Children's Place (PLCE) Lags Q3 Earnings, Cuts View, Stock Down

The Children’s Place, Inc. (NASDAQ:PLCE) reported third-quarter fiscal 2018 results, wherein earnings missed the Zacks Consensus Estimate but sales surpassed the same. That said, the company’s top and bottom lines both increased on a year-over-year basis, courtesy of surging demand in its digital channels. Despite the improvement, this pure-play children’s specialty apparel retailer’s shares declined more than 13% on Thursday, after it trimmed its fiscal 2018 earnings and margin guidance.

Let’s Delve Deeper

The company reported adjusted earnings of $3.07 a share, which missed the Zacks Consensus Estimate of $3.08 but came at the higher end of its guided range of $2.97-$3.07.

However, the bottom line increased 19% during the quarter under review, following a decline of 18.6% in the fiscal second quarter. This year-over-year improvement can be attributed to higher digital sales, partly offset by lower margins owing to increased focus on e-commerce penetration.

The company generated net sales of $522.5 million, which increased 6.6% year over year and also surpassed the Zacks Consensus Estimate of $502 million. Its net sales topped the consensus mark in the fiscal second quarter as well. The increase in net sales in the fiscal third quarter was due to comparable retail sales increase of 9.5% and due to the new revenue recognition rules. The positives were partly offset by about $14 million impact from the calendar shift related to the 53rd week in fiscal 2017.

Adjusted gross profit edged up about 1% to $204.4 million, whereas gross margin contracted 220 basis points (bps) to 39.1% due to increased e-commerce penetration.

Adjusted operating income came in at $65.5 million, down 4.2% from $68.4 million a year ago, while operating margin contracted 150 bps year over year to 12.5%.

Adjusted SG&A expenses increased 4% from a year ago to $122 million. However, as a percentage of net sales, the same improved 60 bps on a year-over-year basis. The improvement in SG&A expenses was due to fixed cost leverage on stronger comparable retail sales and lower incentive compensation expenses.

Store Update

As part of store fleet optimization endeavors, the company shuttered four stores and did not open any outlet, thereby ending the quarter with 988 stores. Since the announcement of the fleet optimization plan in 2013, the company has shuttered 195 outlets.

The company’s international franchise partners opened 21 net new points of distribution through fiscal 2018, ending the quarter with 211 international points of distribution open that are operated by its eight franchise partners in 20 countries.

Other Financial Details

Children's Place ended the quarter with cash and cash equivalents of $93 million compared with $257.7 million a year ago. The company exited the quarter with inventories of $376.9 million and shareholders’ equity of $343.5 million. It has a revolving loan of $65 million.

During the quarter, the company bought back 192.2 thousand shares for roughly $26 million and paid a quarterly dividend of approximately $8 million. At the end of the quarter, the company still has approximately $281 million remaining under its existing share repurchase program.

Guidance Slashed

Management now anticipates adjusted earnings in the band of $7.69-$7.79 per share for fiscal 2018, down from the prior guided range of $8.09-$8.29 and earnings of $7.91 reported in fiscal 2017. The guidance includes about $30 million costs related to the company’s accelerated digital spending.

Children's Place now envisions total net sales in the range of $1.955-$1.960 billion compared with $1.945-$1.955 billion projected earlier. The company forecasts mid-single digit growth in comparable retail sales.

Meanwhile, it has slashed adjusted operating margin guidance to 7.7-7.8% from the prior guided range of 8.5-8.7%. The tepid outlook takes into account higher fulfillment expenses to support stronger demand in digital channels and shipping costs due to a shift from store to online during the fiscal fourth quarter.

The company, which carries a Zacks Rank #3 (Hold), projects fourth-quarter earnings between $2.07 and $2.17 per share, down from $2.58 recorded in the prior-year period. Management now expects low-single digit increase in comparable retail sales versus prior expectation of mid-single digit growth.

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