Children's Place (PLCE) Falls on Wider-Than-Expected Q2 Loss
Shares of The Children’s Place, Inc. PLCE declined roughly 19% during the trading session on Aug 25. This downside can be attributed to dismal second-quarter fiscal 2020 performance owing to the coronavirus outbreak that led to the temporary closure of stores. The pure-play children’s specialty apparel retailer reported a loss and continued to register year-over-year decline in net sales. We note that this Secaucus, NJ-based company posted wider-than-expected loss. The top line also fell short of the Zacks Consensus Estimate, following a beat in the preceding two quarters.
Management also informed that the company’s back to school sales have been drastically impacted as majority of schools adopted remote or hybrid learning models owing to the COVID-19 outbreak. It further added that this is likely to significantly hurt the company’s third-quarter performance.
Shares of this Zacks Rank #3 (Hold) company have fallen 59.3% in the past three months against the industry’s rally of 22.5%.
It’s quite obvious that Children’s Place bore the brunt of temporary store closures that were undertaken to check the spread of the pandemic. We note that the company opened majority of its outlets during the last two weeks of June. As of Aug 1, the company had opened 94% of its total fleet.
Undoubtedly, management remains committed to address the challenges related to the pandemic. In this respect, the company is accelerating fleet optimization initiative, directing resources toward digital platforms in order to better engage with customers, augmenting supply chain and concentrating on improving financial flexibility. It is also focusing on “Superior Product” strategy to resonate well with millennial customers and advancing omni-channel capabilities.
The Childrens Place, Inc. Price, Consensus and EPS Surprise
Impressively, the company’s digital sales soared 118.2% during the quarter under review. Quite apparent, the company’s $50 million digital transformation investment to enhance omni-channel capabilities in order to meet online demand is reaping benefits.
Management highlighted that since the temporary store closures in March, the company has increased new customers to its digital file by about 175% and converted store-only customers to omni-channel ones at a rate roughly three times the pre-pandemic rate. Furthermore, the company’s app downloads have risen by approximately 115%.
With regards to its fleet optimization strategy, the company plans to close 300 stores by the end of fiscal 2021. Of these, 200 closures are planned for this year and remaining for fiscal 2021. We note that the company has permanently closed 102 stores in the first half of the current fiscal year.
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. The company is aiming mall-based, brick-and-mortar portfolio to represent less than 25% of revenues entering fiscal 2022.
Results in Detail
Children’s Place posted adjusted loss of $1.48 per share, wider than the Zacks Consensus Estimate of a loss of $1.19. Notably, the company had reported an earnings of 19 cents in the year-ago period. Lower net sales and higher interest expense hurt the company’s bottom line.
Net sales of $368.9 million decreased 12.3% year over year due to temporary store closures on account of the pandemic and decline in back to school sales beginning in mid-July. While digital sales increased, store sales dropped 66.1%. We note that the top line came below the Zacks Consensus Estimate of $376.9 million.
Moving on, adjusted gross profit came in at $93.8 million, significantly down from $138.8 million in the year-ago period. Again, gross margin contracted 760 basis points to 25.4% owing to the increased fulfillment costs as result of higher levels of ship-from-store activity related to sturdy digital demand.
Adjusted SG&A expenses declined 10.4% to $103.5 million in the reported quarter. However, as a percentage of net sales, the metric deleveraged 60 basis points to 28.1% primarily due to deleverage of fixed expenses resulting from decline in sales. This was partly offset by lower operating expenses on account of measures undertaken to mitigate the impact of the COVID-19.
The company reported adjusted operating loss of $25.2 million against adjusted operating income of $5.8 million in the year-ago quarter.
The company suspended all store operations in the United States and Canada owing to the coronavirus outbreak effective Mar 18 and only started reopening stores on May 19 in 10 states. In the last two weeks of June, the company reopened majority of its remaining stores. As of Aug 1, the company had opened 771 of 824 stores to the public in the United States, Canada and Puerto Rico, with the majority of the closed stores located in California.
With respect to store fleet optimization strategy, the company opened two stores and permanently closed 98 locations during the quarter under review. Notably, the company ended the quarter with 824 stores. The company’s international franchise partners had 276 international points of distribution in 19 countries as of Aug 1.
Since the announcement of fleet optimization initiative in 2013, the company has closed 373 stores. The company is targeting 625 store locations by the end of fiscal 2021.
Other Financial Aspects
Children’s Place ended the quarter with cash and cash equivalents of $36.1 million, which reflects a sequential decrease of 49.7%. Notably, the company has no long-term debt. However, the company had $250.8 million outstanding on revolving credit facility at the end of the second quarter compared with $235 million outstanding on revolving credit facility at the end of the preceding quarter and $196 million outstanding on revolving credit facility at the end of prior-year quarter. The increase reflects funding to support operations and seasonal working capital needs. Stockholders' equity at the end of the quarter was $61.5 million.
The company used roughly $42.7 million in operating cash flow. The company has temporarily suspended its capital return program — share repurchases and dividends — in response to the coronavirus crisis. At the end of the quarter, the company had approximately $93 million available under its existing share repurchase program.
The company incurred capital expenditures of approximately $9 million during the quarter. Management anticipates capital expenditures of approximately $20 million in fiscal 2020.
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