In spite of a challenging backdrop, The Children’s Place, Inc. (PLCE Quick QuotePLCE - Free Report) reported decent fourth-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 sixth straight quarter. Impressively, net sales and earnings per share of this pure-play children’s specialty apparel retailer improved from the year-ago period.

Jane Elfers, president and CEO, said, “We believe that the accelerated structural reset to a digital first company that we have accomplished since the onset of the pandemic now positions us to deliver EPS and operating margins significantly above pre-pandemic levels and to establish double digit EPS and double digit operating margin as our new baseline for FY 2022 and beyond.”

However, management also cautioned about headwinds in fiscal 2022. This includes decade-high cotton price, record inflation, lapping unprecedented stimulus payments from last year, and persistent freight disruptions.

Let’s Analyze

The Children’s Place posted adjusted earnings of $3.02 per share that comfortably surpassed the Zacks Consensus Estimate of $2.82. Remarkably, the bottom line improved significantly from earnings of $1.01 per share reported in the year-ago period, thanks to higher net sales and margin expansion.

Net sales of $507.8 million rose 7.4% year over year as a result of favorable customer response toward product assortment and the strategic reset of pricing and promotions, partly offset by the impact of permanent store closures. However, the top line fell short of the Zacks Consensus Estimate of $532.7 million, marking the third straight miss.

U.S. net sales jumped 7% year over year to $440 million, while Canadian net sales increased 29% to $47 million. Comparable retail sales climbed 13.3% compared with the year-ago period.

Consolidated digital sales rose 11% during the quarter. We note that digital sales represented 48% of total net sales, with more than 73% of digital business now coming through a mobile device. The company targets a 50% annual digital penetration for fiscal 2022.

Margin Discussions

Moving on, fourth-quarter adjusted gross profit was $193.9 million, up significantly from $143.9 million in the year-ago period. Again, gross margin expanded to 38.2% from 30.4% in the prior-year quarter. This increase was driven by higher merchandise margins across stores, digital and wholesale channels as a result of significant increases in AUR due to the impact of strategic pricing and promotion changes. Additionally, fixed cost leverage stemming from higher net sales as well as lower e-commerce fulfillment expenses resulting from continuing cost optimization efforts favorably impacted the gross margin rate. These were partly offset by higher occupancy costs due to rent abatements recognized in the year-ago period.

Management informed that supply chain bottlenecks resulting in increased inbound freight transportation costs owing to higher levels of air freight costs and rise in container rates hurt gross margin rate by about 200 basis points.

Adjusted SG&A expenses increased 15.9% to $119 million in the reported quarter. As a percentage of net sales, the metric deleveraged 172 basis points to 23.4% primarily due to increased marketing spend to support the launch of Sugar & Jade, and higher incentive compensation expenses.

The company’s adjusted operating income amounted to $61.2 million, up significantly from $26 million in the comparable period last year. Impressively, adjusted operating margin expanded 656 basis points to 12.1%.

Store Update

As of Jan 29, 2022, The Children’s Place retail store locations were open to the public in the United States, Canada, and Puerto Rico. The company ended the quarter with 672 stores.

During the quarter under discussion, the company closed 31 locations. With respect to its store fleet optimization strategy, The Children’s Place permanently shuttered 78 stores during the 12-month period ended Jan 29, 2022. This resulted in total closures of 256 stores since the onset of the pandemic compared to its earlier planned target of 300 closures. The company plans to close roughly 40 stores in fiscal 2022.

Since the announcement of the fleet optimization initiative in 2013, the company has permanently closed 527 stores.

Other Financial Aspects

The Children’s Place ended the quarter with cash and cash equivalents of $54.8 million. The company had $175.3 million outstanding in its revolving credit facility as of Jan 29, 2022. Stockholders' equity at the end of the quarter was $225.5 million.

The company had incurred capital expenditures of approximately $7 million during the quarter. Management anticipates fiscal 2022 capital expenditures in the range of $55 million, with a major portion to be allocated to digital and supply chain fulfillment initiatives.

During the quarter, the company bought back 507 thousand shares for approximately $40.5 million. As of Jan 29, 2022, the company had approximately $257.3 million remaining under its existing share repurchase program.

Outlook

The Children’s Place expects to deliver double-digit earnings per share and a double-digit operating margin for fiscal 2022. It envisions consolidated net sales to be up approximately 1% compared with fiscal 2021. The company expects digital sales to increase in fiscal 2022 and represent approximately 50% of total consolidated net sales. It estimates only 25% of total retail sales coming from traditional brick-and-mortar models. The company is taking pricing actions to mitigate the impact of higher raw material costs.

For fiscal 2022, The Children’s Place is guiding high single-digit increase in the cost of goods sold due to escalating cotton prices. The company foresees fiscal 2022 gross margin contraction of 200-300 basis points compared with the last year. It expects gross margin to be lower in the first half of fiscal 2022 compared to the back half. It is anticipating SG&A expenses to be marginally higher than last year.

Management anticipates first-quarter fiscal 2022 net sales to be down mid-single to high single-digits compared with the prior-year period. This is due to lapping the unprecedented government stimulus year ago, the uncertainty surrounding high inflation, the impact of the permanent store closures since the first quarter last year, supply chain disruptions, and the impact of the lingering Omicron variant.

The Children’s Place envisions second-quarter net sales to be higher than last year but expects third-quarter net sales to be lower than due to record-setting back-to-school season last year and rollout of enhanced child tax credits. Fourth-quarter net sales are expected to be higher than fiscal 2021 as the company laps the impact of the Omicron spike.

The company expects to post first-quarter operating margins well above pre-pandemic highs. However, it does not anticipate delivering a double-digit operating margin. Meanwhile, SG&A expenses are expected in the range of $112 million, higher than last year, primarily due to incremental investments in brand marketing and the impact of lapping the temporary store closures in Canada last year.

Markedly, shares of this Zacks Rank #4 (Sell) company have fallen 28.5% in the past six months compared with the industry’s decline of 38.3%.

3 Stocks Hogging the Limelight

We have highlighted three top-ranked stocks, namely, Target (TGT Quick QuoteTGT - Free Report) , Tractor Supply Company (TSCO Quick QuoteTSCO - Free Report) and Sprouts Farmers Market (SFM Quick QuoteSFM - Free Report) .

Target, a general merchandise retailer, carries a Zacks Rank #1 (Strong Buy). The company has an expected EPS growth rate of 16.5% for three-five years. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Target’s current financial year sales and EPS suggests growth of 3.5% and 6.7%, respectively, from the year-ago period. TGT has a trailing four-quarter earnings surprise of 21.3%, on average.

Tractor Supply Company, a rural lifestyle retailer in the United States, carries a Zacks Rank #2 (Buy). The company has an expected EPS growth rate of 9.8% for three-five years.

The Zacks Consensus Estimate for Tractor Supply Company’s current financial year sales and EPS suggests growth of 8.2% and 8.4%, respectively, from the year-ago period. TSCO has a trailing four-quarter earnings surprise of 22%, on average.

Sprouts Farmers, which offers fresh, natural, and organic food products, carries a Zacks Rank #2. The company has an expected EPS growth rate of 7.3% for three-five years.

The Zacks Consensus Estimate for Sprouts Farmers’ current financial year sales and EPS suggests growth of 4.7% and 4.8%, respectively, from the year-ago period. SFM has a trailing four-quarter earnings surprise of 17.9%, on average.