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Children's Place Down 23% in 6 Months: Reasons for Fiasco

Zacks Equity Research

Shares of The Children's Place, Inc. PLCE came under pressure following the company’s lower-than-expected fourth-quarter fiscal 2018 results, wherein both the top and the bottom line declined on a year-over-year basis. This was the second straight quarter in which the company witnessed negative earnings surprise. Net sales also fell short of the Zacks Consensus Estimate, after surpassing the same in the preceding two quarters. Its bleak fiscal 2019 view on account of unforeseen challenges owing to the bankruptcy of its rival, Gymboree, and a very late Easter have also hurt the stock.

Following the results and muted view, there has been a sharp downward revision in the Zacks Consensus Estimate, as analysts covering the stock gradually took a bearish stance. The Zacks Consensus Estimate for first-quarter fiscal 2019 has moved south from earnings of 23 cents to loss of 59 cents over the past 30 days. For fiscal 2019, the consensus estimate has moved down to $5.67 from $7.02 in the same time frame.

This pure-play children’s specialty apparel retailer also announced that it has entered into an Asset Purchase Agreement with Gymboree Group, Inc. and related entities to buy intellectual property assets of Gymboree and Crazy 8 (the Gymboree Assets) for $76 million. Although this buyout is likely to be accretive to fiscal 2020 adjusted earnings per share, it may have a negative low-teens percentage impact on fiscal 2019 earnings owing to incremental investments to harness opportunities provided by the Gymboree assets.

Management expects adjusted earnings in the band of $5.25-$5.75 per share for fiscal 2019, down from earnings of $6.75 reported in fiscal 2018. Total net sales are expected in the range of $1,890-$1,915 million, down from $1,938.1 million recorded in fiscal 2018. Also, the company forecasts comparable retail sales to be flat to down 1% compared with 4.6% increase in fiscal 2018.

Children's Place expects first half of fiscal 2019 to be quite tough with performance expected to improve in the back-half on account of lower supply in the children’s apparel space. Margins are likely to gain from lower inventory levels and a fall in product costs.

For first-quarter fiscal 2019, the company anticipates adjusted loss of 40-70 cents a share, down from earnings of $1.87 recorded in the prior-year period. Net sales are projected to be in the range of $385-$395 million, down from $436.3 million reported in the first quarter of fiscal 2018. Comparable retail sales are expected to decline in the band of 10-12%.

Moreover, we note that the company is witnessing strained margins for quite some time now. After contracting 150 basis points during the third quarter of fiscal 2018, operating margin shriveled 590 basis points to 4.1%. We also note that adjusted gross margin contracted 550 basis points to 31.5% due to lower merchandise margin, deleverage of fixed expenses and increased e-commerce penetration. Adjusted SG&A expenses, as a percentage of net sales, deleveraged 60 basis points on a year-over-year basis.

Cumulatively, these have led this Zacks Rank #5 (Strong Sell) stock to plunge more than 23% in the past six months compared with the industry’s decline of 14.8%.

Key Picks

Abercrombie & Fitch Co. ANF has a long-term earnings growth rate of 15.3% and carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Foot Locker, Inc. FL has a long-term earnings growth rate of 9.4% and a Zacks Rank #1.

Zumiez Inc. ZUMZ has a long-term earnings growth rate of 13.5% and a Zacks Rank #2 (Buy).

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