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Bear of the Day: The Children's Place (PLCE)

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The Children's Place (PLCE - Free Report) surprised Wall Street with a horrible fourth quarter thanks to the bankruptcy of its chief rival Gymboree. This Zacks Rank #5 (Strong Sell) also guided below consensus for fiscal 2019.

The Children's Place is a specialty retailer of children's apparel. It operates 972 stores in the United States, Canada and Puerto Rico. It also sells online at www.childrensplace.com.

Huge Miss in the Fourth Quarter

On Mar 4, The Children's Place announced its fourth quarter results and missed on the Zacks Consensus by 48%. It shocked Wall Street by reporting just $1.10 versus the consensus of $2.11.

This was the second miss in a row, however.

Comparable retail sales, a key metric for retailers, fell 0.6% when analysts had expected to see a gain. US comparable retail store sales declined 8.2%.

Retail comparable store traffic also fell 3%, largely due to the industry-wide mysterious pre-Christmas shopping slowdown. For The Children's Place, that period saw traffic decline 11%.

Canada's comparable retail store sales weren't great either, falling 0.2% on flat traffic.

The company continues to see gains in e-commerce, however, which was up 20.1% to 27% of total sales.

Gymboree Liquidation Slams Earnings

Gymboree, The Children's Place key competitor with over 800 Gymboree and Crazy 8 stores, declared bankruptcy last year. This should be good news for The Children's Place because it overlaps with 70% of those stores.

But first, Gymboree had to liquidate all of its merchandise.

Where are you going to shop for children's clothes? At Gymboree which is having massive sales or The Children's Place, which isn't?

Children's Place tried to front-run the liquidation sale by accelerating the liquidation of its own seasonal inventories ahead of Gymboree's total liquidation in Q1.

That strategy allowed it to exit the quarter with total inventories down 6.5%. But this accelerated liquidation impacted the fourth quarter earnings by $0.79.

Guidance for Fiscal 2019

Once Gymboree is finally liquidated, the company said there will be a record supply reduction in the children's apparel space. Suddenly, over 800 stores will just be gone.

That sets them up for better performance in the second half of 2019.

It also agreed to acquire certain of the Gymboree assets, including the worldwide rights to the names “Gymboree” and “Crazy 8” and other intellectual property, including trademarks, domain names, design rights, and customer databases, for $76 million.  

For the full fiscal 2019, however, the company sees comparable store retail sales at flat to negative 1%.

The Gymboree liquidation is expected to impact 2019 EPS by $1.50 and the acquisition of the assets by $0.75. It expects earnings to be just $5.25 to $5.75 for the year, down from $6.75 it made in 2018.

Estimates Slashed

Given the big hits from the Gymboree events on the guidance, it's not surprising that the analysts moved to lower their earnings estimates to get in line with the $5.25 to $5.75 range given by the company.

2 estimates have moved lower in the last week, pushing the Zacks Consensus down to $5.47 from $9.28. That's an earnings decline of 19% from 2018.

2020 was also revised lower to $7.07 from $11.46 previously.

Is This a Buying Opportunity?

Shares of The Children's Place were weak even before this news as they fell in 2018.



But they're now down 35% over the last year.

They trade with a forward P/E of just 13.

It's also shareholder friendly with a buyback plan and a dividend, currently yielding 2.2%.

With Gymboree out of the picture, it will likely have more market share.

But if you want to avoid the Zacks Strong Sell Rank, you might want to consider other competitors like Target (TGT - Free Report) , Gap (GPS - Free Report) , which just bought one of Gymboree's clothing lines for $35 million, and Ascena Retail Group (ASNA - Free Report) which operates Justice stores. All three are Zacks Rank #3 (Hold) stocks.

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