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FOOL PLATE SPECIAL
An Investment Opinion
by Louis Corrigan
Shareholders Leave the Children's Place
Shareholders jumped out of The Children's Place <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PLCE)") else Response.Write("(Nasdaq: PLCE)") end if %> this morning, even though this mall-based retailer of value-priced kids clothes reported adult-sized sales and earnings for the fourth quarter. By midday, the stock had tripped for a $4 loss to $29 1/4.
The main bummer seems to be the registration filing late yesterday indicating that a group of long-time shareholders will dispose of 2.7 million shares in a public secondary offering. Senior Children's Place executives and directors will add in another 1.3 million shares. Although the selling shareholders will continue to own a majority stake in the firm, investors rightly took this as a sign that knowledgeable investors believe this is a good time to take some chips off the table. After all, this retailer went public in September 1997 at just $14 a share and promptly fell on its face -- not the kind of first impression you want to make. Weak back-to-school sales that year left shareholders crying at the $5 share price. The company's been scrapping to recover since then and had recently topped out at $34 a share, after tripling since October.
Still, those Q4 numbers look impressive. Sales rose 49% to $97.3 million, thanks in part to an 18% jump in same-store sales. Net income performed a jumping jack to $9.9 million from $4.2 million, pushing earnings per share up to $0.38 from just $0.17 a year ago. That crushed the $0.31 per share consensus estimate. A robust hike in gross margins to 45.1% from 36.5% more than made up for an uptick in selling, general and administrative expenses to 24.0% of sales from 22.7%. For the full year, revenue increased 47% to $284 million on 14% same-store sales growth. Net income nearly tripled to $20.7 million, leaving EPS at $0.80 versus just $0.29 a year ago, excluding a one-time charge last year. Net margins improved to 7.3% from 3.6% for the year. Return on average equity for the year was an impressive 25.8%.
Unlike Gymboree <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GYMB)") else Response.Write("(Nasdaq: GYMB)") end if %>, its more upscale mall-based competitor, Children's Place offers more value-oriented basic solids and simple prints for children ages 12 days to 12 years. While Gymboree has stumbled badly in the last year, as high prices and excess inventories badly bruised its results, Children's Place has recovered from its troubles because it offers parents a good value proposition. The company's successful formula has led to rapid expansion, from 108 stores at the end of 1996 to 155 at the end of 1997 to 209 stores today. The retailer hopes to open 70 additional stores this year.
Yet, at $29 1/2 per share, Children's Place carries a current P/E of 36.9. Even assuming that FY99 results come in closer to $1.00 than to the now stale $0.90 estimate, the shares are trading at 29.5 times forward estimates, or right at the 28.5% growth rate projected by analysts. For a growing retail concept operating in what's still a sweet spot in the Gen Y demographic bulge, that may be about right or even a little low. Still, it's worth noting that inventories rose 74% to $35.3 million. Accounting for the store growth, they're still up 29% year over year on a per store basis. Even with the strong same-store sales growth, that seems a little high. Given the firm's mostly basic apparel, though, these numbers probably don't represent quite the risk that high inventories posed for Gymboree.
Related articles:
-- The Children's Place, 10/27/97: The Daily Trouble
-- The Children's Place, 7/27/98: The Daily Double