- The pandemic has accelerated the declining trend of the birth rate in North America.
- Despite successful digitalization, the company will face the challenges of top-line growth due to the low birth rate after 2023/2024.
- The current price of $70+ is not an extreme overshooting, but it already reflects all the recoveries that will happen in the coming years.
- Investors do not have to rush to sell the stock, but I recommend reconsidering this stock from a long-term perspective.
Nice revenue recovery is expected for The Children's Place (NASDAQ:PLCE) for 2021 to 2023. However, the revenue growth is expected to be pressured from 2024, as the pandemic has accelerated the declining trend of the birth rate in North America. I find that the current price of $70+ is not an extreme overshooting, but it already reflects all the recoveries that will happen in the coming years. Investors do not have to rush to sell the stock, but I recommend reconsidering holding this stock from a long-term perspective.
Management concerns about declining birth
From the Q4 2020 earnings call, the CEO casts concerns on the declining birth rate in North America.
The USA and Canadian birth rate has been declining, and the trends are accelerated due to economic devastation driven by the COVID-19. Since the 2008 financial crisis records (4.25 million births in the USA), birth registration has been constantly dropping by 1% annually and has recorded -11.3% over the past 11 years. In 2019, 3.75 million births were registered in the United States. The pre-existing condition of low birth rate can be explained by several factors such as higher women labor participation, the burden from living costs with higher house prices, and worsening income inequality. (Source: National Center for Health Statistics)
Currently, the management expects that the birth registration in 2020 has dropped to approximately 3.4 million. This figure is a remarkable 9% drop from pre-pandemic and is equivalent to a minimum 5-year impact of the declining birth rate trend. One survey indicates that people have been either delaying pregnancies or planning to have fewer children mainly because of pandemic and economic costs. The management expects that the figure will recover up to approximately 3.5 million births in 2022, but it will continue to drop for another decade. The trend will likely continue over a decade unless we see any substantial socioeconomic events or powerful policy measures that support the family plan and curb the trends of lower birth rates.
The declining birth rate will matter for long-term holders
The Children's Place has product categories mainly for toddlers and young children, aged from 2 to 10, so its revenue is not expected to get the major hit in a short term from the 2020 shock. Hence, the revenue may continue to recover to the pre-pandemic level up to 2024 without interruptions.
However, the prolonged economic pressure on average households will pressure the birth rate continuously, and that's not good news for the children's apparel business. I expect that the entire market size will contract at an annual rate of 1-3% from 2024.
The company's management has done an excellent job so far with the digitization (at a target penetration rate (online revenue/total revenue)) of 50%, developing attractive products and maintaining the brand values, and also reincarnating the Gymboree brands. Due to its strategy and execution, I believe that its market share can be maintained or slightly upwards over time.
Despite the above positive elements, I forecast that the revenue will be slowly declining at an average of 1% for The Children's Place after the recovery peaks in the year 2023.
|Buy Target||Fair Value||Sell Target|
|Price||$ 48||$ 67||$ 74|
DCF price valuation by Author
I concluded that The Children's Place fair value is $67 given all the assumptions I have. The current price is $70+, which is not extremely overpriced, but it has no upside from the valuation point. As revenue growth will be pressured in the future years from 2024 onwards, my DCF calculation suggests that there are much more downside risks than upside benefits.
|Operating Income ($M)||(161)||52||68||148||123||123||116||110|
|Cash And Equivalents ($M)||64||148||234||193||251||377||499||617|
|Debt Total ($M)||245||242||237||59||-||-||-||-|
|EPS Calculated ($)||(10.5)||1.5||3.1||7.0||5.4||5.6||5.2||4.8|
|Cash from Operations||(36)||118||114||158||145||149||146||143|
Below is the explanation of the DCF model: Financial Forecast by Author
1. Revenue recovers to 2019 level by 2023 to 2024 at $1.9B, with digital revenue continuing to grow at 20% in 2021, 10% for 2022 and 2023. As the company sets a goal of 75% of online sales penetration, I expect that to happen around the end of 2022 or 2023.
The brick-and-mortar revenue will be slightly negative or flat, as the revenue per store recovers back to 80%-90% of pre-COVID, while the number of stores will keep declining at an annual 10%-15% following the management's strategic plan to optimize the fleet.
2. From 2024 onwards, the company's revenue growth will slowly decline by 0.5% to 1%. As the birth rate is dropping by 1% annually, my forecast is that the general children's apparel market size will decline by 1% annually as well. I assumed that the company's revenue decline is slightly lesser than the general market size decline because the company is well-positioned in the digital channels and has high brand recognition.
3. Gross margin recovers from 20% (2020) to 33% by 2024. I assumed that the company may not make the historical gross margin of 35%-36% as the shifting to digital revenue will permanently increase the logistics costs, and the price competition in the digital world will make it harder for the company to improve the margin per unit.
4. Using the assumptions above, this results in the operating margin stabilizing at 5% to 6% after the recovery is completed in 2024.
5. Cash flow and liquidity seem to be a little tight, but I wouldn't be too much worried about this. The company still has room for additional borrowing from a credit facility of $104M, and some of the proceedings of store closure may make up for any cash needs.
As of Q4 2020, the company has a cash balance of $64M, $173M from the revolver borrowing and $80M from the term loan. Assuming that company can make a minimum operating cash flow of $100M from 2021, the $173M revolver can be repaid by 2023. The term loan of $80M is scheduled to pay off its major portion of $64M by 2024, and the cash balance still looks healthy after debt repayment by 2024.
I expect that the company can resume the dividends and stock repurchasing program by around 2024, as the cash and free cash flow start to look stabilized from that point.
The stock price recovers from the lowest point ($30) during the pandemic to the current level of $70+. I consider that the 2-3 years of recoveries are already reflected in the price. However, there will be fewer young children in North America for the next decade, and not so many growth prospects left in this industry.
Hence, I consider the current price range of $70 may fall into a value-trap zone. Once the market pulls back, it may not be easy to recover to the current price level.
The initial recovery will be strong, so investors do not have to rush back to sell the stock, but I recommend reconsidering holding this stock from a long-term perspective.
This article was written by
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