Is The Children’s Place Stock a Buy? The Children’s Place (NASDAQ:PLCE) is a major retailer of premium children’s clothing.
Year-to-date (YTD), the stock has sold off by nearly 40 percent, leaving it trading at low multiples to both sales and earnings, so is it now a buy?
The Children’s Place Revenue and Earnings
In Q1, The Children’s Place suffered a rather severe revenue miss, bringing in $362.4 million against estimates of $401.6 million. This was a 16.8 percent decline from Q1 2021.
Revenue was also down 12.1 percent from Q1 2019, which the company uses as a gauge for comparing its current business to pre-pandemic levels.
Earnings were also down significantly in the first quarter.
The company reported adjusted earnings of $1.05 per share against expectations of $1.46.
This was a massive decline from the $3.25 it reported in Q1 2021, though investors and analysts had not expected earnings to keep pace with the stimulus-fueled performance of last year.
There were, however, bright spots in the company’s quarterly report.
Earnings may have missed expectations, but they were still nearly three times the $0.36 per share The Children’s Place reported in Q1 2019. Operating income was also up 211 percent from the first quarter in 2019.
In large part, these numbers are the result of cost-cutting measures taken by the company as it reduces its physical retail presence and transitions toward the digital marketplace.
Market Size, Competition & Forecast
The global market for children’s apparel totals about $263 billion as of 2022. This market is expected to achieve a modest 2.94 percent growth rate through 2026.
The primary competitors to The Children’s Place are larger, less-specialized retailers that also deal in children’s wear. These include Target, Walmart, Ross and Gap.
The median 12-month analyst price forecast for The Children’s Place is $70, 46 percent higher than the current price.
Even with the significant slide the stock has taken this year, though, analyst forecasts don’t universally view the decline as over. The lowest price forecast puts the stock at $36, a further drop of about 25 percent.
Is The Children’s Place Undervalued?
Thanks to its heavy losses, there’s at least a decent argument to be made that The Children’s Place could be undervalued.
The stock currently trades at a forward P/E of just 4.8 and a price-to-sales ratio of 0.35. Given these metrics, undervaluation is very probable.
Another likely confirmation of this comes from discounted cash flow analysis. When we ran the numbers, PLCE had upside potential to $81.45, suggesting as much as 70% upside from current levels.
Analysts are a bit more sanguine and have placed a $66 price target on the company.
Brick & Mortar Shutdowns Faster Than Online Growth
The Children’s Place obviously has its financial strengths, but there are also some fairly considerable risk factors associated with the stock. The most fundamental of these is the fact that the company is closing its physical retail stores faster than its online presence is growing.
Since Q1 2019, The Children’s Place has closed 32 percent of its retail stores. In Q1, online sales represented 45 percent of the company’s sales, up just 1 percentage point from Q1 2021.
Although management assures investors that it is investing in digital growth, there is a risk that The Children’s Place could lose ground to competitors that are already more active in eCommerce as it transitions away from physical retail.
Another possible cause for concern related to digital transformation is the company’s reliance on Amazon for product sales.
As noted in the Q1 earnings report, Amazon sales make up a large part of the company’s digital marketing strategy. While Amazon is obviously a key marketplace for apparel sellers in general, excessive reliance on a third-party platform where competitors’ products are also just as available could be a problem in the long run.
Falling earnings are also worrisome for investors. Although the company has correctly pointed out that its earnings have improved considerably since 2019, the fact remains that it is unable to keep pace with the success it saw during the pandemic.
The Children’s Place is also vulnerable to inflation and higher fuel prices, both of which could persist for some time to come and continue hampering the company’s performance.
Is The Children’s Place Stock a Buy?
The Children’s Place appears to be what Warren Buffett has occasionally referred to as a “cigar butt stock.” The stock is undeniably trading at very attractive multiples and almost certainly well below its intrinsic value. The core business, however, appears to be facing headwinds that would make it a poor candidate for long-term investment.
In spite of impressive earnings growth since 2019, The Children’s Place is at a crossroads between physical and digital retail.
As noted above, the chain’s physical presence is shrinking faster than online sales are growing. While The Children’s Place certainly could succeed in the digital world, it’s far from clear that the company will have a competitive advantage over other sellers in this space.
Economic concerns also introduce additional risk. With inflation still running high and fears of a recession increasing, consumers will be incentivized to reuse children’s clothing more frequently. Although children’s wear is a growing market, parents may be less willing to spend until the economy improves.
Overall, The Children’s Place likely isn’t a good buy for long-term investors who are planning to buy and hold. Value investors with a shorter time horizon may, however, have an opportunity to realize some gains on the deeply discounted stock.
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