The Children's Place (PLCE 85.74, -8.86, -9.37%), North America’s largest
pure-play children's specialty apparel retailer, is under pressure this morning
(-9%) after the company reported Q4 (Jan) earnings and guidance that were well
below market expectations. In addition to earnings, PLCE also announced that it
has purchased, for $76 mln in cash, certain intellectual property and related assets
through Gymboree's bankruptcy auction. The Gymboree assets purchased include
worldwide rights to the names "Gymboree" and "Crazy 8" and
other intellectual property, including trademarks, domain names, design rights,
and customer databases.
Non-GAAP EPS at The Children’s Place in the quarter was more than cut in half to just $1.10 vs $2.52 last year. An EPS decline was expected, but not one of this degree. PLCE had previously guided for EPS of $2.07-2.17, so a $1.10 result was quite a shock. Revenue was a similar story; it fell 6.9% year/year to $530.6 mln, which missed prior guidance for revenues of of $547-552 mln. Same store comps were -0.6% versus prior guidance for "positive low single digit comps."
The company’s latest guidance was similarly less than uplifting. PLCE expects a Q1 (Apr) non-GAAP loss of $(0.70)-(0.40) per share; the market had been expecting a pretty sizeable positive number. AprQ revenue is expected at just $385-395 mln, also well below market expectations. AprQ same store comps are expected to be in the -12% to -10% range. The springtime, Easter quarter is usually a good one for children's clothing, but this time around the sun, PLCE is expecting the season to present some difficulties. The company’s full year guidance, meanwhile, was also below expectations.
What could explain such a large miss and such weak guidance? The answer is clear: as we mentioned, the company’s direct competitor Gymboree is going bankrupt and is closing all its stores. As such, Gymboree is having massive liquidation sales of children's clothing. While PLCE's prices are good, it's tough to compete with liquidation prices at Gymboree.
PLCE concedes that it has never experienced a total liquidation of a direct competitor of the size and proximity of Gymboree. Consider that PLCE’s operations overlap with nearly 70% of the approximately 800 Gymboree stores, all of which will complete their liquidation events and close within the next 60 days. Additionally, PLCE is hurt by a very late Easter. This has all combined to create what the company identifies as “unprecedented near-term visibility challenges,” and as a result, 1H19 is expected to be a "highly disruptive" time for PLCE.
How PLCE responding to these challenges? In JanQ, PLCE took actions to significantly accelerate the liquidation of its seasonal inventories ahead of Gymboree's total liquidation in Q1. This strategy enabled PLCE to exit the quarter with over 50% less seasonal carryover inventory versus a year ago, with total inventories down 6.5% versus its guided range of flat to up low single-digits. This accelerated liquidation hurt JanQ EPS by $0.79.
However, this accelerated liquidation strategy allowed PLCE to minimize the adverse margin impact that it would have otherwise experienced had it attempted, and potentially failed, to liquidate its seasonal carryover inventory in Q1 during the Gymboree liquidation. PLCE's lean inventory levels entering AprQ better position the company to prioritize sell-through of its spring seasonal product in what should be a highly volatile first half of 2019.
There is some good news. PLCE expects improved performance in the back-half of 2019 with record supply reduction in the children's apparel space. PLCE expects to drive margin benefits from those reduced inventory levels as well as lower product costs and the tapering-off of accelerated digital transformation spend. Also, the aforementioned Gymboree assets purchase should create additional avenues of growth. Specifically, control of the Gymboree brand and IP will allow PLCE to expand its market share opportunity across price and channel. PLCE plans to revitalize the Gymboree brand across various channels.
In sum, as you can see, there is a lot of upheaval going on the children's apparel space. Clearly, this is causing some pain for PLCE in the near-term. The good news, zooming out, is that a major competitor is leaving the market, which is good for PLCE in the long run. The stock is under pressure today and has been weak since late October, when it was trading around $160, b and while the immediate future seems set to present continued challenges and uncertainties for the company, the hope is that improvement in results could be realized in 2H19.
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