicial determination of statutory authority is Buxton Helmsley's analysis, not a conclusion stated in either source.

[13] FASB Accounting Standards Codification 250-10-45-17 and 250-10-45-23, paraphrased (supports that a change in accounting estimate is accounted for in the period of change and, if applicable, future periods, and that the correction of an error is accounted for by restating previously issued financial statements). Verified against PwC's Income taxes guide, Section 6.3, which cites and reproduces both paragraphs.

[14] FASB Accounting Standards Codification 450-30-20, paraphrased (supports the definition of a gain contingency as an existing condition, situation, or set of circumstances involving uncertainty as to possible gain that will ultimately be resolved when one or more future events occur or fail to occur). Verified against Deloitte's Roadmap, Section 3.1.

[15] NIKE, Inc., Annual Report on Form 10-K for the fiscal year ended May 31, 2026 (primary; supports that during the fourth quarter of fiscal 2026 Nike deemed recovery of IEEPA tariffs paid to be probable, recognized a benefit of $986 million in cost of sales of which $965 million was classified within North America and $21 million within Converse, stated that the benefit largely offset the impact of IEEPA tariffs recognized during fiscal 2026, and that as of May 31, 2026 it had received $302 million and recorded $684 million of outstanding IEEPA tariff receivables within accounts receivable, net). The disclosure as read does not name a codification section; the characterization of Nike's threshold as a probability assessment follows the language of the filing.

[16] Terex Corporation, Quarterly Report on Form 10-Q for the fiscal period ended June 30, 2026 (primary; supports the ASC 450-30 election, $51 million of refund claims filed during the quarter, $29 million of cash refunds received, $26 million recognized as a reduction of cost of goods sold, and $3 million recorded as a liability because not yet realized).

[17] Topgolf Callaway Brands Corp., filed under Callaway Golf Co., Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2026 (primary; supports recognition of $10.8 million of tariff refunds on approved Phase 1 claims as a reduction of cost of sales during the second quarter, and receipt of $6.7 million of approved Phase 2 refunds after the quarter end to be recognized in the third quarter).

[18] Mettler-Toledo International Inc., Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2026, Note 14 (primary; supports refund claims of approximately $53 million, non-recognition as gain contingencies under ASC 450-30, the anticipation that a significant portion of any refund will be refunded to customers, and the absence of any provision for customer refunds pending claim resolution).

[19] ADTRAN Holdings, Inc., Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2026 (primary; supports the conclusion that the potential refund should be evaluated under a loss recovery model pursuant to ASC 410-30, that recovery was not probable as of the reporting date, that no refund receivable was recognized, and that the Company may owe amounts to customers depending on final assessments of pass-through obligations).

[20] PVH Corp., Quarterly Report on Form 10-Q for the quarterly period ended May 3, 2026 (primary; supports the ASC 450-30 election and that no receivable was recorded as of May 3, 2026). Kohl's Corporation, Annual Report on Form 10-K for the fiscal year ended January 31, 2026, Note 8 (primary; supports the determination that recovery was not yet probable or reasonably estimable).

[21] Culp, Inc., Annual Report on Form 10-K for the fiscal year ended May 3, 2026 (primary; supports that Culp filed a claim with the Court of International Trade seeking approximately $7.0 million, received payment for the full amount claimed during the first quarter of fiscal 2027, and disclosed uncertainty as to whether the company may retain the refund).

[22] Penn Wharton Budget Model, "Supreme Court Tariff Ruling: IEEPA Revenue and Potential Refunds" (February 20, 2026) (third-party calculation from official data; supports cumulative IEEPA tariff collections of approximately $164.7 billion through January 2026, based on the model's calculations using U.S. International Trade Commission DataWeb, Customs and Border Protection revenue reports, and the Treasury Daily Statement). This is a model estimate, not a figure published by the collecting agency.

[23] KPMG, "Supreme Court overturns IEEPA tariffs," Financial Reporting View (June 2026) (secondary commentary from a major accounting firm; supports that in a May 29, 2026 notice of appeal to the Court of International Trade the Administration stated that Customs and Border Protection was relying on its own authorities to begin refunding approximately $85 billion of IEEPA tariffs, characterized as more than half of the total paid, and that for entities that had not issued financial statements as of February 20, 2026 the ruling is a subsequent event evaluated under ASC 855). Buxton Helmsley has not reviewed the notice of appeal.

[24] Annual Reports on Form 10-K filed after February 20, 2026 by Lowe's Companies, Inc. (fiscal year ended January 30, 2026, Note 19), Ross Stores, Inc. (January 31, 2026, Note K), Best Buy Co., Inc. (January 31, 2026), The Gap, Inc. (January 31, 2026, Note 18), The Buckle, Inc. (January 31, 2026, Note O), Vince Holding Corp. (January 31, 2026, Note 15), Cricut, Inc. (December 31, 2025, Note 17), Dorman Products, Inc. (December 31, 2025), and National Presto Industries, Inc. (December 31, 2025, Note Q) (primary; each supports disclosure of the February 20, 2026 ruling and the absence of any recognized recovery, with each issuer citing uncertainty as to availability, timing, or amount).

[25] Carter's, Inc., Form 10-Q for the fiscal quarter ended July 4, 2026, Condensed Consolidated Statements of Cash Flows and Note 4 (primary; supports operating cash flow of $202,295 thousand for the first two fiscal quarters of 2026 against negative $8,338 thousand for the comparable prior-year period, income taxes payable of $27,030 thousand at July 4, 2026 against $635 thousand at January 3, 2026, and the Company's attribution of that increase to incremental income taxes on the IEEPA tariff refunds received during the second quarter).

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