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Children's Place (NASDAQ: PLCE ) stock fell Thursday, despite beating earnings and revenue estimates. Now, in early morning trading, PLCE stock is making a comeback.
The cause for yesterday's pain? A tax issue and higher marketing spending led to lower profits compared to year-ago levels. But despite this, Children's Place stock remains on track for double-digit profit growth.
Although one could build a sell argument based on other factors, investors should not sell PLCE stock based on the latest quarterly report.
PLCE Beat Estimates for Both Earnings and Revenue
Children's Place reported Q2 earnings-per-share at 70 cents. This came in 11-cents-per-share ahead of expectations, though it fell short of last year's Q2 EPS of 86 cents. The company earned $448.72 million in revenue. This beat estimates by $20.84 million and grew revenues by 20.1% compared to the same quarter last year. This led to a same-store sales increase of 13.2%. Wall Street had only expected an 8.9% increase.
The company also raised guidance for the current fiscal year to the range of $8.09 and $8.29-per-share. Previous guidance estimated earnings at $7.95 to $8.20-per-share. The company earned $7.91-per-share last year. PLCE stock surged as much as 7% in pre-market trading following the announcement. However, the rally was short-lived. PLCE stock had closed down by just over 1.25% by the end of the trading day.
The tepid reaction to the earnings and revenue beats possibly revolves around profits falling from the year before. The company spent $16 million more on sales, general and administrative expenses than it had the prior year. However, profits came in higher in the same quarter last year, primarily because the company paid a negative 226% tax rate due to impacts from share-based compensation. In the same quarter the previous year, the company paid a 26% tax rate on its operating income, thus reducing profits.
Financials Do Not Justify Post-Earnings Selloff
Despite this anomaly, I see little that would justify a sell-off. Yes, Wall Street only expects profits to grow by 5.8% this year. However, profit growth averaged 17.22%-per-year over the last five years. Over the next five, they still expect an average of 11.75%-per-year. This takes the forward price-to-earnings ratio to about 16.75. Although I prefer to avoid fickle, no-moat sectors such as retail clothing, this stands as a stock displaying average growth while trading at a multiple well below the S&P 500 average.
The company also compares well with its peers. PLCE stock and Carter's (NYSE: CRI ) stand as the only major pure-play children's retailers to trade on the market. Its other direct peer, Gymboree , remains private. All other peers focus on different clothing types. Gap (NYSE: GPS ), also sells men's and women's apparel. Children's clothing only constitutes a small percentage of sales for the likes of Walmart (NYSE: WMT ), Target (NYSE: TGT ) and Kohl's (NYSE: KSS ). Still, regarding sales growth, Children's Place beats the more generalized retailers and holds its own against the more direct peers.
As for how PLCE stock performs, it looks to approximately match the P/E ratio and growth rate of Carter's. If I were going to invest in this sector, I would go slightly outside of children's clothing and choose GPS stock even though it experienced a similar sell-off after beating estimates. Gap maintains a forward P/E of about 12.6, 25% lower than that of Children's Place stock.
GPS also pays a dividend of about 3%. The dividend for PLCE stock comes in at just under 1.5%. However, for investors that need to choose PLCE, it remains on track to maintain its pace of slow, steady growth for some time to come.
The Bottom Line on PLCE Stock
Despite a post-earnings selloff, PLCE stock maintains its track record of solid financials and double-digit growth. PLCE sold off in Thursday trading following an earnings and revenue beat. Due to one-time factors, growth will slow this year. However, its past and its foreseeable future point to double-digit income growth.
Despite a generally strong performance, Children's Place faces a difficult competitive environment. Virtually any clothing and general retailer can compete with this company. This competition can hurt the company if it fails to stay on top of trends that change for seemingly arbitrary reasons. Moreover, even among its major peers, GPS stock will offer the same level of growth at a lower valuation.
However, in comparison to most companies in this sector, PLCE stock offers strong growth at a reasonable valuation. One quarterly report should not change that.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You canfollow Will on Twitterat @HealyWriting.
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