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Children's Place (PLCE) Up on Q3 Earnings Beat, Sales Drop Y/Y

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After reporting a loss in the preceding two quarters, The Children’s Place, Inc. (PLCE - Free Report) swung back to profit in the third quarter of fiscal 2020. During the quarter, both top and bottom lines cruised past the Zacks Consensus Estimate. Markedly, shares of this children’s specialty apparel retailer gained 6.9% during the trading session on Nov 19.

However, both earnings and sales declined year over year. Incidentally, revenues during the peak back-to-school season were majorly hurt by the adoption of remote and hybrid learning practices amid the pandemic. Nonetheless, sales improved following the back-to-school season peak as the company’s offerings converted to having more casual options and as the weather became cooler. Also, Children’s Place has been benefiting from solid digital sales, which have accelerated amid the pandemic.

Delving Deeper

Notably, the company’s digital penetration elevated to 44% in the third quarter and it was 55% of sales in the year-to-date period. Management highlighted that since the onset of the pandemic in March, the company has seen its new digital customer count double year over year. Further, it has converted more than 800,000 of its store-only customers to omnichannel ones. Moreover, the company’s app downloads have risen more than 60%.

Certainly, the solid digital engagement gives management further confidence in its accelerated store closure plans. In fact, the company’s focus on digital transformation and speeding up store closures is expected to place it well for accelerated operating margin expansion in the post-pandemic period.

However, the Zacks Rank #4 (Sell) company expects sales and profitability to remain under pressure in the fourth quarter due to several challenges associated with coronavirus. These include lower demand for dress-up products, a major decline in store traffic, social distancing measures, reduced operating hours at malls and recent countrywide surges in coronavirus cases, which in turn have resulted in more temporary store closures.

Apart from this, fourth-quarter sales and margins are likely to bear the brunt of capacity limitations in the domestic logistics network stemming from unexpected online demand and the associated freight surcharges levied by the company’s major carriers. Management expects sales in the fourth quarter to be at or a little lower than the third-quarter level.

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 earnings of $1.44 per share, significantly better than the Zacks Consensus Estimate of 51 cents. However, the bottom line declined from adjusted earnings of $3.03 reported in the year-ago period. Reduced net sales and elevated interest expenses can be accountable for the earnings decline.

Net sales of $425.6 million tumbled 19% year over year due to the pandemic-led temporary and permanent store closures, along with lower back-to-school sales as a result of the adoption of remote and hybrid learning practices amid social distancing. We note that the company has permanently closed 151 stores over the past 12 months. Nonetheless, the top line surpassed the Zacks Consensus Estimate of $403 million.

Moving on, adjusted gross profit came in at $151.7 million, down 23.4% from $198.1 million in the year-ago period. Again, gross margin contracted 210 basis points to 35.7% on account of elevated e-commerce penetration and increased fulfillment costs, together with fixed cost deleverage stemming from lower sales. This was somewhat compensated by increased merchandise margins in stores as well as e-commerce. Management expects gross margin in the fourth quarter to be hurt by the same hurdles as witnessed in the third quarter. Apart from this, increased freight surcharges and capacity limitations (discussed above), along with store closures and associated inventory liquidation are likely to dent the gross margin.

Adjusted SG&A expenses declined 11.2% to $103.5 million in the reported quarter. However, as a percentage of net sales, the metric deleveraged 210 basis points to 24.3% mainly due to fixed cost deleverage stemming from reduced sales and increased incentive compensation accruals. This was somewhat countered by lower operating expenses resulting from actions undertaken due to the pandemic, as well as lower store costs stemming from permanent store closures. SG&A expenses are expected to be moderately lower from the year-ago level in the fourth quarter.

The company’s adjusted operating income came in at $33.3 million, down 47.5% from $63.4 million in the year-ago period. Adjusted operating margin declined 430 basis points to 7.8%.

Store Update

As of Oct 31, the company had 99% of its stores open to the public in the United States, Canada and Puerto Rico.

With respect to its store fleet optimization strategy, Children’s Place permanently shuttered 16 stores during the third quarter. Notably, the company ended the quarter with 809 stores. Since the announcement of the fleet optimization initiative in 2013, the company has closed 389 stores. Additionally, it plans to close 300 stores by the end of fiscal 2021. Of these, 200 closures are planned for fiscal 2020. We note that the company has permanently closed 118 stores in the first nine months of the current fiscal year.

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. Entering fiscal 2022, the company targets a store fleet of roughly 625 locations and aims to have 75% of its total revenues coming from sources outside the traditional malls.

Other Financial Aspects

Children’s Place ended the quarter with cash and cash equivalents of $64.5 million, which reflects a sequential increase of 78.5%. Notably, the company had no long-term debt on its balance sheet as of Oct 31. However, the company had $179.4 million outstanding on revolving credit facility at the end of the third quarter compared with $250.8 million at the end of the preceding quarter.

Additionally, Children’s Place concluded a term loan financing deal of $80 million and used it to repay its existing revolving credit facility. Stockholders' equity at the end of the quarter was $77.4 million.

The company generated roughly $32.5 million in operating cash flow during the third quarter. It incurred capital expenditures of approximately $9 million during the quarter.

Wrapping Up

Undoubtedly, management remains committed to addressing the challenges related to the pandemic. In this respect, the company is accelerating the fleet optimization initiative, directing resources toward digital platforms in order to better engage with customers, improving the supply chain and concentrating on enhancing financial flexibility.

Shares of Children’s Place have surged a whopping 85.7% in the past three months compared with the industry’s growth of 49.5%.

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