On February 16, the financial world got wind of Children’s Place’s (PLCE) $130 million lifeline amid deteriorating financial health. A staggering 52% drop weighted its shares on the unenviable Bottom 100 Stocks on Feb. 16. The stock stumbled to the 89th spot, casting a gloomy shadow on its future.
The woes of the children’s retailer extend over five years, with a searing 85% plunge and a painful 65% descent in the last year alone. A sharp contrast to 2018, when its shares danced near the $160 mark.
Fashioned by the heart-wrenching Rana Plaza disaster in 2013, my skepticism of the fashion industry has stayed sturdy. While Children’s Place is not embroiled in such issues, the market seemingly served its own brand of retribution, striping the stock of most of its value since 2018.
Now, in the turmoil, investors stand at a crossroads between seizing a bargain or steering clear of the tumult.
Is Children’s Place a haven for value seekers or a treacherous trap for the unwary? Let’s ruminate on both viewpoints.
Reasons to Believe in PLCE’s Value – Part 1
Before diving into metrics, let’s survey Children’s Place’s current predicament.
On February 9, the company unveiled preliminary earnings for Q4 2023. Revenue projections loomed at $454 million, matching the prior year. However, the bottom line forecasted a hefty loss of approximately $2.90 per share, a steep descent from the previous year’s adjusted loss of $3.87 per share.
Projections for the full year 2023 revealed anticipated revenue of $1.60 billion and a net loss surpassing $47 million, around $3.76 a share—a stark contrast to 2022’s $1.71 billion revenue and a mere $1.1 million net loss, $0.08 per share.
Despite forecasting a daunting adjusted Q1 2023 loss of $1.60 per share in March, the company tipped a profit of at least $2.50 for the whole year, a sharp turn from the anticipated loss of $3.76 per share.
The jarring gap between forecasts and reality triggered a wave of class-action suits.
In response, the Rosen Law Firm, renowned for championing investor rights, highlighted in a poignant March 15 press release:
“According to the lawsuit, defendants misled by engaging in aggressive promotions, inflating inventory values likely to mar fiscal 2023 outcomes. Children’s Place’s rosy outlook, thus appeared fallacious and misleading.” Lawsuits notwithstanding, valuation merits consideration.
PLCE’s Value Play Continues – Part 2
Presently, Children’s Place’s enterprise worth stands at $703.3 million, reports S&P Global Market Intelligence. With a $1.60 billion 2023 revenue, the EV/Revenue ratio stands at 0.44x—a far cry from the peak $160 glory days at an average EV/Revenue of 0.72x.
From a revenue perspective alone, it stands undervalued compared to its historical standings.
Examining operational earnings, the highest occurred in 2017, hitting $166.7 million from $1.87 billion revenue with an 8.9% margin. However, a meager 6.1% margin prevailed in 2018’s $160 heyday over $1.95 billion revenue.
Despite two operating losses—2020 and 2023—in the last decade, Children’s Place grapples with a cash flow predicament. In the year ending October 28, 2023, operating activities hemorrhaged $33.9 million, a stark contrast to 2021’s $133.3 million inflow.
To remedy this, a $130 million term loan inked in February, maturing on Nov. 15, 2026, provided a financial salve at a 14.3% interest rate. Subsequently, Mithaq Capital, commanding a 56.1% stake, extended $78.4 million in interest-free, unsecured, and subordinated term loans.
A revamped financial footing now sees Mithaq Capital assuming a more pivotal role with the appointment of four board members, chaired by Turki Saleh A. AlRajhi, helming Mithaq Capital, galvanizing hopes of a turnaround.
Unpacking the Value Trap
Ever heard of the Altman Z-Score, the bankruptcy soothsayer dreamt up by NYU’s Edward Altman in 1968? It unfolds a numerical prophecy on a company’s looming financial demise.
Scores below 1.8 hint at bankruptcy within 24 months, while 1.8 to 3.0 bask in moderate jeopardy. Over 3.0? The bankruptcy bogeyman slinks away for two years.
In Children’s Place’s 2018 peak, where it approached the $160 milestone, the Altman Z-Score likely spun cautionary tales for disregarding danger signals.
A Closer Look at PLCE: From Altman Z-Score to Market Valuation
The Altman Z-Score Plunge
Once a stalwart in the retail sector, Children’s Place (PLCE) has hit rough waters. Its Altman Z-Score of around 6.77, well above the 3.0 threshold for financial distress, has taken a nosedive to 1.56 as per the results of October 28, 2023, placing it in the danger zone of below 1.8.
Market Capitalization Rollercoaster
At a market capitalization of $160 million, some argue that PLCE may be overvalued, considering the looming shadow of potential bankruptcy on the horizon. In 2018, the company once boasted a market cap that was a staggering 14 times larger than its current value.
The Debt Dilemma
In 2018, PLCE’s total debt stood at a modest 18% of its market cap, a far cry from the alarming 405% it now represents. The metrics from yesteryears paint a far rosier picture compared to the grim reality of today.
The Lifeline and the Investment Play
Despite the looming financial woes, PLCE finds itself tethered to a lifeline in the form of its controlling shareholder. The strategic moves made by the shareholder suggest a grander plan beyond mere stock price manipulation, adding an intriguing layer to the investment landscape.
The Mithaq Effect
When Mithaq took significant control of Children’s Place, the market reacted with frenzy. Share prices skyrocketed to a high of $38.01, reminiscent of meme-stock mania, only to plummet back down. Now trading below $14, aggressive investors eye the historic opportunity, with PLCE hitting lows not seen since the early 2000s.
