We’re going long Children’s Place (PLCE), as we see earnings-driven upside to $90, which is 60% higher than current levels. The punchline is that we think the Street is egregiously mis-modeling recovery earnings given the consolidation we’ve seen in the Children’s Apparel market during the pandemic, as well as the other company-specific actions PLCE has taken to streamline cost structure, invest in e-comm, improve margins and take incremental market share. We’re at $5.10 vs the Street’s $3.19 in CY21, and then are coming in between $8-$9 per share by year three of our model, which is double the consensus. Consider the following…
The last time the children’s apparel market was in a place we’d consider ‘healthy’ was in 2016-17. At that point in time, PLCE was a 9% EBIT margin business with $8 in EPS power. Since then the industry suffered from the following…
- June 2017: Gymboree, PLCE’s top competitor in the mall, files Ch 11 causing initial disruption in the competitive landscape while it reorganized.
- September 2017: Toys R Us/Babies R Us files for bankruptcy and liquidates.
- FY17/18: PLCE doubles Capex to invest in e-comm platform.
- January 2019: Gymboree files Chapter 22, and liquidates 800 stores. Children’s wear margins get hit across the board. Starts off 12-month period of pain as stores are liquidated. PLCE margins down to 6%.
- March 2019: PLCE pays $76mm for the Gymboree IP, basically buying its top competitors' intellectual property and customer list out of bankruptcy court on the cheap.
- 3Q19: Now with PLCE controlling the content of two top brands, it made the move to accelerate store closures in B and C malls – jettisoning its least profitable stores.
- March 2020: Covid hits…stores closed, mall traffic declines, and sales around all-important Easter miss.
- Fall 2020: Worst back to school in company history. Accelerates store closures to 20% of the fleet for 2020. Company aggressively renegotiates leases with malls for stores that are profitable, but temporarily closed.
- Dec 2020: Justice – formerly owned by Ascena – files and liquidates 600 stores with everything 60-80% off to hit store closure targets by early 2021 – further pressuring the kidswear market.
- Jan 21: PLCE set to close out the year with a (-12%) margin.
- FY22 (Jan): PLCE to finish store closure program with an incremental 10% closed for the year, and will have only 25% of its sales tied to the mall. The remainder is strip mall and online.
The punchline here is that Children’s Place just took it on the chin for three years straight as the children’s wear market consolidated and end-demand headed lower. It made the right strategic decisions with acquiring Gymboree IP, re-pricing deals with landlords, investing in an e-comm platform to recapture ~25% of sales from closed stores, and by the end of FY22 it will have taken ~$3.75 per share out of its cost structure. That accounts for 500bps in margin when compared to prior peak of 9% margins. In other words, if we want to paint a really bullish scenario, we could get to a 12% margin – that’s about $12-$13 per share in EPS power with the stock trading sub-$60. We’re not making that call yet, but don’t think we have to in order to get paid here. Within 2-years we think PLCE revisits prior peak margins of 9% which gets to EPS power of $8-$9.
It's important to note that our model assumes zero share repurchases, something that is likely to kick back in once the company’s P&L is back on offense in 2H21. Keep in mind that that this company has bought back 50% of its float over the past decade, and will likely revisit repo’s once the business stabilizes. Are we early on this name? Yeah, potentially. Easter of this year is likely to be almost as much of a mess as last year, stores are still closing (which pressures GM), and the spike in cotton inflation won’t help margins in the back half. But we think the TAIL model has been largely de-risked here, the consensus is simply way-off modeling the impact of store closures, and we think you can make a lot of money on this name as the consensus realizes how much upside there is to margins. With 38% of the float short the stock and the lowest percentage of Buy rating out of Old Wall in company history (only 25%), we think the top line acceleration in 2021 on top of a streamlined cost structure could create a serious squeeze in this stock.
