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Editor's Note: Below is a flashback on our long Children's Place (PLCE) research call from our Retail analysts Brian McGough and Jeremy McLean. Our Retail team originally made their long call for +60% upside on January 18, 2021 with the stock at $57.27. As of Thursday, May 20, 2021, the stock is at $92.05, notching +60% gain. In the interim, our Retail team wrote follow-up research on March 9, 2021 explaining why their long thesis was still intact. They also periodically discussed their thoughts with Hedgeye CEO Keith McCullough on The Call, Hedgeye's daily morning call featuring our research team's latest analysis on their best stock ideas. In addition, McCullough "hit the button" in Real-Time Alerts on May 13, 2021 when $PLCE was at $71.72. You can learn more about Brian's research subscription, Retail Pro, here. |
The original long call on 1/18/21
Takeaway: After 3-yrs of taking it on the chin, PLCE should see outsized margin gains and EPS nearly double consensus. 60% upside on base case model.
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…
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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.
THE Follow-up on 3/9/21
Takeaway: PLCE set the stage for big earnings upside in 2021. Though its up 44% since our call, we still think it's got 33% left to go.
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.
McCullough's Real-Time Alert on 5/13/21
McGough's tweets on 5/20/21
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