The Children's Place (PLCE) Q4 Earnings Beat, Digital Sales Up

In spite of a challenging backdrop, The Children’s Place, Inc. PLCE reported better-than-expected fourth-quarter fiscal 2020 results. This pure-play children’s specialty apparel retailer witnessed a decent improvement in sales trends on a sequential basis. The quarter marked the second straight top- and bottom-line beat.

Shares of The Children’s Place rose approximately 3% during the trading session on Mar 9, 2021. Markedly, this Zacks Rank #1 (Strong Buy) stock has surged a whopping 89.8% in the past three months compared with the industry’s rally of 24.5%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Let’s Take an Insight

The Children’s Place posted adjusted earnings of $1.01 per share, against the Zacks Consensus Estimate of a loss of 17 cents. However, the bottom line declined from adjusted earnings of $1.85 reported in the year-ago period. The decline can be attributed to lower net sales and higher interest expenses.

Net sales of $472.9 million decreased 7.8% year over year due to the temporary and permanent store closures and the adverse impact of lower operating hours in mall stores, as directed by the mall owners. Nonetheless, we note that the rate of sales decline has decelerated sharply from 19% witnessed in the preceding quarter. Moreover, the top line surpassed the Zacks Consensus Estimate of $420 million.

Management stated that quarterly results surpassed its expectations across all key metrics. Impressively, sales topped expectations in both digital and stores channels owing to better-than-expected traffic levels and favorable response toward casual and expanded sleepwear assortments. However, the demand for holiday dress up apparel and accessories were soft. Consolidated digital sales surged 38% during the quarter, representing 46% of total sales. Comparable retail sales increased 1% during the quarter.

U.S. store sales were stronger-than-anticipated, thanks to no major temporary store closures due to the pandemic during the quarter. However, the picture was somewhat different in Canada, where government mandated COVID-19 closures impacted roughly two-third of stores for approximately half of the quarter. While the U.S. store sales performed at 81% of last year’s levels, Canada store sales performed at 52%, with traffic down about 35% and 62% in the respective regions.

The Childrens Place, Inc. Price, Consensus and EPS Surprise

The Childrens Place, Inc. Price, Consensus and EPS Surprise

The Childrens Place, Inc. price-consensus-eps-surprise-chart | The Childrens Place, Inc. Quote

Margin Discussions

Moving on, adjusted gross profit was $143.9 million, down 13.8% from $166.9 million in the year-ago period. Again, gross margin contracted 210 basis points to 30.4% on account of elevated e-commerce penetration and increased fulfillment costs, together with fixed cost deleverage stemming from lower sales. This was somewhat compensated by increased merchandise margins across stores and digital channels, and lower occupancy expenses.

Adjusted SG&A expenses declined 9.1% to $102.7 million in the reported quarter. As a percentage of net sales, the metric leveraged 30 basis points to 21.7% primarily due to lower store expenses stemming from permanent store closures and decline in overall operating expenses owing to the actions undertaken in response to the pandemic. This was partly offset by increased incentive compensation accruals.

The company’s adjusted operating income amounted to $26 million, down 26.7% from $35.4 million in the year-ago period. Adjusted operating margin shrunk 140 basis points to 5.5%.

Store Update

As of Jan 30, 2021, The Children’s Place had 680 of 749 stores open to the public in the United States, Canada and Puerto Rico, with all but one store of the temporarily closed stores located in Canada.

With respect to its store fleet optimization strategy, The Children’s Place permanently shuttered 60 stores during the fourth quarter. This brings the total store closures to 178 in fiscal 2020. The company now plans to shutter 122 stores in fiscal 2021. Of these, the company plans to close roughly 25 stores in the first quarter and about 97 stores by the end of fiscal 2021. This will take the total store closure count to 300 for the two-year period.

Since the announcement of the fleet optimization initiative in 2013, the company has permanently closed 449 stores.

These store closures are seen as part of the company’s effort to lower dependency on brick-and-mortar platform and shift toward digitization due to the changing consumer shopping pattern. Entering fiscal 2022, the company targets a store fleet of roughly 625 locations and aims to generate 75% of its total revenues from sources outside the traditional malls.

Other Financial Aspects

The Children’s Place ended the quarter with cash and cash equivalents of $63.5 million. The company had $170 million outstanding on its revolving credit facility at the end of the quarter. Stockholders' equity at the end of the quarter was $93.4 million.

The company generated roughly $15 million in operating cash flow during the quarter. It incurred capital expenditures of approximately $7 million during the quarter.

Outlook

Management envisions first-quarter fiscal 2021 net sales to be $330 million. This indicates an increase from net sales of $255.2 million reported in the year-ago period, as the company anniversary the complete closure of stores for approximately half of the quarter.

The Children’s Place expects first-quarter gross margin to be meaningfully higher than last year. This is due to expectation that the majority of stores will remain open for the entire quarter, the impact of lower occupancy costs, and merchandise margin expansion. SG&A is projected to be $100-$105 million, higher than last year’s adjusted figure of $88.2 million.

We note that management anticipates substantial increase in store sales for the first half of fiscal 2021, as the company anniversary the temporary store closures during the first and second quarters of fiscal 2020. However, for the second half of the fiscal 2021, store sales are projected to remain flat with fiscal 2020 levels. This is due to permanent store closures as part of store fleet optimization strategy that is likely to offset higher store productivity.

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