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The Children’s Place Blames Mall Traffic for Slashing Year-End Outlook

The Children’s Place has another reason to look forward to the Spring 2020 integration of Gymboree as another hard quarter for the children’s wear retailer provoked a selloff worth more than 23 percent of its share price following the release of its Q3 financial report.

In a Nutshell: In the retailer’s third-quarter conference call, The Children’s Place CEO and president Jane Elfers said the company is preparing a new, personalized online experience for Gymboree that has received an “overwhelmingly positive” reception.

“Our plan is to reintroduce the Gymboree brand in early 2020 through a meaningfully improved digital experience on gymboree.com complemented by shop-in-shop locations in over 200 TCP stores in the US and Canada,” Elfers said.

In October, the retailer said it expects to capture at least $140 million in Gymboree sales. The Children’s Place expressed confidence in the strength of a consumer base dubbed “Gymboree moms,” millennial matriarchs with strong connections to omnichannel shopping technologies, Elfers said. A large portion of these consumers already patronize The Children’s Place and would be prime candidates for the shop-in-shop concept.

Constituting approximately 40 percent of the retailer’s total customer base, millennial moms’ revenue share increased by roughly 14 percent in the third quarter, now accounting for 60 percent of the company’s identifiable U.S. sales.

“This is a strong indicator that we have the ability to provide the millennial Gymboree mom with the same type of “omni” experiences that we are providing to our core TCP millennial customers,” Elfers said.

Sales: Total revenue for The Children’s Place increased by 0.4 percent to $524.8 million in the third quarter, up from the $522.5 million it recorded in the comparable period last year but substantially below the mark of $534 million predicted by Wall Street. Comparable sales were up by just 0.8 percent and gross profit was down to $198.1 million from $204.4 million in Q3 of 2018.

However,  The Children’s Place performed well in the back-to-school season, despite difficult comps, Elfers said.

“Our key product categories resonated strongly with mom in the back-to-school season. The second most important shopping period of the year. In fact, we believe, we were one of the top destinations for key back-to-school categories this year, further solidifying our preeminent position in the U.S. kids specialty apparel market,” Elfers said. “Our e-commerce business continued its stellar performance, delivering 23 percent growth and representing a record 35 percent penetration to total sales, a 650 basis point increase versus last year.”

Although Elfers praised the increase in e-commerce penetration, the retailer’s margins fell by 130 basis points to 37.8 percent of net sales due to the channel’s lower gross margin rate.

As a result of falling margins and reduced mall traffic, The Children’s Place lowered its year-end outlook, predicting revenue in the range of $1.862 billion to $1.867 billion in FY19, down from a predicted range of $1.910 billion to $1.925 billion offered up in the previous quarter. The retailer also expects comparable sales to decrease by roughly 3 percent after previously projecting same-store sales would remain flat.

Earnings: Net income of $47.1 million provided earnings of $3.03 per diluted share, compared to net income of $50.7 million and $3.07 adjusted EPS in Q3 of 2018. This result came in above the average Wall Street prediction of $3.02.

The Children’s Place now expects adjusted net income per share of between $5.00 and $5.20, lower than its previous prediction of an earnings range between $5.40 to $5.75. This reflects an impact of about 13 cents caused by tariffs and trade war uncertainty.

CEO’s Take: In a statement, Elfers said The Children’s Place would look to its progress in omnichannel initiatives along with the growth of its e-commerce business for reasons to be excited about the future of the ailing children’s wear business.

“Driven by a strong back-to-school season, we delivered a positive 0.8 percent comp in Q3 on top of a positive 9.5 percent comp in Q3 a year ago and EPS near the upper end of our guided range, despite multiple headwinds, including prolonged warmer weather into late October, which negatively impacted sales of colder weather product in key regions across the country,” Elfers said.

“Quarter-to-date, our digital penetration continues to increase and our AURs are strengthening as we focus on disciplined inventory management in a promotional environment,” she added. “However, due to meaningfully weaker than planned mall traffic quarter-to-date, we are lowering our outlook for Q4.”

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