Monday, July 27, 1998
The Children's Place Inc.
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Phone: 973-227-8900
Website: http://www.childrensplace.com
Price (7/24/98): $9 5/8
HOW DID IT DOUBLE?
Sandlot Gravity 101: Even kids know that when some things drop, they often bounce back up. This rubber playground equity hit the pavement shortly after going public last year. Priced at $14 a share and opening at $16, the newborn stock would take just three weeks of public life before the children's apparel retailer shocked investors with news of a lackluster summer selling season. As students went back to school it seems that parents weren't going back to Children's Place.
In one of the worst initial public offering debacles of 1997, the stock eventually fell below $5 a share. Future expansion was questioned. Class action lawyers circled the company. Then the Asian flu came and the company became one of the few beneficiaries of the malaise.
Since the company's apparel was manufactured overseas, primarily in the Far East, with the tumbling foreign currencies came cheaper prices for the clothing goods. While the same may have been said for Gymboree <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GYMB)") else Response.Write("(Nasdaq: GYMB)") end if %>, whose shares have gone the other way, this spring it was Gymboree who had the inventory problems and sluggish sales despite the savings on the raw materials.
Children's Place responded with a strong holiday season and that led to a pair of blowout quarters. For January, a 5% same-store sales gain capped off a year in which pre-tax earnings rose by 23%. That was followed by a spectacular April quarter in which sales shot up by 43% (7% at the comparable store level) and net income soared 171% in what is usually the quietest of periods.
The tetherball had gone full circle.
BUSINESS DESCRIPTION
The Children's Place owns 178 retail outlets specializing in children's apparel. The namesake stores, which are mostly located in shopping malls, cater to kids from birth to 12 with value-priced proprietary clothing lines.
The company was taken public by Montgomery Securities on Sept. 19, 1997, at $14 a share.
FINANCIAL FACTS
Income Statement*
12-month sales: $209.4 million
12-month income: $8.7 million
12-month EPS: $0.36
Profit Margin: 4.2%
Market Cap: $246.4 million
(*Excludes one-time charges)
Balance Sheet
Cash: $3.6 million
Current Assets: $40.4 million
Current Liabilities: $18.7 million
Long-term Debt: None
Ratios
Price-to-earnings: 36.7
Price-to-sales: 1.2
HOW COULD YOU HAVE FOUND THIS DOUBLE?
Tomorrow in the Trouble we will dig into Gymboree's woes. While both Gymboree and Children's Place are mall-based retailers, they are not the same. Gymboree is more stylish, with the higher prices to show for it. While Gymboree may be a more direct competitor with fashion-intensive stores like Gap-owned babyGap and Gap Kids, Children's Place relies less on designer patterns and more on the value-priced solids and simple prints one would find at discount department stores like Wal-Mart <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WMT)") else Response.Write("(NYSE: WMT)") end if %> or Sears <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: S)") else Response.Write("(NYSE: S)") end if %>.
For the quarter that ended on May 2 for both companies, it was clear that despite the booming economy shoppers chose the value-priced Children's Place. For the quarter, same-store sales were up 7% at Children's Place while rising just 1% at its more upscale mall counterpart.
Beneath the surface the disparity was even larger and savagely unexpected. Children's Place blew away earnings estimates of $0.06 with an $0.11 a share showing, while Gymboree had its income halved from the prior year's quarter, and the $0.17 a share report was six pennies shy of the consensus projection.
But if the lone bullish analyst on Children's Place was stumped, how could a Fool have picked up on this clearance bin bargain? The reality is that last year's initial euphoria and eventual crash were both overdone. Investors shouldn't have paid as high as $16 a share for the company the day it went public. While the 1996 earnings proudly proclaimed a $1.28 a share showing, all but $0.40 a share came from a favorable charge. As bad as 1997 seemed, it was actually a 23% improvement in pre-tax, pre-charge earnings. While the company wasn't worth buying in the mid-teens, one certainly shouldn't have bailed two months later when it dropped below $5.
WHERE TO FROM HERE?
Like the kids the chain dresses, this company is growing. Last year the retailer went from 108 to 155 stores. Children's Place is looking to add another 45 stores this year and it is off to a good start -- it opened half of those already in the first quarter alone. New markets this year include Atlanta, St. Louis, and Kansas City, and while the company had some problems last year breaking into new regions, this time around it has much better pricing leeway to win over young parents.
This is not a perfect company, but as an underfollowed entity if the company earns the projected $0.53 a share this year and $0.70 a share next year, this fast grower seems more than reasonably priced.
While I am not sure what conclusion Louis Corrigan will draw in dissecting Gymboree tomorrow, it seems to me that the recent laggard -- Gymboree -- and not the hot Children's Place, is the better buy here.
This is not to belittle the turnaround at Children's Place. Earning estimates have been climbing now to $0.53 a share this year (it was $0.46 a share just last month) while next year the lone analyst has gone from projecting $0.60 a share to $0.70. At Gymboree they have actually been falling.
However, while the share prices of a falling Gymboree and a rising Children's Place have been coming together, like two kids compromising at the playground, Gymboree is still expected to earn twice as much per share as Children's Place over the next two years.
That is where investors need to be cautious. Right now all is well at Children's Place. One can probably assume that the chain's dependency on standard solid colored clothing would be timeless and immune from the deep clearance rack. Yet tastes, like children, are fickle; and today's Children's Place may wind up as tomorrow's Gymboree, or vice versa -- sandlot rules you know.
-Rick Aristotle Munarriz
([email protected])