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The Children's Place (PLCE) Q3 Earnings Beat, Comps Up Y/Y

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In spite of a challenging backdrop, The Children’s Place, Inc. (PLCE - Free Report) reported decent third-quarter fiscal 2021 results. Although the top line fell short of the Zacks Consensus Estimate, the bottom line continued with its positive surprise streak for the fifth straight quarter. Impressively, net sales and earnings per share of this pure-play children’s specialty apparel retailer improved from the year-ago period.

Management stated that the significant structural changes made in business last year and incremental digital investments made pre-pandemic continue to drive upbeat performance. The Children’s Place, which recently launched its new brand Sugar & Jade, informed that fourth quarter is off to a promising start. The company remains well on track to accelerate operating margin expansion in fiscal 2021 and beyond.

Markedly, this Zacks Rank #2 (Buy) stock has surged 19.9% in the past six months against the industry’s decline of 3%.

Let’s Analyze

The Children’s Place posted adjusted earnings of $5.43 per share that comfortably surpassed the Zacks Consensus Estimate of $4.54. Remarkably, the bottom line improved significantly from earnings of $1.35 per share reported in the year-ago period, thanks to higher net sales and margin expansion.

Net sales of $558.2 million rose 31.2% year over year, as a result of favorable customer response toward product assortment and the strategic reset of pricing and promotions. However, the top line fell short of the Zacks Consensus Estimate of $568.9 million, marking the second straight miss.

U.S. net sales jumped 31% year over year to $475 million, while Canadian net sales increased 10% to $53 million. Comparable retail sales climbed 36.2% compared with the year-ago period.

Consolidated digital sales surged 36% during the quarter. We note that digital sales represented 45% of total net sales with more than 71% of digital business now coming through a mobile device. The company targets a steady state annual digital penetration of 50%. Digital sales jumped 40% in the United States and 2% in Canada.

The Children's Place, Inc. Price, Consensus and EPS Surprise

The Children's Place, Inc. Price, Consensus and EPS Surprise

The Children's Place, Inc. price-consensus-eps-surprise-chart | The Children's Place, Inc. Quote

Margin Discussions

Moving on, third-quarter adjusted gross profit was $245 million, up significantly from $149.8 million in the year-ago period. Again, gross margin expanded to 43.9% from 35.2% in the prior-year quarter. This increase was driven by higher merchandise margins across both stores and digital channels as a result of strategic reset of pricing and promotions as well as lower occupancy expenses on account of favorable lease negotiations and permanent store closures. Additionally, fixed cost leverage stemming from higher net sales favorably impacted the gross margin rate.

Adjusted SG&A expenses increased 11% to $114.8 million in the reported quarter. As a percentage of net sales, the metric leveraged 375 basis points to 20.6% primarily due to fixed expense leverage resulting from the increase in net sales, partly offset by higher incentive compensation accruals and increased marketing expenses.

The company’s adjusted operating income amounted to $116.5 million, up significantly from $31.4 million in the comparable period last year. Impressively, adjusted operating margin expanded 1,349 basis points to 20.9%.

Store Update

As of Oct 30, 2021, The Children’s Place had more than 99% of its stores open to the public in the United States, Canada and Puerto Rico. The company ended the quarter with 703 stores.

With respect to its store fleet optimization strategy, The Children’s Place permanently shuttered 47 stores during the nine-month period ended Oct 30, 2021. Five locations were closed during the third quarter. As a result of favorable lease negotiations, the company now plans to close 275 stores since the beginning of fiscal 2020, compared to its earlier planned target of 300 closures. The company’s current plan calls for an additional 50 store closures in the final quarter.

Since the announcement of the fleet optimization initiative in 2013, the company has permanently closed 496 stores.

Other Financial Aspects

The Children’s Place ended the quarter with cash and cash equivalents of $67.1 million. The company had $174.4 million outstanding in its revolving credit facility as of Oct 30, 2021. Stockholders' equity at the end of the quarter was $222.2 million.

The company had incurred capital expenditures of approximately $9 million during the quarter. Management anticipates fiscal 2021 capital expenditures in the range of $40 million with major portion to be allocated to digital and supply chain fulfillment initiatives.

During the quarter, the company bought back 372 thousand shares for approximately $31.7 million. As of Oct 30, the company had approximately $47.7 million remaining under its existing share repurchase program of $250 million authorized in March 2017. The company’s board of directors has approved an additional share repurchase program for up to $250 million.

Outlook

On its earnings call, The Children’s Place highlighted that the impact of — loss of revenues from the permanent closure of 225 stores since the fourth quarter of fiscal 2019, global supply chain disruption due to the pandemic, and uncertainty related to the Delta variant of coronavirus — cannot be ignored.

Management anticipates fourth-quarter gross margin to surpass historical levels but to remain lower than the gross margin rate attained in the preceding quarter owing to higher inbound freight transportation expenses, capacity constraints and higher container rates resulting from equipment shortages. Meanwhile, SG&A expenses are expected in the range of $118 million primarily due to higher incentive compensation accruals and escalating levels of digital marketing spend.

3 More Stocks Hogging the Limelight

Some other top-ranked stocks in the Retail - Wholesale sector include, Boot Barn Holdings (BOOT - Free Report) , Tractor Supply Company (TSCO - Free Report) and Costco (COST - Free Report) .

Boot Barn Holdings, the lifestyle retailer of western and work-related footwear, apparel and accessories, sports a Zacks Rank #1 (Strong Buy). Shares of the company have jumped 82.6% in the past six months. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Boot Barn Holdings’ current financial year sales and earnings per share (EPS) suggests growth of 54.4% and 183.3%, respectively, from the year-ago period. BOOT has a trailing four-quarter earnings surprise of 35.3%, on average.

Tractor Supply Company, a rural lifestyle retailer in the United States, flaunts a Zacks Rank #1. The company has a trailing four-quarter earnings surprise of 22.8%, on average. Shares of the company have jumped 25.4% in the past six months.

The Zacks Consensus Estimate for Tractor Supply Company’s current financial year sales and EPS suggests growth of 19% and 23.9%, respectively, from the year-ago period. TSCO has an expected EPS growth rate of 9.6% for three-five years.

Costco, which operates membership warehouses, carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 7.7%, on average. Shares of the company have jumped 38.5% in the past six months.

The Zacks Consensus Estimate for Costco’s current financial year sales and EPS suggests growth of 9.6% and 9.7%, respectively, from the year-ago period. COST has an expected EPS growth rate of 8.6% for three-five years.