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Children’s Place (PLCE) Shares Fall Despite Q1 Earnings Beat


In spite of reporting better-than-expected first-quarter fiscal 2019 results, shares of The Children’s Place, Inc. PLCE fell roughly 7% during the trading session on May 15. We note that the year-over-year decline in both the top and bottom line may not have been well perceived by investors. Moreover, the company’s second-quarter guidance for sales and earnings was lower than the Zacks Consensus Estimate.

Nevertheless, management did highlight that results came ahead of their expectations despite “70% store overlap with the approximately 800 Gymboree and Crazy 8 liquidations that occurred in Q1 and the headwind of a later Easter.”

We note that shares of this Zacks Rank #3 (Hold) company have increased 14.3% in the past three months, against the industry’s decline of 8%.

Let’s Delve Deeper

After two straight quarters of earnings miss, Children’s Place bounced back with a positive earnings surprise. This children's specialty apparel retailer reported adjusted earnings of 36 cents a share, against the Zacks Consensus Estimate of loss of 48 cents but fell significantly from the year-ago period’s figure of $1.87. Management informed that the bottom line was adversely impacted by Gymboree liquidation, lower stock-based compensation tax benefit and operating and financing costs related to the buyout of Gymboree. Further, lower net sales hurt the bottom line.

The company generated net sales of $412.4 million that surpassed the Zacks Consensus Estimate of $405 million, after missing the same in the preceding quarter. However, the metric declined 5.5% on a year-over-year basis. The decrease in net sales can be attributed to fall of 4.6% in comparable retail sales. While U.S. comparable retail store sales slid fell 4.4%, Canada comparable retail store sales declined 6.4%. Nonetheless, e-commerce penetration surged 270 basis points to 29% of net sales during the quarter under review.

Adjusted gross profit came in at $151.4 million, down 6.2% year over year, while adjusted gross margin contracted 30 bps to 36.7% owing to deleverage of fixed expenses and increased e-commerce penetration, which is a lower margin rate operation. This was partly offset by higher merchandise margin. Adjusted operating income came in at $6.6 million, down from $25.4 million a year ago, while adjusted operating margin shriveled 420 basis points to 1.6%.

Adjusted SG&A expenses increased 7.1% from a year ago period to $127.2 million, while as a percentage of net sales, the same increased 360 basis points to 30.8%. The increase in SG&A expenses was due to fixed cost deleverage on account of decline in comparable retail sales and higher incentive compensation expense.

Store Update

As part of store fleet optimization endeavors, the company opened one store and closed two outlets, thereby ending the reported quarter with 971 stores. Since the announcement of store fleet optimization program in 2013, the company has shuttered 213 outlets. The company plans to close 40-45 stores in 2019. The company concluded the quarter with 212 international points of distribution open and operated by its eight franchise partners in 20 countries.

As a result of Gymboree’s bankruptcy, the company intends to open 25 stores in centers with high productivity within a span of two years. Of these, 10 stores will be inaugurated in 2019.

Other Financial Details

Children's Place ended the quarter with cash and cash equivalents of $66.1 million compared with $90.1 million a year ago. The company exited the quarter with inventories of $341.2 million and shareholders’ equity of $280.4 million. Management incurred capital expenditures of about $11 million during the quarter and anticipates the same to be approximately $75 million for 2019.

During the quarter, the company bought back 344 thousand shares for roughly $33 million and paid a quarterly dividend of approximately $9 million. At the end of the quarter, the company still has approximately $206 million remaining under its existing share repurchase program. The company remains on track to repurchase shares worth $500 million between 2018 and 2020.

A Look at Guidance

Management now anticipates adjusted earnings in the band of $5.75-$6.25 per share for fiscal 2019, down from earnings of $6.75 reported in fiscal 2018. The Zacks Consensus Estimate for the fiscal year is currently pegged at $5.62.

Children's Place now envisions net sales in the range of $1,905 million-$1,925 million down from $1,938.1 million reported in fiscal 2018. The company forecasts comparable retail sales to be flat. E-commerce penetration is projected to increase to 30% of net sales from approximately 28%. Meanwhile, it envisions adjusted operating margin in the range of 6.4-6.9% compared with 6.6% in fiscal 2018.

Earlier, the company had forecast adjusted earnings in the band of $5.25-$5.75 per share, net sales in the range of $1,890-$1,915 million and operating margin between 6.3% and 6.8%.

The company now anticipates second-quarter fiscal 2019 adjusted earnings to be in the range of breakeven to 20 cents a share, down from earnings of 70 cents recorded in the prior-year period. The Zacks Consensus Estimate for the quarter currently stands at 13 cents.

Net sales are anticipated to be between $415-$420 million down from $448.7 million reported in the second quarter of fiscal 2018. The Zacks Consensus Estimate for the quarter is pegged at $428.5 million. Comparable retail sales are expected to decline in the band of 4-5% compared with growth of 13.2% in the prior-year period. Meanwhile, adjusted operating margin is projected to be in the range of 0.4-1.3%.

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