Children’s Place stock rocked as Gymboree bankruptcy blamed for big earnings miss

Shares of Children’s Place Inc. took a beating Monday, after the apparel retailer reported fourth-quarter earnings and sales, and provided full-year guidance that missed expectations by a wide margin, citing the “unprecedented” negative effect of rival Gymboree’s bankruptcy.

The stockPLCE, -10.34%plummeted 11.5% in active afternoon trade, putting it on track for the lowest close since November 2016. The stock led the 80 of 95 components of the SPDR S&P Retail exchange-traded fundXRT, -1.93%that were losing ground.

The company reported before the open that it swung to net income of $12.02 million, or 74 cents a share, for the quarter to Feb. 2, from a loss of $9.9 million, or 57 cents a share, in the same period a year ago. Excluding nonrecurring items, adjusted earnings per share came to $1.10, below the FactSet consensus of $2.10.

Net sales fell 6.9% to $530.6 million, missing the FactSet consensus of $553.1 million, while the 0.6% decline in same-store sales missed expectations of a 2.7% increase.

For fiscal 2019, the company expects adjusted EPS of $5.25 to $5.75, below the FactSet consensus of $8.84; net sales of $1.89 billion to $1.92 billion, versus expectations of $2.01 billion; and same-store sales of flat to down 1%, compared with expectations of 3.7% growth.

“We have never experienced a total liquidation of a direct competitor of the size and proximity of Gymboree,” said Chief Executive Jane Elfers. “We overlap with nearly 70% of the approximately 800 Gymboree and Crazy 8 stores, all of which will complete their liquidation events and close within the next 60 days.” Read more about Gymboree’s bankruptcy.

Elfers said Children’s Place raced to beat Gymboree to the punch, by significantly accelerating the liquidation of its own seasonal inventories ahead of Gymboree’s sales. That move shaved about 79 cents off fourth-quarter EPS, but she believes it helped minimize the negative impact on margins.

Eventually, Elfers believes the reduction of supply in the children’s apparel market will lead to improved results in the second half of 2019.

Analyst Jim Chartier at Monness Crespi Hardt cut his stock price target to $128 from $150, while reiterating his buy rating. He said that while the near-term impact of Gymboree’s bankruptcy was greater than expected, the medium-term potential remains intact.

“[Children’s Place] has a strong management team, as evidence by very strong [same-store] sales growth the last three years, and we believe they will continue to executive going forward,” Chartier wrote in a note to clients.

Separately, Children’s Place said it won an auction to buy the intellectual property and related assets of Gymboree and Crazy 8 for $76 million in cash, pending bankruptcy court approval. The company expects the deal to reduce adjusted EPS in the “low teens” percentage range, during fiscal 2019, then add to adjusted EPS starting in fiscal 2020.

“Control of the Gymboree brand and IP will now allow us to meaningfully expand our previously targeted market share opportunity,” Elfers said.

The company’s post-earnings conference call with analysts is scheduled for Tuesday at 8 a.m. Eastern.

Children’s Place’s stock has slumped 41% over the past 12 months, while the retail ETF has eased 0.1% and the S&P 500 indexSPX, -0.39%has gained 3.6%.

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