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No Kidding: Children's Place Has Stellar Growth at a Cheap Price  

 

By Nathan Slaughter
Editor, Half-Priced Stocks

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Published:  April 11, 2007

For the most part, we steer clear of apparel retailers. Though they can sometimes deliver enormous gains, they are also subject to fickle consumer trends and a crowded competitive environment. However, that doesn't mean there aren't any worth exploring. 

Children's Place (Nasdaq: PLCE),
for example, has delivered market-beating gains of +23% annually over the past three years, and we believe the stock has more gas left in the tank. 

Children's Place is a leading provider of apparel targeted to infants, toddlers, and children. The firm operates a chain of nearly 1,200 specialty retail outlets nationwide. As any parent knows, kids can outgrow their clothes almost overnight, and frequent trips to the store for replacements are a fact of life.

While this particular industry has grown at a healthy pace in recent years, Children's Place has been outrunning its peers. Over the past decade, the company's store base has expanded at a rapid +27% annual clip, rising from 108 locations in 1996 to 1,194 last year. Yet, there is ample room for further expansion. According to the company's internal estimates, Children's Place has only penetrated 66% of its potential market. 

At the same time, management has done a remarkable job of boosting productivity and squeezing more sales from each store. Last year, Children's Place stores reported sales per square foot of $356 -- a figure that has risen steadily from just $262 in 2003. As a result, same-store sales (comps) results have been stellar, often landing near the top of the retail world. Comps were up a healthy +11% last year, on top of gains of +9% in fiscal 2005 and +16% in 2004. Meanwhile, comps at rival Gymboree (Nasdaq: GYMB) have only inched up +4% per year over that same period. 

Through a combination of aggressive expansion and steady organic growth, annual revenues have soared +36% annually over the past three years, topping the $2 billion mark for the first time in 2006. Some of the credit for that increase goes to the acquisition of the Disney Store brand a few years ago, which handed the company control of more than 300 Disney Store outlets. While the retail face of the Disney empire struggled for many years, it has begun to flourish under the retail expertise of Children's Place -- reporting same-store sales gains of +14% last year.

Over the past year, the size of the overall children's apparel market has grown from $31 billion to $33 billion. Considering the 4-6 year-old age group is the fastest-growing population of any demographic, we think that figure will continue to trend higher. Meanwhile, Children's Place (not counting the Disney stores) has increased its share of the market from 3.8% to 4.2%, and the firm's shift towards value-oriented merchandise should help it capture even more market share. 

Despite recent improvements, the stock has tumbled around -20% since reaching a 52-week high above $71 in early November. Thanks to that pullback, the shares are now trading at a reasonable discount to our $61 fair value estimate -- and at a rock-bottom PEG ratio of 0.80. 

At the moment, Children's Place is still probing its stock options practices and like many, will most likely be restating prior financial results. The firm is also currently in talks with Disney regarding its long-term licensing agreement. More conservative investors may want to remain on the sidelines for now to see how these discussions play out. 

However, for those that aren't particularly concerned with tying up these loose ends, the long-term case for PLCE is promising. The company is well-positioned in the growing children's apparel market and has just boosted its 2007 earnings forecast. It will also continue to reap the rewards of a lucrative arrangement with Disney and cash in on some of the world's most beloved and iconic characters. 

Thanks for reading!




Nathan Slaughter
Editor
Half-Priced Stocks, The ETF Authority

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