PLCE | This Model Is Jacked

I get why PLCE traded down today. It ripped into the print, and though the company blew away the Street’s EPS ($1.71 vs $0.47) the reality is that it missed comp. Could the company have driven a 20% comp or better? Yes. It could have promoted to put the top line into overdrive, but it clearly managed this quarter for full price selling and higher margins, which came in at 9.7% vs the Street at 2%. We were hit repeatedly with the same bear case on PLCE today -- that you’re looking at peak earnings today, which is worth only about 8x a $10 earnings number – or $14 below today’s closing price. I get the argument, but I don’t agree with the numbers, or the logic behind this being a ‘peak’ earnings year. The Street is sitting at $9.33 in EPS for this year, which is more than double when we made the call to go long PLCE at $57 in January. But we still think that numbers are wrong. For the balance of the year, we think the company still has $7.50 in EPS embedded in the model (which compares to the Street at $5), for a total of $12.55 for the year. It’s important to note that about 400bps of the Gross Margin improvement that we’re seeing is due to closing money-losing stores, and is therefore permanent. Will the company give back a good 200bps in merch margin next year? Yes, likely. Also no more stimmy, and no more child tax credit. All these are in our model, which has EPS next year of $12.25 – which compares to the Street at $8.45. Also keep in mind that the company should be a meaningful buyer of its stock as we anniversary the margin gains of this year, which should drive an incremental $1 in EPS power per year. All in, this is a company that should sustain a new EPS power of $12-$13, with TAIL EPS up to $15. We’ll never argue a sexy/growthy multiple for PLCE. But the reality is that the underlying earnings power is 20-30% higher than where the consensus is landing today – and that’s AFTER a big upwards revision this quarter. There’ll be a day where we walk away from this idea. But that day is not today. Not til the Street gets a proper grasp of the real earnings power here. We still think this is a $130 stock in a year, or nearly 40% upside from where it went out today.