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How Children's Place (PLCE) Looks Just Ahead of Q2 Earnings

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The Children’s Place Inc. (PLCE - Free Report) is expected to report second-quarter fiscal 2018 results on Aug 8. The company outperformed the Zacks Consensus Estimate in three of the trailing four quarters by an average of 1.3%. In the last reported quarter, this pure-play children's specialty apparel retailer delivered a negative earnings surprise of 15.8%. Consequently, investors are keeping their fingers crossed and hoping that the company surpasses earnings estimates this time.

How are Estimates Faring?

After registering a bottom-line decrease of 4.1% in the first quarter of fiscal 2018, Children’s Place is likely to record year-over-year decline of 33.7% in the second quarter as well. This is quite evident from the Zacks Consensus Estimate for the quarter under review, which is pegged at 57 cents compared with 86 cents reported in the year-ago quarter. We note that the Zacks Consensus Estimate has gone down by a penny in the last 7 days.

The Zacks Consensus Estimate for revenues of $428.1 million indicates an increase of 14.6% from the year-ago quarter. If all goes well, the company may witness a top-line beat after a miss in the last reported quarter. We note that total revenues of this New Jersey-based company remained flat in the last reported quarter.

Let’s delve deeper and find out the factors impacting the results.

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

Factors to Consider

Children’s Place is reeling from stiff competition, declining comps, aggressive promotional environment and soft traffic that are making the scenario tough for the company. Notably, the company’s comparable sales have declined for the first time, after increasing in the last nine quarters. During the first quarter fiscal 2018, comparable retail sales were down 1.8% versus 6.1% growth in the year-ago quarter. U.S. and Canada comp sales declined 1.4% and 7.1%, respectively.

The company is also facing headwinds from strained margins. In the first quarter, adjusted gross profit fell 5.6% year over year to $161.5 million, while gross margin contracted 220 basis points (bps) to 37%. For fiscal 2018, management expects adjusted operating margin of 8.5-8.7% compared with 8.7-9% announced earlier.

To offset the above-mentioned hurdles, Children’s Place is making efforts that will help boost the top line and expand customer base. Children's Place is focusing on digital transformation to provide a hassle-free shopping experience. The company plans to invest $50 million in SG&A over the next three fiscals to support digital transformation, with $30 million, $15 million and $5 million in fiscal 2018, 2019 and 2020, respectively. Per management, its digital business is expected to see a decline of 20% in CAGR. The company also expects to generate 35% of total revenues from its digital channel by 2020.

Further, the company is taking steps not only to gain traction in the U.S. market but also to expand globally. This is evident from its recently-signed license agreement with Zhejiang Semir Garment Co. Ltd (Semir) for the Greater China market, which covers Mainland China, Taiwan, Hong Kong and Macau. Semir is the parent company of Balabala — a prominent name in China’s specialty children’s apparel retail industry.

What Does the Zacks Model Say?

Our proven model does not conclusively show that Children’s Place is likely to beat estimates this quarter. A stock needs to have both — a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and a positive Earnings ESP — for this to happen. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Children’s Place has a Zacks Rank #4 (Sell) but an Earnings ESP of +8.30%. Consequently, making surprise prediction difficult.

Stocks With Favorable Combination

Here are some better-ranked companies you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat:

American Eagle Outfitters (AEO - Free Report) has an Earnings ESP of +4.88% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Boot Barn Holdings (BOOT - Free Report) has an Earnings ESP of +2.85% and a Zacks Rank of 2.

The Gap (GPS - Free Report) has an Earnings ESP of +2.52% and a Zacks Rank of 2.

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