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Bear Of The Day: Children's Place (PLCE)

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Children's Place (PLCE - Free Report) is yet another product of the quickly escalating retail apocalypse. The COVID pandemic has been devasting to retail businesses that rely on brick-and-mortar foot-traffic, and PLCE is no exception. PLCE shares have run up unjustly these last few months, and I would pull my money out while I still had the chance. Analysts have been dropping their expectations for PLCE for some time, and this stock is now sitting at a Zacks Rank #5 (Strong Sell).

Pandemic Impact 

The business is getting hammered by the COVID pandemic, with sales down 38% in PLCE's Q1 (ending May 2nd). Earnings flipped to a massive loss of ($28.6) million (on an adjusted basis) and an EPS of ($1.96), which represents the company's worst quarter in over a decade.

Children's Place liquidity is dwindling with a disappearing line of credit that leaves the company with only about $100 million left in liquidity and currently liabilities up to $759 million. I am worried that if the business is unable to open its stores to full capacity in the next 6-months or so, it could be looking at a bankruptcy restructuring or worse.

Look for PLCE's Q2 report on Wednesday, August 19th, in what is expected to be another unprofitable quarter. According to Zacks Consensus estimates, PLCE is expected to report an EPS of -$1.34 on sales of $368 million.

The Retail Apocalypse & Recent Acquisition 

The company has closed over 200 stores since 2013, with 42 store closures in 2018 and another 45 closures in 2019. The company is en route to close about 1/3 of its stores in less than 10 years. Management will not give up despite the obvious systemic issues in its business model.

Children's Place just acquired children's brand Gymboree for $76 million (this acquisition also included Crazy 8 brand) after the company filed for its second bankruptcy in less than two years. Gymboree was forced to close down ¾ fourths of its stores following its January bankruptcy as the brand goes seemingly obsolete. Children's Place is attempting to revitalize the company through rebranding, which I expect will take a substantial amount of capital and may not be successful.

The acquisition brought on an extensive amount of debt to the firm's balance sheet bringing its total debt-to-capital up to 72%. This is a concerning level for me to see, especially when the firm is experiencing a declining top and bottom-line. If consumer discretionary spending dries up, this combined company will find itself in bankruptcy court pretty quickly. 

Children's Place is hoping to rejuvenate Gymboree with its 200 remaining stores and's relaunch in 2020. This whole venture is a massive risk, and I personally don't see it working out.

Take Away

Children's Place appears to have systemic issues that this new acquisition of an obsolete brand will not improve. I think that the purchase of Gymboree marks the beginning of the end for this enterprise. I would stay away from PLCE, especially after the unjustified share price run-up these past few months.

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