The Children’s Place: No Place For Me (NASDAQ:PLCE)

The Children’s Place (NASDAQ:PLCE) has seen a new boom-bust cycle. Once a $150 stock in 2018, shares fell to the $60 mark ahead of the pandemic, traded in their teens a couple of weeks later (they even temporarily traded in the single digits), rallied to the $100 mark late in 2021, and now are back to the low forties as investors are pricing in much tougher operating conditions.

A Recap

My last take on the Children’s Place dates back to December 2020 when I concluded that the situation was a mixed bag. At the time, the company has seen a big recovery in its most recent quarter, as profitability looked good and digital sales were making their necessary contribution given the pandemic. Nonetheless, the company has taken a hit as financial markets looked a bit upbeat to me with shares trading at $47 at the time.

Ahead of the pandemic, the company posted its 2019 results with sales down 3% to $1.9 billion, driven by negative comparable sales growth and store closures, as operating profits fell 14% to $96 million, as this still resulted in net earnings power of $73 million, close to $5 per share.

Net debt stood at $102 million by year-end 2019, far below the $170 million EBITDA number. While leverage looks minimal, this stands in contrast to large net cash balances traditionally held by the company, with the deviation mostly the result of accelerated buybacks. Over a billion was spent on buybacks in the decade before, at prices over the $100 mark, raising real questions with regard to capital allocation practices.

The company actually halted the buyback program when shares traded at $15 in March 2020, as the quarterly results reported soon thereafter were dismal, with huge losses reported, even if we adjust for incidental items. Third quarter sales fell just 19% to $425 million, as the company actually posted operating profits again, as net debt stabilized at $190 million following large losses incurred in the first half of the year, yet a cautious voice on the fourth quarter performance were issued.

This left me a bit cautious, as the company has been incurring some debt, as I feared that $5 earnings per share power has been impaired, in part because of debt incurred, as well as a poor mix between store and digital sales, as the valuation did not leave me with a very interesting risk-reward proposition.

Boom-Bust

Since the end of 2020, shares rallied in a fierce manner, actually touching the $100 mark already in the summer of 2021, consolidating around that level in the second half of the year, but ever since have gradually fallen to $42 per share here.

In March 2021, the company posted its 2020 results with revenues down to $1.5 billion, as sales declines moderated further in the fourth quarter. For the year, the company posted a GAAP loss of $140 million and adjusted loss of $53 million. Following a few strong quarters in 2021, which drove up the share price to the $100 mark, the company announced a quarter of a billion buyback program later in the year (of course at elevated prices).

Early this year, the company posted very strong 2021 results as revenues bounced back to $1.9 billion, but comparables became more challenging. A huge GAAP profit was posted at $187 million, equal to $12.59 per share, with adjusted earnings coming in nearly a dollar higher. Net debt inched up to $120 million, following some recent buybacks.

While the outlook was a bit uncertain for 2022, the company guided for double-digit earnings per share, note that this is not earnings per share growth, but an actual double-digit earning per share number.

In May, the company reported first quarter results, and they were not pretty. Revenues fell 17% to $362 million, down 12% from the first quarter in 2019. This is attributed to poor weather, inflation hurting consumer spending and Covid-19 stimulus spending coming to a halt. Inventories rose by a quarter to $549 million, as this resulted in poor cash flow conversion with net debt up towards $200 million as the results were softer than expected of course, like many peers.

With quarterly earnings power falling more than 50%, to $1.43 per share, there appear real risks to the full year guidance as the company withdrew the outlook so early in the year, with reasons for softer performance only strengthening.

What Now?

Shares now trade rather flattish compared to the end of 2020, all while the balance sheet has been impaired following the pandemic and continued share buybacks, although the wider markets have been trading at rather flattish levels ever since as well of course given the recent pullback in markets.

Of course 2021 was a great year, as earnings power of $12.50 per share came in 2.5 times as high as my estimated earnings power of around $5 per share, as pegged late in 2020. But the double-digit earnings outlook for 2022 will be very hard to achieve; given the first quarter results and current environment, this year’s outlook has realistically already thrown out of the window.

While the pullback from a high of $100 looks rather compelling, I remain unimpressed with the capital allocation practices, following another ill-timed buyback program and continued volatility in the business model, with continued challenges to its core retail operations.