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

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Yet another product of the retail apocalypse, Children’s Place (PLCE - Free Report) , has had a very disappointing year for investors, with its share price falling over 32% so far in 2019. This dying retailer saw massive profit declines bringing it close to loses for Q1 and Q2. Its topline is also declining as demand for this children’s apparel fades. Analysts have been dropping their expectations for PLCE for some time, and this stock is now sitting at a Zacks Rank #5 (Strong Sell).

The company has closed over 200 stores since 2013, with 42 store closures in 2018 and another 45 closure expected by the end of this year. 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 the relaunch of Gymboree.com 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 will mark the beginning of the end for this enterprise. PLCE is a falling knife, and I would stay away from these shares.

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