PLCE - Children's Place: Huge Value At Considerably Low Risk

Summary

• Currently, the company has been trading at $435 million, whereas it has produced more than $130 million in cash flow from operations for a very long period of time.
• Due to its strong financial position along with its robust cash-generating business model, the risk of permanent capital loss seems very low.
• From this price point, the stock offers huge upside potential with a very low risk of permanent capital loss.

Children's Place ( PLCE ) is the largest pure-play specialty retailer in North America, providing high-quality merchandise at value prices through retail, wholesale, and license agreements.

The company operates 672 stores and has been closing the stores at a very rapid rate over the last few years as an optimization strategy. Also, the company has been improving its online shopping experience through various initiatives. Strategic management of e-commerce and ongoing improvement in stores is expected to increase the overall margins in the upcoming years.

Since 2013, the company has reduced its total square footage (Store) from 5.2 million to 3.2 million, and expanded its e-commerce business, as a result operating margins have improved considerably. But as the economic conditions are progressing towards recession, the stock price has been dropping consistently despite stability in net profits.

I believe consistent buyback has produced huge value for the company, and going ahead the company could expand its margins due to the management's considerable effort and optimization initiatives.

Due to the current inflationary environment, the stock price has dropped to significantly lower levels despite strong operating performance and robust financial position, from this point the stock offers significant upside potential. I assign a buy rating to the stock.

Historical performance

In the last ten years, revenue has seen modest growth , from $1.7 billion in 2012 to about $1.9 billion by 2021. Also, net profits have been significantly volatile and have reached all-time high levels of $187 million by 2021; over the same period, management has substantial value for the shareholders.

Till 2020, the company was debt free, but in the last two years, debt has increased slightly due to acquisition activity. Also, the company had considerable cash reserves, but with the recent increase in inventory levels, overall cash has reduced to $19 million, but the overall liquid assets are substantially high. Having low debt with significant liquid assets provides the company with significant stability. Also, intangible assets are considerably low, reducing the impairment risk.

The company's strong financial position is attributed to its huge cash-producing business model; in the last ten years, the company has produced huge cash flow from operations for the company, which stood above $130 million every year except 2020. Management has infused the cash generated for acquisition and share repurchase, resulting in substantial value creation for the shareholders.

Furthermore, from 2012 onwards till 2018, the stock soared more than 230% but then lost nearly 90% of its value till 2020; currently, the stock price has reached $35 per share, dropping from $102 million in the last year, note that over the last ten years, the outstanding share count has reduced from 25 million shares to 13 million by now, which shows that the stock is trading at a considerably lower valuation.

Strength in the business model

The company has significant liquid assets, along with low long-term debt and low goodwill assets; having such a strong financial position provides huge flexibility even in adverse economic conditions. As the recessionary environment is affecting various companies in the United States, children's place gets a significant competitive advantage over its competitors. And if the current situation lasts longer, the company has substantial resources to weather the situation.

Risk factors

Although the business model has been robust, there are various concerns that can affect business operations, such as the inflationary situation, recently increased inventory, and increased borrowing. Also, as per the management, supply chain related increased costs might affect profitability in the coming quarter. Due to such conditions, stock prices might suffer in the upcoming quarters, but the long-term outlook remains favorable.

Recent development

In the latest quarter, revenue declined from $558 million the same quarter last year to $509 million now, primarily attributed to adverse economic conditions; as a result, net profits declined to $42 million. It should be appreciated that, even in the adverse economic condition, where a large number of retailers are producing huge losses, the company could generate positive net profits.

Due to increased inventory levels, borrowing from revolvers has increased to $265 million, it seems that upon stabilizing the situation, borrowing levels might be reduced considerably. Also, the company has launched its newest online sleepwear brand, PJ Place, which is expected to drive market share and revenue in the upcoming quarters.

As per the management , the company has not experienced any significant supply chain cost pressure till the quarter, but the cost has started increasing recently, in such cases, the company might face a significant backdrop in the upcoming quarters, but the long-term outlook is very much attractive.

Moving on to our digital-first strategy. Digital represented 50% of our total retail sales in Q3 versus 48% in 2021 and 37% in 2019. We're very proud of our industry-leading digital penetration, and we're excited about our digital growth opportunities in 2023 and beyond. E-commerce traffic held up well during the quarter, at positive 6% versus last year. We continue to deliver industry-leading digital results supported by the combination of our structural reset during the pandemic our increased marketing investments and our focus on optimizing our channel results.

Also, the management is focusing relentlessly on developing the e-commerce segment through a digital-first strategy, it seems that initiatives are bearing fruits as a result sales from the digital segment is increasing rapidly. As the business model is shifting from retail stores to digital sales, margins are expected to improve in the future.

Currently, the company has been trading at $435 million, whereas it has produced more than $130 million in cash flow from operations for a very long period of time; it appears that the stock has been trading for just 3.3 times its CFO. Also, historically, the stock had been trading for 7-8 times its CFO. Furthermore, due to its strong financial position along with its robust cash-generating business model, the risk of permanent capital loss seems very low. Therefore, I assign a buy rating to the stock.

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