PLCE - The Children's Place: Ominous Signs In Retail

Summary

• The Children's Place, Inc. is a specialty retailer that has been resilient, with wild swings in share prices.
• We have had broader concerns regarding the strength of the consumer.
• The Children's Place reduced guidance in a bit of a preannouncement today, and we take that as warning sign for specialty retail.

The Children's Place, Inc. ( PLCE ) is a specialty retailer that we have previously liked and traded in the past, but it has been a horrible market and a horrible time for retail stocks largely. However, PLCE stock bottomed out in 2022, traded mostly sideways for months, but exploded higher in January with the market. This stock is also pretty heavily shorted, making it prone to swings. We believe that retail is rather strong, all things considered, but today they put out news that serves as a warning sign for specialty retailers that will be reporting earnings in the coming weeks.

Generally speaking in the specialty retail space, it is those companies that are best managing their inventory, using tactical promotion to attract sales but preserve margins, and watching costs generally speaking, that are doing well in this environment. Inflation has been a bit of a retail killer for many months, and the rising input costs coupled with a consumer whose dollar does not go as far is a bad mix for retailers. We think The Children's Place, Inc. stock heads back under $40, and other retailers may see some pressure.

So why are we sharing these thoughts? Look, we are realistic. The market has gotten ahead of itself because the broader landscape is a bit better than feared. We agree, but do not think the market's 700-point run can be sustained. But we do believe that PLCE stock made its bottom at this time. The stock chopped along until January.

When the company reported Q3 earnings and gave its guidance for Q4 and the year, the retailer had reduced both its top and bottom-line expectations for Q4 as well as the full year. This was back when they reported in the fall, and they reduced their outlook because of the questionable macroeconomic environment and supply chain cost pressures, as well as inventory. Factor in the consumer, who seemingly has weakened, and we can see there has been a recipe for some troubling earnings misses.

When the company reported Q3, it guided for revenues to be in the range of $460 million to $470 million for Q4. That was already below consensus back then. The company believed at the time that it would face a low-teens percent decrease in comparable retail sales. The company saw adjusted operating income in the range of 2.5% to 3.3% of net sales and adjusted earnings per share of $0.50 to $0.75. For the whole year, management had guided for adjusted earnings per share of $4.05 to $4.30.

Well, the company just preannounced , and while it is not horrific, it was bad enough to warrant informing the Street. For the stock itself, it is only down a few percentage points. We think the Street will be more concerned with real updated guidance when the company does fully report.

This update has us concerned for other retailers as well. The magnitude of the reduction in the expectations relative to what was already a previously disappointing outlook in many respects reflects the concerns we have for the consumer more broadly.

Sales are looking like they will come in well below the low end of the guidance, around $454 million to $456 million, compared to $460 million at the low end. This would be a drop of 10.2% to 10.6%, versus last year. There will be operating losses here too of -14.2% to -15.6%. Folks, The Children's Place, Inc. guided previously for positive 2.5% to 3.3%. That is painful. What is more, the loss will be -$4.02 to -$4.41. That compares to the adjusted earnings of $0.50 to $0.75 per share. This is horrific.

There was some good news on the inventory front, however, and this may be why the Street is largely shrugging off this preannouncement. Q4 inventory is expected to increase 5.5% to 6.5%. This slight increase is far below what other retailers are experiencing, and is down from the 24% increase we saw in Q3 2022 alone year-over-year.

So why is this such a bad omen? Is this not just a company-specific issue. While it could be only a concern for The Children's Place, management stated in the preannouncement:

The macro-economic environment in the fourth quarter proved to be far more challenging for our core customers than originally expected, resulting in lower sales than projected and the need for increased promotions

We believe that this comment is a warning sign. While inventory and promotion is company-specific, the degree of the sales miss - while not overwhelmingly drastic - was pretty noteworthy. We are concerned.

As for The Children's Place, Inc., well, it is moving in the right direction, in our opinion. The company has worked to implement significant reductions in their input costs and has really paid attention to their expense levels. We also applaud the inventory management. The lower cotton costs will help this year as well, keep that in mind, but now the risk is largely on the consumer. This The Children's Place, Inc. report has us worried in that regard, and we will update you when we have more reports from specialty retail in the coming weeks.

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