The Children's Place Retail Stores, Inc. (PLCE) is a little-noticed retailer that has been generating lackluster growth in recent years. However, investors may be overlooking some promising opportunities from e-commerce and international markets.
The company claims to be the largest pure-play specialty retailer for children in North America. It specializes in selling clothing, footwear, and accessories for children up through the age of 10 years old. The company's clothing lines include shirts, shorts, pants, dresses, sweaters, jackets, bathing suits, pajamas and underwear. Children's Place also offers school uniforms, christening outfits, and first communion dresses. Accessories include hats, sunglasses, hairbands, socks, tights, bracelets, earrings, ties and belts. In addition, PLCE sells an assortment of footwear, including sneakers, flip flops, sandals, ballet flats, boots, and casual and dress shoes.
Not surprisingly, the business is extremely seasonal with sales being particularly strong during the Christmas and Easter holiday periods, as well as during the back-to-school period. The second-fiscal quarter (i.e., May, June, and July) is the company's weakest, typically accounting for only about 20% of annual sales. Children's Place usually posts an operating loss during its second-fiscal quarter.
The company has North America well covered with its stores. It currently operates a total of 1,095 stores with 966 in the U.S. (including Puerto Rico) and 129 in Canada. Total store count is up by almost 200 over the past five fiscal years. Sales are also up. Net sales have risen 3.1% on an annualized basis over the past five fiscal years. The growth, however, has come entirely from new store openings and the internet (childrensplace.com). Indeed, comparable-store sales have been weak. During the most recent fiscal year, which ended February 2, 2013 (i.e., fiscal 2013), comparable-store sales were flat in the U.S. and down 1.7% in Canada.
Children's Place also relies on another metric it calls comparable-retail sales. This includes both comparable-store sales and comparable e-commerce sales. On this basis, comparable-retail sales were up 2%, or $31.3 million, in fiscal 2013, marking the first time in several years that comparable retail sales increased. The gain was due to the 20.8% surge in comparable e-commerce sales. E-commerce is the company's most profitable business and it already accounts for 12% of total net sales. Management expects e-commerce to climb to 15% of total sales this fiscal year (i.e., fiscal 2014). E-commerce is an underappreciated portion of the company's business. It is a hidden gem that should boost profit margins for years to come.
Total net sales in fiscal 2013 were $1.8 billion with the U.S. segment (including U.S. e-commerce) generating 86% of that amount. The remainder came from the smaller, but more profitable Canada segment. U.S. gross margins were 37.5% in fiscal 2013, up slightly from the prior fiscal year. Canada gross margins were 42.6%, down quite a bit from 46.8% during the prior fiscal year. The decline, however, is not as worrisome as it may seem because it is largely the result of the company's recent expansion into the Middle East. Children's Place is including sales from the Middle East in the Canada segment.
Because management realizes that growth opportunities in North America are limited, it is just now turning to other geographic markets. While Children's Place has long sourced its products from abroad, up until recently, it had not generated any sales from outside of North America. This is what makes the company's recent entry into the Middle East so important and exciting. It is expected to be just the first step toward greater international expansion.
So far, things are going well. The company chalked up $8.4 million in net sales in the Middle East during fiscal 2013; but unlike in North America, Children's Place is not operating its own stores in the Middle East. Instead, it is relying on partners and it is using the franchise model. While franchise sales carry lower margins than do sales from the company's own stores, they also offer the opportunity to generate significant growth with little investment in a relatively well-off part of the world that doesn't suffer from some of the uncertainties currently plaguing Asia, Africa, and Europe. Indeed, the company's exposure in the Middle East is currently limited to the wealthy nations of Saudi Arabia, Kuwait, United Arab Emirates, Oman, Bahrain, and Qatar.
Children's Place also enjoys a healthy balance sheet. It has $209 million in cash and short-term investments, it carries no goodwill or other intangible assets, and it has no debt. Children's Place also generates strong cash flows with net cash from operating activities coming in at $205 million in fiscal 2013, $156 million in fiscal 2012, and $175 million in fiscal 2011.
So, future growth will come from two key sources. E-commerce, which is already a significant part of the company's overall business, is the fastest growing and most profitable component of the company's operations. International, which is just getting started, holds the promise to make significant contributions to top-line growth, albeit at lower profit margins.
Of course, there is still a lot that could wrong with these promising growth strategies. Franchising is a new business for the company; and franchising in new geographic markets carries unique risks. Other companies have found themselves embroiled in disputes with partners that resulted in delayed payments and disappointing profits. Furthermore, the part of the Middle East that Children's Place is exposed to is stable, but there are also tensions beneath the surface that could boil over and make for an unfavorable business climate. As for e-commerce, sales from this channel might come at the expense of physical stores. As a result, overall growth might fall short of expectations. Yet even if that happens, overall profit margins should expand.
Additional disclosure: I hold PLCE in my portfolio and in the portfolios I manage at Greenwich Wealth Management, LLC.