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The Children's Place (PLCE) Q1 Earnings Beat, Stock Rise

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In spite of a challenging backdrop, The Children’s Place, Inc. PLCE reported stronger-than-anticipated first-quarter fiscal 2021 results. This pure-play children’s specialty apparel retailer witnessed a significant improvement in net sales that even surpassed pre-pandemic level despite having 261 or 27% fewer stores at the end of first-quarter fiscal 2021 compared with first-quarter fiscal 2019. Notably, the quarter under review marked the third straight top- and bottom-line beat.

The two-pronged approach of massive coronavirus stimulus package and mass vaccination has acted as tailwind. Shares of The Children’s Place rose approximately 5% during the trading session on May 20, 2021. Markedly, this Zacks Rank #3 (Hold) stock has surged 34.6% in the past three months against the industry’s decline of 0.7%.

Let’s Analyze

The Children’s Place posted adjusted earnings of $3.25 per share that comfortably surpassed the Zacks Consensus Estimate of 3 cents. Impressively, the bottom line improved significantly from an adjusted loss of $3.33 per share reported in the year-ago period, thanks to higher net sales and margin expansion.

Net sales of $435.5 million surged 70.6% year over year owing to double digit jump in AUR resulting from favorable customer response toward product assortment, higher price realization, lower promotional activity, and stimulus checks to eligible Americans. Top line further gained from acceleration in back-to-school sales, ability to hold new digital customers gained amid the pandemic, and a significant improvement in store customers.

However, temporary and permanent store closures and the adverse impact of lower operating hours in mall stores, as directed by the mall owners hurt the company’s top-line performance to an extent. Nonetheless, the top line handily beat the Zacks Consensus Estimate of $351 million.

Management stated that all key metrics across both digital and stores channels surpassed its expectations. Comparable retail sales increased 83% during the quarter. Impressively, consolidated digital sales surged 37% during the quarter, representing 42% of total sales. Digital sales rose 35% in the United States and 82% in Canada.

The expansion of digital business coupled with the significant sales transfer rate that the company is attaining owing to the strategic decision to shutter 300 stores are resulting in long-term steady state annual digital penetration of 50%.

Again, we note that U.S. store sales were better-than-expected driven by strong product acceptance and double-digit AUR increases. However, the picture was somewhat different in Canada, where government mandated COVID-19 closures impacted roughly 50% of stores for more than half of the quarter. Canada’s store sales declined 43% with traffic down 69%.

The Childrens Place, Inc. Price, Consensus and EPS Surprise

The Childrens Place, Inc. Price, Consensus and EPS Surprise
The Childrens Place, Inc. Price, Consensus and EPS Surprise

The Childrens Place, Inc. price-consensus-eps-surprise-chart | The Childrens Place, Inc. Quote

Margin Discussions

Moving on, first-quarter fiscal 2021 adjusted gross profit was $189.2 million, up significantly from $45.3 million in the year-ago period. Again, gross margin expanded to 43.4% from 17.7% in the prior-year quarter. This increase was driven by higher merchandise margins across both stores and digital channels, and lower occupancy expenses on account of rent abatements, favorable lease negotiations and permanent store closures. Additionally, fixed cost leverage stemming from higher sales favorably impacted the gross margin rate.

Adjusted SG&A expenses increased 12.7% to $104.1 million in the reported quarter. As a percentage of net sales, the metric leveraged 1,231 basis points to 23.9% primarily due to fixed expense leverage resulting from the increase in net sales, partly offset by higher incentive compensation accruals.

The company’s adjusted operating income amounted to $70.7 million, against operating loss of $64.9 million in the year-ago period, and leveraged 4,168 basis points to 16.2% of net sales. Markedly, the company remains well on track to accelerate operating margin expansion in fiscal 2021 and beyond. Management notified that lower occupancy costs owing to fleet optimization strategy should continue to fuel operating margin expansion throughout the current fiscal year and beyond.

Store Update

As of May 1, 2021, The Children’s Place had 679 of 724 stores open to the public in the United States, Canada and Puerto Rico, with all of the temporarily closed stores located in Canada.

With respect to its store fleet optimization strategy, The Children’s Place permanently shuttered 25 stores during the first quarter. The company now plans to shutter additional 98 stores in fiscal 2021. This will take the total store closure count to 300 for the two-year period.

Since the announcement of the fleet optimization initiative in 2013, the company has permanently closed 474 stores. These store closures are seen as part of the company’s effort to lower dependency on brick-and-mortar platform and shift toward digitization due to the changing consumer shopping pattern. Moreover, entering fiscal 2022, the company targets a store fleet of roughly 625 locations and aims to generate 75% of its total revenues from sources outside the traditional malls.

Other Financial Aspects

The Children’s Place ended the quarter with cash and cash equivalents of $65.4 million. The company had $196.9 million outstanding on its revolving credit facility at the end of the quarter. Stockholders' equity at the end of the quarter was $145 million.

The company used about $16.6 million in operating cash flow during the quarter under review. It incurred capital expenditures of approximately $7 million during the quarter. Management anticipates fiscal 2021 capital expenditures in the range of $50 million with major portion to be allocated to digital and supply chain fulfillment initiatives.

It also intends to recommence capital return program in the third quarter of fiscal 2021 based on current liquidity position and assuming a normalized back-to-school selling season. The company currently has $91 million remaining under its $250 million authorization.

Outlook

Management foresees sales opportunities and operational efficiencies when social distancing measures as well as other restrictions such as limited-hour operations are further removed and the company’s stores and distribution centers start to operate normally.

The Children’s Place has commenced second-quarter fiscal 2021 on a strong note. Although management expects e-commerce sales to be lower versus last year, it envisions sturdy second-quarter store sales as the company anniversary the shutdown of entire store fleet for about 50% of the quarter last year. The company witnessed unprecedented levels of e-commerce demand last year. We note that e-commerce represented more than 70% of sales in second-quarter last year.

The company expects lower sales in Canadian stores business, thanks to government mandated COVID-19 closures that have been in place since the beginning of March and is expected to continue until sometime in June. This is likely to impact approximately half of the Canadian fleet.

Again, management anticipates second-quarter gross margin to moderate from first-quarter level owing to deleverage of fixed costs on lower net sales, the larger first-quarter abatement, and increase in inbound transportation expenses due to persistent supply chain disruption. Again, SG&A expenses are expected in the range of $110 million, higher than the first quarter.

For the second half of fiscal 2021, store sales are projected to remain flat with fiscal 2020 levels. This is due to higher store productivity, which is likely to offset the impact of permanent store closures as part of store fleet optimization strategy.

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