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Children's Place (PLCE) Tumbles 29% Despite Q4 Earnings Beat

Zacks Equity Research

Shares of The Children’s Place, Inc. PLCE lost 29.1% during the trading session on Mar 17 despite the company reporting better-than-expected results for fourth-quarter fiscal 2019. While the bottom line registered solid growth year over year, the top line declined on soft comparable retail sales. In the past three months, the stock has plunged 67.7%, wider than the industry’s decline of 49.5%.

Further, management deferred the guidance for fiscal 2020 in the wake of the prevailing uncertainty surrounding the coronavirus outbreak. Although the company saw low-single digits growth in comparable sales for the first five weeks of first-quarter fiscal 2020, management cited that after five weeks, the impact of the pandemic increases. It further informed that Children’s Place has taken measures in the form of store closures and limited hours across the United States and Canada.

Nevertheless, this Zacks Rank #3 (Hold) company has been receiving positive customer feedback for the Gymboree brand. The company also informed that it is not forecasting issues with product deliveries or delays due to the disruption in China, backed by strength in its diversification strategy and vendor partnerships.

Q4 Details

The children's specialty apparel retailer reported adjusted earnings of $1.85 a share, which outshined the Zacks Consensus Estimate of $1.59. Also, the bottom line surged a whopping 68.2% from the year-ago quarter’s $1.10. Impressively, this marked the company’s fourth straight quarter of an earnings beat. The reported figure exceeded management’s guided earnings range of $1.48-$1.68 as well.

However, net sales fell 3.3% year over year to $513 million in the fiscal fourth quarter. The decline was mainly due to soft comparable retail sales, which fell 3.6%. Nonetheless, the top line marginally came ahead of the Zacks Consensus Estimate of $512 million, returning to a positive surprise after two straight quarters of a miss. Further, the company’s digital business represented nearly 31% of total sales in the quarter under review.

Moreover, adjusted gross profit remained flat year over year at $166.9 million. Meanwhile, adjusted gross margin expanded 100 basis points (bps) to 32.5% owing to higher merchandise margins. The improvement was somewhat offset by deleveraged fixed expenses and higher penetration of e-commerce business that operates at a lower gross-margin rate.

Adjusted SG&A expenses fell 11.9% from the year-ago period to $113 million, while as a percentage of net sales, the metric leveraged 220 bps to 22%. The contraction in SG&A expenses primarily resulted from better expense management and lower incentive compensations, somewhat negated by higher fixed expenses.

The Children's Place, Inc. Price, Consensus and EPS Surprise

The Children's Place, Inc. Price, Consensus and EPS Surprise

The Children's Place, Inc. price-consensus-eps-surprise-chart | The Children's Place, Inc. Quote


As a result, the company’s adjusted operating income surged 62.4% to $35.4 million, with adjusted operating margin increasing 280 bps to 6.9%.

Store Update

As part of store fleet optimization endeavors, Children’s Place opened two stores and shuttered 33 in fourth-quarter fiscal 2019, thereby ending the quarter with 924 stores. Since the announcement of the store fleet optimization program in 2013, it has shuttered 271 stores.

Additionally, its international franchise partners opened six net new points of distribution in fourth-quarter fiscal 2019. Consequently, the company had 266 international points of distribution open and operated by eight franchise partners across 19 countries, as of Feb 1, 2020.

Other Financial Details

Children's Place ended the quarter under review with cash and cash equivalents of $68.5 million compared with $69.1 million a year ago. The company exited the quarter with inventories of $327.2 million, up 7.8% year over year. Shareholders’ equity totaled $235.2 million as of Feb 1, 2020.

Moreover, the company generated operating cash flow of about $178 million in fiscal 2019. Also, it had $171 million outstanding on its $325-million revolving credit facility at the end of the fiscal year. This revolving credit facility also provides an additional $50 million in liquidity.

During the fiscal fourth quarter, the company bought back 557 thousand shares for roughly $38 million and paid quarterly dividends worth nearly $8 million. In the fiscal year, it bought back about 1.6 million shares for roughly $131 million and paid dividends of nearly $35 million. As of Feb 1, 2020, it had about $108 million remaining under its existing share repurchase program.

Key Picks in Retail

Macy's M has an expected long-term earnings growth rate of 12% and a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Chico's FAS CHS, which has a long-term earnings growth rate of 15%, carries a Zacks Rank #2 (Buy).

Costco Wholesale COST, also a Zacks Rank #2 stock, has an expected long-term earnings growth rate of 8.4%.

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