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Children's Place (PLCE) Stock Falls on Q1 Loss, Sales Decline

Zacks Equity Research

Shares of The Children’s Place, Inc. PLCE declined roughly 4% during the trading session on Jun 11. This downside can be attributed to dismal first-quarter fiscal 2020 performance owing to the coronavirus outbreak that led to the temporary closure of stores. The pure-play children’s specialty apparel retailer reported a loss and continued to register year-over-year decline in net sales. Nonetheless, this NJ-based company posted narrower-than-expected loss. Top line also came marginally ahead of the Zacks Consensus Estimate, marking the second straight quarter of positive surprise.

Shares of this Zacks Rank #5 (Strong Sell) company have fallen 16.5% in the past six months compared with the industry’s decline of 33%.

Let’s Introspect

It’s quite obvious that Children’s Place bore the brunt of temporary store closures that were undertaken to check the spread of COVID-19. The company suspended all store operations in the United States and Canada owing to the coronavirus effective Mar 18 and only started reopening stores on May 19 in 10 states. The company announced that it will continue to reopen stores in a phased manner as per state and local guidelines.

Undoubtedly, management remains committed to address the challenges related to the pandemic. In this respect, the company is accelerating fleet optimization initiative, directing resources toward digital platforms in order to better engage with customers, augmenting supply chain and concentrating on improving financial flexibility. It is also focusing on “Superior Product” strategy to resonate well with millennial customers and advancing omni-channel capabilities. Management notified that the company has one of the highest digital penetrations in the industry — accounting for 31% of revenues for fiscal 2019.

The company informed that to help fulfill its surging online demand amid the pandemic, it enabled ship-from-store capabilities in roughly 85% of its U.S. stores, which more than doubled its daily shipping capacity.

Children’s Place also stated that due to the upsurge in demand for essential children’s clothing, quarter-to-date consolidated sales have increased in low double-digits. It further pointed that on-line demand has soared 300%, as quite a number of stores remain closed. Management expects majority of stores to be operational by Jul 1. As of Jun 8, the company had 61 stores open to the public in the United States and Canada.

With regards to its fleet optimization strategy, the company plans to close an additional 300 stores by the end of fiscal 2021. Of these, 200 closures are planned for this year and remaining for fiscal 2021. 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. The company is aiming mall-based, brick-and-mortar portfolio to represent less than 25% of revenues entering fiscal 2022.

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

Results in Detail

Children’s Place posted adjusted loss of $1.96 per share, narrower than the Zacks Consensus Estimate of a loss of $2.35. Notably, the company had reported an earnings of 36 cents in the year-ago period. Lower net sales hurt the company’s bottom line.

Net sales of $255.2 million declined 38.1% year over year thanks to the temporary store closures on account of the pandemic. However, the top line came ahead of the Zacks Consensus Estimate of $254 million.

Moving on, adjusted gross profit came in at $68.4 million, significantly down from $151.4 million in the year-ago period. Again, gross margin contracted 990 basis points to 26.8% owing to the higher penetration of e-commerce business and its increased fulfillment costs. Deleverage of fixed expenses on account sales decline also hurt the metric.

Adjusted SG&A expenses declined 30.7% to $88.2 million in the reported quarter. However, as a percentage of net sales, the metric deleveraged 380 basis points to 34.6% primarily due to deleverage of fixed expenses resulting from the decline in sales. This was partially offset by lower operating expenses on account of measures undertaken to mitigate the impact of the COVID-19.

The company reported adjusted operating loss of $37.5 million against adjusted operating income of $6.6 million.

Store Update

With respect to fleet optimization strategy, the company closed four outlets during the quarter under review. Notably, the company ended the quarter with 920 stores with 62% in malls and 38% in non-malls. The company had 266 international points of distribution operated by eight international franchise partners in 19 countries.

Since the announcement of fleet optimization initiative in 2013, the company has closed 275 stores. Moreover, it plans to close additional 300 stores by the end of fiscal 2021.

Other Financial Aspects

Children’s Place ended the quarter with cash and cash equivalents of $71.8 million, which reflects a sequential increase of 4.8%. Notably, the company has no long-term debt. However, the company had $235 million outstanding on its $360 million revolving credit facility compared with $171 million outstanding on its $325 million revolving credit facility at the end of fiscal 2019. The increase reflects funding to support operations and seasonal working capital needs. Stockholders' equity at the end of the quarter was $105 million.

The company used roughly $40.5 million in operating cash flow and repurchased 262 thousand shares for approximately $15 million. At the end of the quarter, the company had approximately $94 million available under its existing share repurchase program. However, effective Mar 18, the company suspended its capital return program — share repurchases and dividends — in response to the coronavirus crisis. The company incurred capital expenditures of approximately $6 million during the quarter. Management anticipates capital expenditures of approximately $20 million in fiscal 2020.

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