The Children’s Place Sees Ups and Downs in Most Recent Quarter

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The Children’s Place Retail Stores Inc. (NYSE:PLCE) is the largest pure-play children’s specialty apparel retailer in North America. It sells apparel, accessories, and footwear for children, and designs, contracts, manufactures, and sells merchandise under The Children’s Place, Place, and Baby Place brands. The company serves the wardrobe needs of girls and boys, babies, and newborns. It is also engaged in international franchise business through territorial agreements with franchisees. It operates more than 1,100 stores and operates an online store at ChildrensPlace.com. The stock has been rather flat to down of late, losing 12 percent in the past six months. The purpose of this article is to examine the most recent quarter to determine if the stock can be bought after this pullback.

In the most recent quarter, the Children’s Place saw net sales of $410.1 million. The quarter included the negative impact of approximately $3.5 million from currency exchange rate fluctuations. This compares to net sales of $423.2 million for the first quarter of 2013. Comparable retail sales declined 3.6 percent for the first quarter 2014. Net income was $13.6 million, or 61 cents per diluted share, in the first quarter of 2014, compared to $19.3 million, or 83 cents per diluted share, the previous year. Adjusted net income was $15.3 million, or 68 cents per diluted share, compared to $19.3 million, or 83 cents per diluted share, the previous year. Gross profit was $148.3 million, compared to $163.3 million in the first quarter of 2013. Adjusted gross profit in the first quarter of 2014 was $148.4 million and declined 240 basis points to 36.2 percent of sales due to deleverage on the lower sales base and modest merchandise margin deleverage.

As a result of the company’s strong expense management, selling, general, and administrative expenses were $113.7 million, compared to $119 million in the first quarter of 2013. Adjusted expenses in the first quarter of 2014 were $111.4 million and leveraged 80 basis points to 27.2 percent of sales.Operating income was $20.1 million compared to $28.5 million in the first quarter of 2013. Adjusted operating income in the first quarter of 2014 was $22.7 million and deleveraged 120 basis points to 5.5 percent of sales. During the first quarter, the company recorded charges of $2.6 million for unusual items, which primarily consisted of severance associated with a corporate restructuring as well as severance associated with its fleet optimization initiative.

In terms of growth, the company opened four stores and closed five during the first quarter of 2014. The company ended the quarter with 1,106 stores and square footage of 5.195 million, a decrease of 2 percent compared to the prior year. In 2014, the company now plans to open approximately 25 stores, 10 fewer than the original plan, and close 35 for a net of 10 fewer stores in North America. Ending square footage is expected to be 1.2 percent lower than end of fiscal 2013.

One of the big positives is the company’s share buyback program. During the first quarter of 2014, the company repurchased 521,017 shares for approximately $26.5 million. At the end of the first quarter, $88.2 million of the $100 million share repurchase program authorized in March remained available for future share repurchases. Additionally, the company reported that its Board of Directors approved a quarterly dividend of 13.25 cents per share, payable on July 17 to shareholders of record at the close of business on June 27.

Discussing the quarterly performance, Jane Elfers, president and CEO, said: “We delivered first quarter results which exceeded our expectations despite weather challenges that continued into early April. We achieved a positive 9 percent sales comp in April with the benefit of a later Easter and normalized weather patterns in the Northeast and Midwest regions of the United States. Our sales acceleration is a positive catalyst as we move forward into the second quarter. We opened 13 International franchise stores during the first quarter, including 10 stores in Israel, our first in that market, and the results have been very encouraging. We are announcing a new franchise agreement with Grupo David, for store openings in Latin America and the Caribbean beginning in the fall of 2014.”

The quarter was certainly rough, but the stock may be worth initiating a small position if it pulls back further. This is because the company slightly raised its guidance. It projects that adjusted earnings per diluted share will be between $2.90 and $3.05, assuming comparable retail sales for the year will be flat to negative 1 percent. This compares to its initial guidance of $2.85 to $3.05. However, the company provided initial guidance for the second quarter of fiscal 2014 and is expecting an adjusted loss per share between 47 cents and 41 cents, assuming comparable retail sales will be down low single digits. This compares to an adjusted net loss per share of 42 cents in the second quarter of 2013. Given that the company seems to be maintaining the status quo, the stock is a hold at this point. However, should it pull back another 10 percent, the earnings would certainly justify the initiation of a position.

Disclosure: Christopher F. Davis holds no position in The Children’s Place and has no plans to initiate a position in the next 72 hours. He has a hold rating on the stock and a $49 price target.

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