Children’s Place Becomes a Buy as Rivals Struggle

Founded in 1989, Children’s Place (PLCE), is a specialty retailer of apparel and accessories. The company’s creations are designed for babies and children. A single share of Children’s Place stock sells for $92 and change. Rewind back to November of 2018, and Children’s Place was trading at $157. Today, the stock presents a valuable opportunity for investors.

Though Children’s Place shares have declined in value by about 40 percent across the past year alone, the company is still financially healthy. Sales growth comps increased by nearly 10 percent in the latest financial quarter. Unfortunately, company executives have hinted upcoming sales and profitability will not grow as quickly as anticipated. At the moment, Children’s Place leaders are zeroed in on scooping up market share as former industry power players like Sears and Gymboree close their doors at locations across the United States. The focus on maximizing market share has led to a reduction in earnings-per-share guidance for the year. The combination of e-commerce investments with liquidation sales is pointed to as the cause for narrower quarterly profits.

The good news is Children’s Place’s top rival, Gymboree, will close upward of 800 stores following its bankruptcy. Children’s Place will absorb a considerable portion of this market share, helping the company grow that much faster. It appears as though investors have sold Children’s Place too early. Children’s Place has an incredibly modest P/E (price to earnings) ratio that hovers around 12. This company is quite the attractive combination of value with newly-emerging growth.

Jane Elfers, the CEO of Children’s Place, recently told reporters that stronger than expected digital demand in the second half of 2018 made the company ramp up online access to inventory stored at conventional brick-and-mortar stores. Even the company’s ship-from-store stock was relied upon to meet the growing digital demand. This unplanned demand ultimately resulted in a fulfillment cost increase of 24 cents per share, or a total of $5 million in the fourth quarter alone. Though the company’s inventory challenges might seem like bad news on the surface, the truth is unexpectedly high demand is a good problem to have.

Children’s Place stock provides a dividend yield of 2.3 percent. This payout has increased with each year since the dividend’s debut back in 2014. The dividend initially paid a mere 13 cents. If the dividend continues to increase in accordance with previous hikes, investors will soon receive about 60 cents per share, representing a yield of about 2.5 percent. Though Children’s Place’s revenue potential is inherently limited compared to high-flying tech companies as the product is clothing instead of fancy gadgets, this retailer should be in your portfolio for years to come.

Children’s Place bulls point to the fact that company executives have bought back stock in recent months. This buyback push will likely intensify that much more following the latest investor mass exodus. Company stock buybacks are a good sign for several reasons. For one, buybacks are a vote of confidence. Furthermore, accelerated buybacks typically send earnings per share that much higher across the long haul.

Though Children’s Place has had its struggles in recent quarters, the company is still one of the top-performing traditional brick-and-mortar retail businesses around. The company’s sales comps, e-commerce sales and growing dividend are fantastic signs for investors, regardless of whether they are looking for a short-term or long-term position. It is particularly important to point out nearly one-third of Children’s Place sales stem from the company’s online channel. This is a good sign as some Children’s Place bears have criticized the company for failing to compete with the top e-commerce players. Children’s Place digital sales have soared 38% this past quarter alone.

Do not be swayed by Children’s Place’s temporary sacrifices. These brief financial setbacks provide the company with strategic footholds in spaces formerly occupied by Sears and Gymboree. The bottom line is this stock is oversold. This is your chance to invest in a class-leading retailer with an incredibly low P/E ratio and a growing dividend. Add Children’s Place to your portfolio, check in on it every couple months and you will make out like a bandit.

Regards,

Ethan Warrick
Editor
Wealth Authority

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