Children's Place's stock heads for 21-year low after company says it's running out of cash

By Ciara Linnane

Children's apparel chain issued a profit warning for the fourth quarter

The Children's Place Inc.'s stock tumbled 53% on Friday and was headed for a roughly 21-year low, after the children's-clothing chain issued a profit warning for the fourth quarter and said it's working with lenders to secure new financing.

If the losses hold, it would be the stock's (PLCE) biggest-ever one-day percentage decline and send it to the lowest close since March 31, 2003. The move came after it said in a filing with the Securities and Exchange Commission that it would consider strategic alternatives if it can't secure funds needed to support operations.

Monness Crespi Hardt downgraded the stock to neutral from buy, given "continued execution missteps," as well as new liquidity concerns.

"While management did not comment on expectations for fiscal 2024, we expect the company will lose money in the first half and need to build working capital ahead of the back-to-school season," analyst Jim Chartier wrote in a note to clients.

Secaucus, N.J.-based Children's Place said it now expects a fourth-quarter adjusted operating loss equal to 9% to 8% of sales, after prior guidance for adjusted operating income of about 2% to 3% of sales.

The loss "reflects the impact of lower than expected merchandise margin resulting from more aggressive promotions in an effort to maximize sales, higher than anticipated split shipments to meet customer e-commerce demand, and increased inventory valuation adjustments," said the filing.

The number is adjusted to exclude nonrecurring costs, the gain from the settlement of a lawsuit and non-cash impairments.

The company expects sales to range from about $454 million to $456 million, down from prior guidance of $460 million to $465 million.

It expects to end the year in a clean inventory position, reducing inventory by 16% to 20% from the prior year.

As of Feb. 3, liquidity stood at about $45 million. Total indebtedness is expected to fall by more than $100 million versus the third quarter of fiscal 2023 and as of Feb. 3 is expected to be about $277 million compared with $408 million.

Children's Place is parent to brands including Gymboree, Sugar & Jade and PJ Place. The company has more than 500 stores in North America and wholesale marketplaces and distribution in 16 countries via six international franchise partners.

Children's Place missed per-share earnings estimates in its most recent report in November, although sales topped expectations. It blamed the shortfall on higher-than-expected distribution costs, driven by unplanned factors. These included higher fulfillment costs, as it shipped more packages that had lower transaction size as its consumers remained under pressure from high inflation.

A spike in labor costs in a tight market and the delay of expected freight and fulfillment savings also added to the pressure.

The stock has fallen 77% over the last 12 months, while the S&P 500 SPX has gained 23%.

-Ciara Linnane

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02-09-24 1123ET

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