Kid’s apparel and accessories retailer The Children’s Place (NASDAQ:PLCE) reported results in line with analysts' expectations in Q2 FY2023, with revenue down 9.26% year on year to $345.6 million. Guidance for next quarter's revenue was also better than expected at $472.5 million at the midpoint, 1.31% above analysts' estimates. Children's Place made a GAAP loss of $35.4 million, down from its loss of $13.3 million in the same quarter last year.
Children's Place (PLCE) Q2 FY2023 Highlights:
- Revenue: $345.6 million vs analyst estimates of $342.6 million (0.86% beat)
- EPS: -$2.82 vs analyst expectations of -$2.10 (34.5% miss)
- Revenue Guidance for Q3 2023 is $472.5 million at the midpoint, above analyst estimates of $466.4 million
- EPS (non-GAAP) Guidance for Q3 2023 is $3.60 at the midpoint, below analyst estimates of $3.67
- The company reconfirmed revenue guidance for the full year of $1.58 billion at the midpoint
- Gross Margin (GAAP): 25.4%, down from 30.3% in the same quarter last year
- Same-Store Sales were down 9% year on year
- Store Locations: 596 at quarter end, decreasing by 62 over the last 12 months
Offering sizes up to young teens, The Children’s Place (NASDAQ:PLCE) is a specialty retailer that sells its own brands of kid’s apparel and accessories.
These private label brands include The Children's Place, Place Baby, and Gymboree and span tops, bottoms, dresses, outerwear, and shoes. While there is product for kids up to 12-13 years old, the company mainly serves toddlers and kids under 10. The Children’s Place sits in the middle of the pricing spectrum, generally pricier (but also higher quality) than fast-fashion or discount retailers but less expensive than designer brands.
The company’s core customer consists of parents who prioritize quality clothing and a certain level of stylishness. The Children’s Place is also a reliable option for grandparents, other family members, or friends who are shopping for a kid’s gift. On average, stores are pretty small and range from 4,000 to 5,000 square feet. They are often located in suburban malls or shopping centers alongside other mass market retailers.
The Children’s Place supplements its physical store footprint with an e-commerce presence. There are online-exclusive promotions and discounts and a plethora of sizing guides and resources, as the company recognizes that the buyer of the clothing is almost never the final wearer.
Apparel sales are not driven so much by personal need but by seasons, trends, and innovation, and over the last few decades, the category has shifted meaningfully online. Retailers that once only had brick-and-mortar stores are responding with omnichannel presences. The online shopping experience continues to improve and retail foot traffic in places like shopping malls continues to stall, so the evolution of clothing sellers marches on.Competitors that sell children’s clothing include Carter’s (NYSE:CRI), The Gap (NYSE:GPS), and department stores such as Macy’s (NYSE:M) and Kohl’s (NYSE:KSS).
Children's Place is a small retailer, which sometimes brings disadvantages compared to larger competitors that benefit from economies of scale.
As you can see below, the company's revenue has declined over the last four years, dropping 3.54% annually as its store count and sales at existing, established stores have both shrunk.
This quarter, Children's Place reported a rather uninspiring 9.26% year-on-year revenue decline, in line with Wall Street's expectations. The company is guiding for a 7.19% year-on-year revenue decline next quarter to $472.5 million, an improvement from the 8.8% year-on-year decrease it had recorded in the same quarter last year. Looking ahead, Wall Street expects revenue to decline 4.6% over the next 12 months.
Number of Stores
When a retailer like Children's Place is shuttering stores, it usually means that brick-and-mortar demand is less than supply, and the company is responding by closing underperforming locations and possibly shifting sales online. Children's Place's store count shrank by 62 locations, or 9.42%, over the last 12 months to 596 total retail locations in the most recently reported quarter.
Taking a step back, the company has generally closed its stores over the last two years, averaging a 9.14% annual decline in its physical footprint. A smaller store base means that the company must rely on higher foot traffic and sales per customer at its remaining stores as well as e-commerce sales to fuel revenue growth.
