Shares of The Children’s Place, Inc. PLCE plunged roughly 10.3% during the trading session on Mar 4 following the company’s lower-than-expected fourth-quarter fiscal 2018 results, wherein both the top and bottom line declined on a year-over-year basis. The company’s bleak fiscal 2019 view on account of unforeseen challenges owing to the bankruptcy of its rival, Gymboree, and a very late Easter also affected this Zacks Rank #4 (Sell) stock. Management had earlier indicated that Gymboree’s liquidation activity may ramp up promotional environment.
To mitigate the impact of the same, Children’s Place successfully liquidated its seasonal inventories and exited the fourth quarter with a much leaner inventory level. Total inventories declined 6.5% compared with management’s guidance of flat to up low-single digits. This accelerated liquidation negatively impacted fourth-quarter earnings by about 79 cents a share. Management expects first half of fiscal 2019 to be quite tough with performance anticipated 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 fall in product costs.
Concurrently with earnings release, this pure-play children’s specialty apparel retailer 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.
We note that shares of Children’s Place have plummeted 20.5% in the past three months, as against the industry’s decline of 3.3%.
Let’s Delve Deeper
Children’s Place reported adjusted earnings of $1.10 per share, which missed the Zacks Consensus Estimate of $2.11 and fell significantly from the year-ago period’s figure of $2.52. This was the second straight quarter that the company witnessed negative earnings surprise. Management informed that the bottom line was adversely impacted by accelerate liquidation of seasonal inventories, fall in store traffic and lower conversion rates, rise in fulfillment costs and calendar shift related to the 53rd week in the final quarter of fiscal 2017. Further, lower net sales also hurt the bottom line.
The company generated net sales of $530.6 million, declined 6.9% year over year and also fell short of the Zacks Consensus Estimate of $560.8 million, after surpassing the same in the preceding two quarters. The decrease in net sales was owing to fall of 0.6% in comparable retail sales and an adverse impact of about $37 million on account of calendar shift related to the 53rd week in fiscal 2017.
Children's Place, Inc. (The) Price, Consensus and EPS Surprise
Children's Place, Inc. (The) Price, Consensus and EPS Surprise | Children's Place, Inc. (The) Quote
Retail comparable store traffic fell 3% during the reported quarter, while transactions and conversions declined due to imbalance in store inventory following unplanned ship from store activities. Canada comparable retail store sales slid 0.2% on flat traffic. E-commerce sales surged 20.1% and now represents 27% of total sales on a comparable week basis.
Adjusted gross profit came in at $166.9 million, down 20.9% year over year, while adjusted gross margin contracted 550 basis points (bps) to 31.5% due to lower merchandise margin, deleverage of fixed expenses and increased e-commerce penetration. Adjusted operating income came in at $21.8 million, down from $57 million a year ago, while adjusted operating margin shriveled 590 bps year over year to 4.1%.
Adjusted SG&A expenses decreased 4.6% from a year ago to $128.3 million. However, as a percentage of net sales, the same increased 60 bps on a year-over-year basis. The increase in SG&A expenses was due to fixed cost deleverage attributable to fall in comparable retail sales and reclassification of certain items on account of new revenue recognition rules, offset by lower incentive compensation expense.
As part of store fleet optimization endeavors, the company shuttered 16 stores and did not open any outlet, thereby ending the reported quarter with 972 stores. The company concluded the quarter with 217 international points of distribution open and operated by its eight franchise partners in 20 countries.
Other Financial Details
Children's Place ended the quarter with cash and cash equivalents of $69.1 million compared with $244.5 million a year ago. The company exited the quarter with inventories of $303.5 million and shareholders’ equity of $314.4 million.
During the quarter, the company bought back 429.6 thousand shares for roughly $42 million and paid a quarterly dividend of approximately $8 million. At the end of the quarter, the company still has approximately $240 million remaining under its existing share repurchase program.
Bleak FY19 View
Management now anticipates 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. The Zacks Consensus Estimate for the fiscal year is currently pegged at $9.28, which could witness a downward revision in the coming days.
Children's Place now envisions total net sales in the range of $1,890-$1,915 million down from $1,938.1 million recorded in fiscal 2018. The company forecasts comparable retail sales to be flat to down 1%. E-commerce penetration is projected to increase more than 30% of net sales from approximately 28%.
Meanwhile, it envisions adjusted operating margin in the range of 6.3-6.8% compared with 6.6% in fiscal 2018.
The company now anticipates reporting first-quarter fiscal 2019 adjusted loss of 40-70 cents a share, down from earnings of $1.87 recorded in the prior-year period. Net sales are anticipated 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%.
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