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The Children's Place (PLCE) Up 10.8% Since Last Earnings Report: Can It Continue?

Zacks Equity Research

A month has gone by since the last earnings report for The Children's Place (PLCE). Shares have added about 10.8% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is The Children's Place due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Children's Place Beats on Q3 Earnings, View Soft

The Children’s Place, Inc. reported mixed third-quarter fiscal 2019 results, wherein earnings beat estimates but sales lagged the same. However, the company’s earnings declined on a year-over-year basis while sales improved. Further, it provided soft view for fourth-quarter fiscal 2019 due to weaker-than-planned mall traffic so far in the year. Based on the soft fourth-quarter guidance, the company slashed its view for fiscal 2019.

Though the company’s bottom line beat estimates in the reported quarter, investors were not pleased with bleak view for fiscal 2019.

A Look at Guidance

The company now envisions net sales of $1,862-$1,867 million compared with $1,910-$1,925 million guided previously. The guidance is also lower than sales of $1,938.1 million reported in fiscal 2018.

The company forecast comparable retail sales to decrease around 3%. Earlier, it had guided comparable retail sales to be flat with the fiscal 2018 level. E-commerce penetration is now projected to increase to 31% of net sales from approximately 28% in the prior year. Further, it envisions adjusted operating margin of 5.7-5.9% compared with the prior guidance of 6.1-6.4%. The company recorded 6.6% in fiscal 2018.

The company now anticipates adjusted earnings to be $5.00-$5.20 per share for fiscal 2019 compared with $5.40-$5.75 stated earlier. This indicates a decline from earnings of $6.75 reported in fiscal 2018. The guidance includes an impact of nearly 13 cents from the recently implemented tariffs.

For fourth-quarter fiscal 2019, the company expects net sales of $504-$509 million. Comparable retail sales are expected to decrease in mid single digit compared with the prior-year period. Meanwhile, adjusted operating margin is projected to be 6.1-6.8%.

Adjusted earnings are anticipated to be $1.48-$1.68 in the fiscal fourth quarter, suggesting growth from $1.10 in the prior-year period.

Q3 Details

The children's specialty apparel retailer reported adjusted earnings of $3.03 a share, outpacing the Zacks Consensus Estimate of $3.02. However, the bottom line declined 1.3% from the year-ago period’s figure of $3.07. This marked the company’s second straight quarter of earnings beat.

Children’s Place generated net sales of $524.8 million that lagged the Zacks Consensus Estimate of $534.2 million, marking the second consecutive quarter of miss. Nevertheless, the company’s top line inched up 0.4% on a year-over-year basis. The increase in net sales was driven by 0.8% increase in comparable retail sales. However, comparable retail sales came below its guided range of 3-4%.

Comparable retail sales increased 1.2% in the United States while the same declined 2.8% in Canada. E-commerce penetration improved 650 basis points to 35% of net sales in the quarter under review.

Following a strong back-to-school season, the company’s sales were impacted by warmer weather into late October compared with last year. As a result, the company witnessed decline in store traffic, transactions and conversions in the third quarter. Its seasonal carryover inventory declined in  double digit at the end of the fiscal third quarter.

Coming back to the reported quarter’s results, adjusted gross profit was $198.1 million, down 3.1% year over year. Meanwhile, adjusted gross margin contracted 130 basis points to 37.8%, owing to increased penetration of ecommerce business, which is a lower-margin business.

Adjusted SG&A expenses fell 4.4% from the year-ago period to $116.6 million while as a percentage of net sales, the same decreased 110 basis points to 22.2%. The decrease in SG&A expenses primarily resulted from better expense management and lower incentive compensations.

Adjusted operating income was $63.4 million, down from $65.5 million reported a year ago, while adjusted operating margin shriveled 40 basis points to 12.1% of net sales.

Store Update

As part of store fleet optimization endeavors, the company opened six stores and closed 12 in third-quarter fiscal 2019, thereby ending the quarter with 955 stores. The six stores opened in the reported quarter are in sync with its target of opening about 25 stores in highly productive centers in the next two years. Year to date, the company opened 10 stores that were highly productive centers.

Since the announcement of the store fleet optimization program in 2013, it has shuttered 238 stores. In fact, the company is on track to close about 300 stores by 2020 as part of the program. Further, it has closed nearly 27 stores year to date. Moreover, it now plans to close around 60 stores in 2019 compared with the previous plan of closure of 40-45 stores.

Additionally, its international franchise partners opened 34 net new points of distribution in third-quarter fiscal 2019. Consequently, the company had 260 international points of distribution open and operated by its eight franchise partners in 19 countries, as of Nov 2, 2019.

Other Financial Details

Children's Place ended the quarter under review with cash and cash equivalents of $66.1 million compared with $93 million a year ago. The company exited the quarter with inventories of $389.8 million, up 3.4% year over year. Shareholders’ equity totaled $254.4 million as of Nov 2, 2019. Management incurred capital expenditure of about $21 million in the reported quarter. Further, the company now expects capital spending of approximately $60-$65 million in fiscal 2019 compared with the prior view of $65-$75 million.

During the fiscal third quarter, the company bought back 414 thousand shares for roughly $33 million and paid out a quarterly dividend worth nearly $9 million. As of Nov 2, 2019, it had about $146 million remaining under existing share repurchase program.

Concurrent to the earnings release, it also declared a quarterly cash dividend of 56 cents per share, which is payable Dec 27 to shareholders of record as of Dec 16.

Plans for Gymboree

With respect to Gymboree, Children’s Place is on track to relaunch this iconic brand in early 2020 with an enhanced, personalized, online shopping experience at gymboree.com, and with over 200 shop-in-shop locations in selected The Children’s Place stores across the United States and Canada.

Recently, the company showcased spring 2020 Gymboree collections at a media event supporting the relaunch of the brand. It received positive response along with appreciation from Gymboree fans. Apart from this, the company expects to continue gaining traction from the abandoned Crazy 8 and Gymboree customers.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -26.83% due to these changes.

VGM Scores

At this time, The Children's Place has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise The Children's Place has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.



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