We still like PLCE Long at current levels, and think it has big earnings upside in its back pocket for 2021. The stock isn't as cheap as when we first made the call at $57 on 1/18 -- as it's up 44% in a +3% tape. But for 2021 we're coming out at $6.04 in EPS vs the Street at $3.27. Then in 2022 we've got recovery to a 7.6% EBIT margin (keeping in mind pre-pandemic peak was 8.9%), which suggests operating EPS of $8.45, or $9.32 after stock buyback -- which we think resumes in 2H of this year. We think that a 12x is hardly aggressive for a company like PLCE (it's historically traded higher), which suggests a stock a year-out of ~$110, or about 33% upside from current levels. Still respectable upside from here.
We saw several encouraging signs out of the fourth quarter numbers. First off, PLCE absolutely annihilated expectations, putting up $1.01 per share vs the Street at a loss of $0.23. The massive upside was entirely due to top line momentum, as the company put up a positive 1% comp vs expectations for -11%. Clearly, a 1% comp is hardly worth a victory lap especially given that earnings were still down 45% vs a year ago. But the company did an exceptional job in making up for US traffic being down 35% due to Covid, and traffic in Canada stores being down 62% due to government-mandated closures. Digital was up 38% in the quarter and now makes up 46% of total sales.
Keep in mind that part of the playbook here is to exit money-losing 'C Mall' stores such that only 25% of the business will be mall-based by year-end '21. The remainder will be strip mall and e-commerce. We're mindful that e-comm is largely Gross Margin dilutive, though the company offsets much of this with the elimination of dilutive occupancy expense due to store closures (which helps Gross Margin) as well as lower SG&A. But in the end, we think that current e-comm penetration levels are close to peak, and will likely remain at ~50% of the mix going forward. In other words, there's very little long-term TAIL risk of eroding gross margin that other retailers face -- as it's already near max penetration.
The one knock on the quarter is that inventories were up 18% -- not what you want to see when sales are down 7%. The entire increase vs last year is comprised of the same back-to-school basics that the company has been carrying since June due to the absence of BTS last year. The company has 2 more quarters -- tops -- of bloated inventories until it can sell when in-person learning resumes. But we're not worried about this being a typical 'inventory problem' that so often tanks gross margins for retailers.
In the end, we remain comfortable with our PLCE position after this earnings event.
