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Kidding: Children's Place Has Stellar Growth at a Cheap Price |
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!
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Nathan Slaughter
Editor
Half-Priced Stocks, The ETF Authority
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