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The Children's Place (PLCE) Q1 Earnings Miss, Comps Fall Y/Y

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·6 min read
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The Children’s Place, Inc. PLCE came up with first-quarter fiscal 2022 results, wherein both the top and the bottom lines not only missed the Zacks Consensus Estimate but also declined year over year. Soaring inflation, unseasonably cold weather and the lapping of the unprecedented stimulus released into the economy in March last year adversely impacted the company’s quarterly performance. Management pointed out that 2022 March sales plunged approximately 35% year over year.

This pure-play children’s specialty apparel retailer expects inflation to persist into fiscal 2023 and continue to impact lower-income consumers. Owing to the unprecedented level of inflation and the lack of visibility about its impact in the near term, management trimmed the sales forecast for fiscal 2022. It now envisions a mid-single-digit decline in sales versus its earlier projection of growth of 1%.

In spite of these headwinds, The Children’s Place foresees a double-digit operating margin and double-digit earnings per share for fiscal 2022 and beyond, supported by a structural reset to the business model made in the last two years. It also appears enthusiastic about the launch of the Gymboree brand on Amazon’s website in July this year.

Let’s Analyze

The Children’s Place posted adjusted earnings of $1.05 per share that fell short of the Zacks Consensus Estimate of $1.66. The reported figure declined sharply from the year-ago period figure of $3.25, thanks to lower net sales and margin contraction.

Net sales of $362.4 million decreased 16.8% year over year, primarily due to the lapping of the pandemic relief payments last year, the impact of inflation on customers, prolonged unseasonably cold temperature through the end of the quarter in key markets, and the impact of permanent store closures. The top line also came below the Zacks Consensus Estimate of $406 million, marking the fourth straight miss.

U.S. net sales fell 21% year over year to $306 million, while Canadian net sales increased 2% to $31 million. Comparable retail sales fell 16.9% from the year-ago period.

Consolidated digital sales declined 18% year over year during the quarter. We note that digital sales represented 45% of total retail sales, with approximately 73% of digital business now coming through a mobile device. Again, store net sales were down 20% from the year-ago period, while comp-store traffic fell 8%.

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 and EPS Surprise

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

Margin Discussions

Moving on, the first-quarter adjusted gross profit was $141.9 million, down from $189.2 million in the year-ago period. Again, gross margin shriveled 429 basis points to 39.2%. This year-over-year contraction was the result of higher inbound transportation costs and the deleverage of fixed expenses resulting from lower net sales. These were partly offset by higher merchandise margins in both channels, driven by AUR increases.

Management informed that increased inbound freight transportation costs owing to higher levels of air freight costs and rise in container rates hurt gross margin rate by about 275 basis points.

Adjusted SG&A expenses increased 3.9% to $108.2 million in the reported quarter. As a percentage of net sales, the metric deleveraged 595 basis points to 29.9%, primarily due to the deleveraging of fixed expenses resulting from lower net sales as well as planned higher marketing spend.

The company’s adjusted operating income came in at $20.6 million, down significantly from $70.7 million in the comparable period last year. Meanwhile, the adjusted operating margin contracted 1,057 basis points to 5.7%.

Store Update

The Children’s Place ended the quarter with 665 stores. With respect to its store fleet optimization strategy, The Children’s Place permanently shuttered seven stores during the first quarter. The company plans to close roughly 40 stores in fiscal 2022. Since the announcement of the fleet optimization initiative in 2013, the company has permanently closed 534 stores.

Other Financial Aspects

The Children’s Place ended the quarter with cash and cash equivalents of $58.5 million. The company had $249.5 million outstanding on its revolving credit facility as of Apr 30, 2022. Stockholders' equity at the end of the quarter was $213.7 million.

The company incurred capital expenditures of approximately $11 million during the quarter. Management anticipates fiscal 2022 capital expenditures in the range of $55 million, with a major portion to be allocated to digital and supply chain fulfillment initiatives.

During the quarter, the company bought back 666,000 shares for approximately $38.8 million. As of Apr 30, 2022, the company had approximately $218.6 million remaining under its existing share repurchase program.

Outlook

Management foresees sales trends to improve compared with the first quarter of fiscal 2022 as the company progresses through the balance of the fiscal year. It envisions back-to-school sales this year to be significantly lower than the last year, which had benefited from pent-up demand and the rollout of enhanced child tax credits.

The Children’s Place anticipates lower occupancy costs compared with the last year due to the impact of permanent store closures. Given accelerated digital transformation and structural reset to the business model, the company expects to generate higher operating cash flow for the fiscal year versus pre-pandemic.

Shares of this Zacks Rank #3 (Hold) company have lost 26.2% in the past three months compared with the industry’s decline of 28.4%.

3 Stocks Hogging the Limelight

Here we highlight three top-ranked stocks, namely, Steven Madden SHOO, G-III Apparel GIII and Designer Brands DBI.

Steven Madden is a leading designer and marketer of fashion-forward footwear, accessories and apparel for women, men and children. The stock currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Steven Madden’s current financial year revenues and EPS suggests growth of 15.2% and 19.6%, respectively, from the year-ago reported figure. SHOO has a trailing four-quarter earnings surprise of 44%, on average.

G-III Apparel designs, sources and markets apparel and accessories under owned, licensed and private label brands. The stock currently carries a Zacks Rank #2 (Buy).

The Zacks Consensus Estimate for G-III Apparel’s current financial year revenues and EPS suggests growth of 10% and 5.4%, respectively, from the year-ago reported figure. G-III Apparel has a trailing four-quarter earnings surprise of 160.6%, on average.

Designer Brands, one of North America's largest designers, producers and retailers of footwear and accessories, carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 112.8%, on average.

The Zacks Consensus Estimate for Designer Brands’ current financial year sales and EPS suggests growth of 6.5% and 8.8%, respectively, from the year-ago period.


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