Same-store sales growth is a key performance indicator used to measure organic growth and demand for retailers.
Children's Place's demand has been shrinking over the last eight quarters, and on average, its same-store sales have declined by 2.01% year on year. The company has been reducing its store count as fewer locations sometimes lead to higher same-store sales, but that hasn't been the case here.
In the latest quarter, Children's Place's same-store sales fell 9% year on year. This decrease was a deceleration from the 8.7% year-on-year decline it had posted 12 months ago. We hope the business can get back on track.
Gross Margin & Pricing Power
We prefer higher gross margins because they make it easier to generate more operating profits.
As you can see below, Children's Place has averaged a weak 32.4% gross margin over the last eight quarters. This means that the company makes $0.32 cents for every $1 in revenue before accounting for its operating expenses.
Children's Place's gross profit margin came in at 25.4% this quarter, marking a 4.9 percentage point decrease from 30.3% in the same quarter last year. One quarter of margin contraction shouldn't worry investors as retailers' gross margins often change due to factors such as product discounting and dynamic input costs (think distribution and freight expenses to move goods).
Operating margin is a key profitability metric for retailers because it accounts for all expenses that keep the lights on, including wages, rent, advertising, and other administrative costs.
In Q2, Children's Place generated an operating profit margin of negative 10.7%, down 7.6 percentage points year on year. We can infer that Children's Place was less efficient with its expenses or had lower leverage on its fixed costs because its operating margin decreased more than its gross margin.
From an operational perspective, Children's Place was profitable over the last eight quarters but held back because of its large expense base. Its average operating margin of 1.73% has been among the worst in consumer retail.
These days, some companies issue new shares like there's no tomorrow. That's why we like to track earnings per share (EPS) because it accounts for shareholder dilution and share buybacks.
This print unfortunately missed Wall Street's estimates, but we care more about long-range EPS growth rather than short-term movements.
Between 2020 and 2023, Children's Place's adjusted diluted EPS dropped 10.8%, translating into 3.58% average annual declines. In a mature sector such as consumer retail, we tend to steer our readers away from companies with multiple years of falling EPS. If there's no earnings growth, it's difficult to build confidence in a business's underlying fundamentals, leaving a low margin of safety around the company's valuation (making the stock susceptible to large downward swings).
Return on Invested Capital (ROIC)
Children's Place's subpar returns on capital may signal a need for future capital raising or borrowing to fund growth. Its five-year average return on invested capital (ROIC) is 7.9%, low compared to the best retail companies that consistently pump out 25%+.
We like to track ROIC because it tells us about a company’s prospects for profitable growth and its management team's ability to achieve it through capital allocation decisions such as organic investments, acquisitions, and share buybacks. ROIC can also be used as a tool to benchmark a company's performance versus its peers, and just like how we focus on long-term investment returns, we care more about analyzing a company's long-term ROIC because short-term market volatility can distort results.
Key Takeaways from Children's Place's Q2 Results
With a market capitalization of $330.8 million and $18.8 million in cash on hand, Children's Place isn't as well capitalized as its peers.
It was good to see Children's Place lift its revenue guidance for next quarter. Other than that, we struggled to find many strong positives in these results. This was a mixed quarter for Children's Place. The stock is flat after reporting and currently trades at $26.5 per share.
Is Now The Time?
When considering an investment in Children's Place, investors should take into account its valuation and business qualities as well as what happened in the latest quarter. We cheer for everyone who's improving the lives of others but in the case of Children's Place, we'll be cheering from the sidelines. Its revenue growth has been weak, and analysts expect growth rates to deteriorate from there. On top of that, unfortunately its decline in physical locations suggests that its demand is shrinking and its decline in same-store sales suggests that it'll need to change its strategy to succeed.
While we've no doubt one can find things to like about Children's Place, we think there might be better opportunities in the market, and at the moment, don't see many reasons to get involved.
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