When it comes to navigating through the COVID-19 induced recession, being a brick-and-mortar retailer can be a tough gig. The long and short of the matter is that if a business is not deemed to be essential to the economy then it has suffered a powerful blow and future relevance questions have to be considered. There are many retail locations that simply are not going to make it at all, or they are going to operate at levels of profitability that look insignificant compared to the past.
One such retailer which appears to be on the cusp of essential versus non-essential is The Children’s Place, Inc. (NASDAQ: PLCE). Based on the company’s losses in the second quarter, the non-essential argument for this children’s apparel retailer seems to be winning over the essential case.
Children’s Place also owns the Gymboree apparel brand, which it acquired out of bankruptcy. Another aspect of this company is that it had already announced plans back in June to close about one-third of its stores.
After taking a look at the earnings report, despite there not being many stores left that just target kids, the stock market’s verdict appears to be that Children’s Place just does not have essential role in a pandemic-driven economy. And we now know why Zacks had named it the “Bear of the Day” just a week earlier.
The company reported a net loss of $46.6 million in the second quarter. This comes to -$3.19 in earnings per share. Net income a year earlier was $1.5 million, which was income of $0.10 per share. The company’s adjusted loss that analysts will use for a comparison came in at -$1.48 per share, also wider than the -$1.14 EPS consensus.
Where things do not look quite as bad is on the total sales figures. Children’s Place generated $368.9 million in revenues in its second quarter. The consensus expectations were roughly $372 million, but the same quarter of 2019 saw revenues at$420.5 million.
Like most retailers, Children’s Place is growing its online sales with growth of 118%. And as of August 1, the retailer had reopened about 770 stores to have 94% of its fleet back in operations. That said, the company had already permanently closed 102 locations with another 200 or so stores set to close in 2020 and another 100 set to close in 2021.
Where things look bad ahead is the slow start in the back-to-school shopping season. All of the remote learning and mixed learning venues is having a negative impact on Children’s Place sales. The company even referred to that as “significantly impacted” and that it now anticipates a “meaningful negative impact” on its third quarter results. While that is not formal guidance, it sets the stage for more disappointment ahead while very few companies in general want to commit to formal guidance.
The company’s $50 million investment into a digital transformation for omni-channel capabilities increased new customers to its digital file by approximately 175%. The company also noted that it has converted what were “store-only” customers to omni-channel customers at roughly 3-times the pre-pandemic rate. With an app download increase of roughly 115% the pandemic trends were shown to continue driving sales online and are also said to give it an opportunity to take more share.
As of August 1, 2020, The Children’s Place had about $36.1 million of cash and cash equivalents on hand. It had no long-term debt but listed $250.8 million outstanding on its revolving credit facility. All in, the company used approximately $42.7 million in operating cash flow in the last quarter.
Shares of The Children’s Place were last seen trading down almost 19% at $18.95 on Tuesday afternoon. The 8 million shares that traded hands as of 1:30 p.m. was already more than 8-times normal trading volume, and the 52-week trading range of $9.25 to $95.53 should spell out how dire the situation has been. Refinitiv’s consensus analyst target price had been $38.60, but that figure is going to be coming down about as rapidly as its total store count.
As for the “essential versus non-essential” question, it is important to judge the value of its stores versus the value of the company itself. The last valuation was a $275 million market cap based on this new drop. Lowering the store count by 300 stores over this year and next is going to leave a total footprint of close to 500 stores, and to make that conservative just take the number down to 450 stores on a more conservative level. Even at that lower level this values each storefront at just over $600,000 per store before backing out a single dollar of value for for its ecommerce platform.
If this company can get back to profitability anywhere close to the old $3.50 in earnings share in 2021 (Fiscal Year 2022) after earnings of $5.36 per share in the last year before the pandemic, then there may be some serious value that the market is overlooking. And on the flip side, if the current situation persists then the retail apocalypse will prove that The Children’s Place is a non-essential retailer.
Sadly, this was a $70 stock in February before the coronavirus panic selling took the shares so low in March and April.