Don’t Count Out Children’s Place Stock Just Yet

Monday, August 24, 2020 | Chris Markoch
Don’t Count Out Children’s Place Stock Just Yet

At a quick glance, there’s not a lot to like about Children’s Place (NYSE:PLCE) stock. The company had to shutter its brick-and-mortar operations in response to the Covid-19 pandemic. And the stock is down nearly 200% for the year. Recent analyst ratings have not helped the business case. The firm B. Riley lowered its 12-month price target for PLCE stock from $36 to $29.

Children’s Place reports earnings on August 25. The consensus is for the company to deliver negative earnings per share of $1.35. However, the whisper number is suggesting an upside surprise with negative earnings per share of $1.29 on revenue of $330 million.

On a year-over-year (YoY) basis, those numbers would be disastrous. But that’s a foolish exercise in 2020. While you can insert whatever joke you want to make about retail here, the fact is 2020 does not have a fair comparison in recent or even somewhat distant memory.

So the question has to be asked, is the worst over? And the answer to that question may be yes, which is why I believe you can’t count out the beleaguered retailer just yet.

Is the worst over for Children’s Place?

Even if the company does not surprise to the upside on earnings, the forecast number would still be showing a huge bounce from the first quarter. And in the first quarter, the company posted a 300% increase in online demand. The company also realized a 250% increase in its digital consumer file.

At that time, the company had 95% of its stores closed. That has since changed, but it’s clear that the future of the company is via the continued execution of its omnichannel strategy.

The company was also showing a stronger balance sheet with $184 million in liquidity at the end of the first quarter.  And the company announced it will close up to 200 stores throughout 2020 although the effects of those closing will be staggered throughout the remainder of the calendar year.

There could be a baby boom?

In October 2019, Barron’s speculated about the potential of a millennial-inspired baby boom. If that was less certain before the pandemic, the odds that the world population may be increasing a little bit have to be better since many couples have been sheltered in place.

By itself, this is a circumstantial, but not necessarily compelling, idea. However, this is a generation that has led the way towards the national focus on e-commerce. In fact, Children’s Place initiated a digital strategy over five years ago for the purpose of capitalizing on this tech-savvy audience. The pandemic, for all its frustrations, may be giving the company a chance to see this strategy shine.

The technical case suggests a post-earnings boost

In mid-June, Forbes suggested that Children’s Place could see a 35% bounce after pandemic fears subsided. Since then, the stock has plummeted over 50%. This was despite the company posting slightly better-than-expected earnings in the first quarter.

However it appears that the stock is now oversold and any sort of an earnings beat should send the stock higher. At the depth of the lockdown, PLCE stock was trading as low as $14 per share. That lends support for a line of support at around $20 per share.

The larger question for traders will be if PLCE stock can break through resistance at around $25 per share. If it can, PLCE stock would be on the low-end of its 12-month price target of $26.

Gymboree remains a question mark

Analysts will be looking for guidance on the progress of the Gymboree launch. In late 2019, Children’s Place announced extensive plans for Gymboree that included a revamped website and 200 “shop-in-shop” locations. However, those stores were scheduled to open in the spring, an objective that was complicated by Covid-19.

And, although the company was seeing some strength in its Gymboree locations, the brand was still a very small part of the company’s digital presence.

Is Children’s Place stock a buy?

With a suspended dividend, Children’s Place has nothing to offer for value investors. It’s unlikely that the company will be reinstating the dividend until revenue returns to something approaching pre-pandemic levels.  And that will take some time. Even if you assume that the worst is over, the company will still be looking at revenue that is significantly lower than the $1.8 billion it posted in 2019.

But, with the stock likely to have bottomed out, there is reason to believe that the stock has at least a small runway for growth. And, if the company sees increased revenue from a post.

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