A Turnaround Story With A Margin Of Safety

While the S&P-500 (SPY) and Nasdaq Composite have had a solid year with an 8% return and 17% return, respectively, the Retail Sector (XRT) has lagged considerably, impacted by promotional activity to unwind bloated inventory levels and continued worries about consumer demand.

This has especially been the case when it comes to brands with a significant portion of their revenue tied to less affluent consumers that have pulled back on discretionary spending.

One small-cap name has a beating in the Retail/Apparel group. This company has ~620 stores in North American and an online presence that has been working to right-size its portfolio.

Normally, I would avoid companies that are struggling to grow annual earnings per share and which have spotty track records when it comes to generating shareholder value.

However, when things become extremely stretched to the downside, there can be value in betting on turnaround stories, and this level for me is below 6.0x forward earnings when it comes to retail names.

Today, this company is not only disliked from a sentiment standpoint after massively underperforming its peers, but it trades at just ~5.2x FY2024 earnings estimates, one of its cheapest multiples over the past decade.

And while there’s no guarantee that value investors will come in to bid up the stock, the company’s turnaround plans look sound and there’s reason to believe that management can turn this ship around.

A Turnaround Story In The Retail Sector

The Children’s Place (PLCE) is a ~$320 million company in the Retail/Apparel industry group with over 600 stores in North America. This figure is down from 750 stores two years ago as the company works to right-size its fleet and the company’s brands include The Children’s Place, Gymboree, PJ Place, and Sugar & Jade.

The latter two brands are new launches in Q4 2021 and Q4 2022, which give the company exposure to the online-only and higher-growth tween girls segment. Meanwhile, PJ Place is an online-only sleepwear brand.

Not surprisingly, The Children’s Place has seen a significant decline in revenue over the past few years as it closed down stores, exacerbated by a pullback in consumer demand with stretched wallets due to higher rates and inflation.

This has resulted in annual revenue declining from ~$1.94 billion in FY2018 to ~$1.71 billion in FY2022, while gross margins have slid by 500 basis points to 30.1%.

Worse, the higher rates have led to significantly higher interest expense for the company, impacting its earnings per share.

Unfortunately when lapping tough comps from wardrobe refreshes and government stimulus in FY2021, annual EPS has fallen off a cliff, declining from $13.40 to a net loss per share last year.

However, while this doesn’t inspire much confidence, there are some green shoots – with the company’s digital transformation making significant progress, as well as gains from its new marketing approach. The company has also continued to right size its fleet, closing 315 stores since the COVID-19 pandemic began, up from its previous target of 300 stores.

This leaner, more digital focused footprint with the addition of two new higher-growth online-only brands should help to insulate the company from the headwinds of falling birth rates and the shift away from in-store shopping for younger consumers, making The Children’s Place a stronger company with a bright future even if it has lower revenues today.

The Fundamental Outlook

Digging into the financial results, The Children’s Place reported revenue of $456.1 million in Q4 2022, down from $507.8 million in the year-ago period.

This was an abnormally bad quarter due to difficult comps, the lapping of the enhanced child tax credits and a record 2021 holiday season, and comp sales fell by 12.8%.

Unfortunately, gross profit also took a beating, coming in at just $79.7 million vs. $193.8 million in the year-ago period.

And while these results are ghastly, the company continues to repurchase shares to take advantage of the weakness in its stock, and while the H1-2023 outlook suggests a tough start, the company expects to see annual EPS bounce back to $2.50-$3.00 this year vs. a net loss in FY2022.

This is just inning #1 of the recovery and $2.50-$3.00 in annual EPS certainly pales in comparison to the $13.00 in annual EPS reported in FY2021.

That said, this is not company-specific and many brands with exposure to lower-end consumers have seen a massive decline in annual EPS vs. FY2021 levels.

That said, with The Children’s Place having one of the lowest multiples sector-wide and continuing to make progress from a marketing/digital standpoint, I am optimistic that FY2024 and FY2025 should be much better years, with annual EPS set to return to $5.00-$6.00, up over 100% from FY2023 guidance.

The Technical Picture

When it comes to PLCE’s technical picture, this is a stock that trend followers and momentum traders would steer clear of, with PLCE trading below all of its key moving averages.

In fact, its 50-day moving average crossed below its 200-day moving average in April and both moving averages have assumed a negative slope.

See the Full Technical Analysis Report for PLCE

That said, the stock is now down 77% from its 2021 highs and 36% over the past month alone, leaving PLCE at its most oversold levels since 2020.

And when combined with the stock trading at its cheapest valuation in nearly a year at just ~5.2x FY2024 earnings estimates, it would not take much of a positive change in sentiment to push the stock back above $35.00 per share.

From a bigger picture standpoint, it’s worth noting that while PLCE has been taken to the woodshed over the past two years, the stock is coming down to test a 25-year uptrend line for the fourth time near the $25.00 level, an area where I would expect the stock to find some support.

So, with the stock finally back in a potential value zone from both a fundamental and technical standpoint, this looks like the time to be open-minded about a potential bottom for the stock.

The Bottom Line

Based on what I believe to be a conservative earnings multiple of 8.5x earnings and FY2024 annual EPS estimates of $5.18, I see a fair value for PLCE of $44.00.

This points to a 64% upside from current levels, and this is based on an earnings multiple that’s 45% below the stock’s 10-year average.

Given this significant upside to fair value, The Children’s Place is one of the most undervalued names in the Retail Sector today, and this is especially true given that annual EPS is expected to increase over 20% in FY2025, translating to a fair value closer to $52.00 at the same multiple.

So, if I were looking for a turnaround story that’s finally offering a decent margin of safety, I see PLCE as a Speculative Buy below $26.00.

The above analysis of The Children’s Place (PLCE) was provided by financial writer Taylor Dart. Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

Is The Children’s Place (PLCE) A Buy or Sell?

Based on MarketClub’s technical analysis tools, The Children’s Place (PLCE) is in a strong downtrend that is likely to continue. While PLCE is showing intraday strength, it remains in the confines of a bearish trend. Traders should use caution and set stops.

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