Shares of The Children's Place, Inc.PLCE have not only declined in the past three months but have also underperformed its industry and the broader market. The stock has declined 10.8% as against the industry's rise of 7.5% and the S&P 500's increase of 4.5%.
Stiff competition, declining comps, aggressive promotional environment and soft traffic are making things tough for the company as is evident from the dismal performance in the last reported quarter of fiscal 2018. Both the top and the bottom line missed estimates. These factors along with the bleak second-quarter fiscal 2018 guidance add to the woes.
Nevertheless, management is striving to return to growth through digital transformation strategies. We are also upbeat about the company's focus on international expansion.
What is Hurting the Stock?
Soft Comps & Q2 Guidance
The company's comparable sales have declined for the first time, after increasing in the last nine quarters. Comparable retail sales were down 1.8% versus 6.1% growth in the year-ago quarter. U.S. and Canada comp sales declined 1.4% and 7.1%, respectively.
For the fiscal second quarter, the company projects adjusted earnings per share of 51-61 cents, sharply down from 86 cents reported in the year-ago quarter.
Margin, an important financial metric for the company's health, declined in the fiscal first quarter. Adjusted gross profit fell 5.6% year over year to $161.5 million and gross margin contracted 220 basis points (bps) to 37%. This specialty retailer of children's apparel reported adjusted operating income of $25.4 million, down from $48.4 million in the prior-year quarter.
Moreover, operating margin decreased 530 bps to 5.8%. For fiscal 2018, management expects adjusted operating margin of 8.5-8.7% compared with 8.7-9% announced earlier. Further, the projected range falls below the fiscal 2017's 9.6%.
Will Initiatives Help the Stock Revive?
In an effort to provide a hassle-free shopping experience, Children's Place is focusing on digital transformation. This Zacks Rank #3 (Hold) company plans to invest $50 million in SG&A over the next three fiscals to support digital transformation, with $30 million, $15 million and $5 million in fiscal 2018, 2019 and 2020, respectively. Per management, its digital business is expected to see a CAGR of low 20%. The company also expects to generate 35% of total revenues from its digital channel by 2020.
Further, the company had earlier delivered customer database and rolled out Wi-Fi, BOPIS, Ship from Store, mobile POS across all U.S. stores. Also, it launched SMS texting capabilities and implemented everyday-free shipping with no minimum purchase. Children's Place will also take up initiatives to implement "BOSS" (Buy Online, Ship to Store) in the fourth quarter of fiscal 2018. Further, it announced plans to open a new e-commerce site with Tmall - the e-commerce platform of Alibaba - in the second half of fiscal 2018.
The company is taking steps not only to gain traction in the U.S. market but also to expand globally. This is evident from its recently-signed license agreement with Zhejiang Semir Garment Co. Ltd (Semir) for the Greater China market, which covers Mainland China, Taiwan, Hong Kong and Macau. Semir is the parent company of Balabala - a prominent name in China's specialty children's apparel retail industry.
We expect these endeavors to lift the stock's performance on the bourses.
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