It has been about a month since the last earnings report for The Children's Place (PLCE Quick QuotePLCE - Free Report) . Shares have lost about 29.8% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is The Children's Place due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

The Children’s Place Posts Q2 Loss & Stock Decline

The Children’s Place, Inc. came up with second-quarter fiscal 2022 results, wherein both the top and bottom lines not only missed the Zacks Consensus Estimate but also declined year over year. Comparable retail sales continued with the sluggish run in the quarter. Management also disappointed investors with its soft third-quarter and fiscal 2022 view.

Cautious consumer behavior amid the soaring inflation, increased promotional activity from key competitors and supply-chain issues adversely impacted the company’s results. These weighed on fashion AUR and margins during the quarter. However, this pure-play children’s specialty apparel retailer highlighted that the third-quarter to-date sales trend has improved compared with the last two weeks of July and that the quarter-to-date AUR increase is encouraging.

Jane Elfers, President and Chief Executive Officer, said, “Based on the current environment, although we are now anticipating that consolidated sales for full year 2022 will be down approximately 8% versus pre-pandemic levels in 2019, we anticipate operating income will be up approximately mid-teens versus 2019 and EPS will increase approximately 30% versus 2019. With the multiple headwinds we are currently facing, these results would only be possible due to the structural reset to our business model since the start of the pandemic.”

Let’s Analyze

The Children’s Place posted an adjusted net loss of 89 cents a share. This was sharply down from the Zacks Consensus Estimate of earnings of 68 cents and the year-ago period’s earnings of $1.71 per share.

Net sales of $380.9 million decreased 8% year over year, primarily due to the soft consumer demand resulting from the unprecedented inflation, higher promotional activity across the sector, the lapping of the enhanced child tax credit last July and the impact of permanent store closures. The top line also missed the Zacks Consensus Estimate of $383.6 million, marking the fifth straight miss. Comparable retail sales declined 8.7% for the quarter.

U.S. net sales fell 13% year over year to $313 million, while Canadian net sales decreased 5% to $35 million.

Consolidated digital sales declined 7% year over year during the quarter. We note that digital sales represented 47% of total retail sales, with approximately 76% of the digital business now coming through a mobile device. Management expects digital revenues to represent 50% of retail sales in fiscal 2022 and 60% of retail sales by the end of fiscal 2024. Again, store net sales were down 14% from the year-ago period, while comp-store traffic fell 4% during the quarter.

Margin Discussion

Moving on, the second-quarter adjusted gross profit was $114.8 million, down from $168.1 million in the year-ago period. Again, the adjusted gross margin shriveled 1,046 basis points to 30.2%. This year-over-year contraction was the result of lower merchandise margins due to unplanned AUR pressure resulting from soft consumer demand, combined with increased promotional activity, higher domestic supply-chain costs and the increased penetration of the wholesale business, which carries a lower margin. Higher inbound transportation costs and the deleverage of fixed expenses resulting from lower net sales also hurt the gross margin.

Adjusted SG&A expenses decreased 0.5% year over year to $113.5 million in the reported quarter. As a percentage of net sales, the metric deleveraged 224 basis points to 29.8%, primarily due to the deleveraging of fixed expenses resulting from lower net sales and higher planned marketing spend. The Children’s Place expects fiscal 2022 SG&A expenses to be marginally lower than the prior year, with SG&A expenses planned to be approximately $450 million for the year.

The company posted an adjusted operating loss of $11.7 million, down significantly from the adjusted operating income of $40.1 million in the comparable period last year.

Store Update

The Children’s Place ended the quarter with 658 stores. Concerning its store fleet optimization strategy, The Children’s Place permanently shuttered seven stores during the second quarter. 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 541 stores.

Other Financial Aspects

The Children’s Place ended the quarter with cash and cash equivalents of $28.2 million. The company had $283.9 million outstanding on its revolving credit facility as of Jul 30, 2022. Stockholders' equity at the end of the quarter was $184.2 million.

The company incurred capital expenditures of $8 million during the quarter. Management anticipates fiscal 2022 capital expenditures to be approximately $45 million, with a major portion to be allocated for digital and supply-chain fulfillment initiatives.

During the quarter, the company bought back 484,000 shares for approximately $22.6 million. As of Jul 30, 2022, the company had approximately $196.1 million remaining under its existing share repurchase program.

Outlook

The Children’s Place assumes a low-single-digit jump in AUR for the back half of the year and foresees significant growth in the Wholesale channel with Amazon. It anticipates lower occupancy costs for the balance of the year due to favorable lease negotiations, permanent store closures and lower variable expenses. It also expects lower interest expenses in the back half of the year.

For fiscal 2022, management guided net sales of approximately $1,725 million. This suggests a decline of 10% from the net sales of $1,915.4 million reported in fiscal 2021. The company expects a low-double-digit decrease in comparable retail sales. It expects the adjusted operating income of approximately 7.5% of net sales, down from 15.1% in the last year. The company expects adjusted earnings of approximately $7.00 per share for fiscal 2022. This indicates a meaningful decline from the earnings of $13.40 per share reported in fiscal 2021.

The Children’s Place estimates third-quarter fiscal 2022 net sales of approximately $500 million, down from the $558.2 million reported in the year-ago period. The company anticipates a low-double-digit decline in comparable retail sales. It projects the adjusted operating income of approximately 14% of net sales, down from 20.9% in the last year. The company envisions third-quarter adjusted earnings to be approximately $3.95 per share. This suggests a significant decline from the earnings of $5.43 per share reported in the prior-year quarter.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

The consensus estimate has shifted -10.56% due to these changes.

VGM Scores

Currently, The Children's Place has a subpar Growth Score of D, however its Momentum Score is doing a lot better with a B. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise The Children's Place has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.