Children’s Place Narrows Losses on Higher Sales

Retailer’s net sales grew 1.4% Y-o-Y to $371.4 million during Q2 FY16

c1The Children’s Place Inc. (NASDAQ: PLCE) announced its Q2 FY16 financial results on August 17th, 2016.

The Secaucus, New Jersey-based Company, the largest pure-play children’s specialty apparel retailer in North America, sells apparel, accessories, footwear, and other items for children; and designs, contracts to manufacture, and sells merchandise under the The Children’s Place, Place, and Baby Place brand names. As of July 30th, 2016, the Company operated 1,064 stores in the U.S., Canada, and Puerto Rico; and 123 international points of distribution operated by its 6 franchise partners in 16 countries. The company also sells its products through its website childrensplace.com. Read more about Children’s Place’s financial results below.

Q2 FY16 financial highlights

c2During Q2 FY16, Children’s Place’s net sales grew 1.4% Y-o-Y to $371.4 million and included the negative impact of about $1.7 million from currency exchange rate fluctuations. On a constant currency basis, net sales grew 1.8% to $373.1 million compared to net sales of $366.5 million in the year-ago period. Comparable retail sales grew 2.4% in Q2 FY16.

The Company’s better-than-expected results hinges on its multi-pronged transformation strategy that comprises superior product, business transformation through technology, global growth through alternate channels of distribution and store fleet optimization aimed at combating a challenging retail environment and the continued weakness in store traffic.

During Q2 FY16, gross profit and adjusted gross profit were higher at $123.9 million compared to $115.0 million in the year-ago period and leveraged 200 basis points to 33.4% of sales due to higher merchandise margin and fixed cost leverage.

During Q2 FY16, Children’s Place’s selling, general, and administrative (SG&A) expenses were lower at $107.9 million compared to $118.3 million in the year-ago period. Adjusted SG&A was $107.9 million compared to $108.6 million in the year-ago period and leveraged 50 basis points as a percentage of sales due to lower store and administrative costs, partially offset by higher incentive-based compensation expenses.

In all, Children’s Place narrowed its operating loss to $2.9 million in Q2 FY16 compared to loss of $20.1 million in the year-ago period. Finally, net loss contracted to $2.0 million, or ($0.11) per diluted share, in Q2 FY16, compared to a net loss of $13.7 million, or ($0.67) per diluted share, the previous year. Adjusted net loss was $0.2 million, or ($0.01) per diluted share, inclusive of a negative ($0.02) impact due to foreign exchange, compared to an adjusted net loss of $6.8 million, or ($0.33) per diluted share, in the year-ago period. On a constant currency basis, adjusted net income per diluted share was $0.01.

H1 FY16 financial highlights

c3During H1 FY16, Children’s Place’s net sales grew 2.5% to $790.8 million, including the negative impact of approximately $4.0 million from currency exchange rate fluctuations. On a constant currency basis, net sales rose 3% to $794.8 million compared to $771.3 million in the prior year period. Comparable sales grew 3.8% in H1 FY16.

The Company’s transformation strategy had a positive impact on net income, which jumped to $24.0 million, or $1.24 per diluted share, in H1 FY16, compared to net income of $1.9 million, or $0.09 per diluted share, in the previous year period. Adjusted net income jumped 154% to $25.6 million, or $1.32 per diluted share, inclusive of a negative $0.03 impact due to foreign exchange, compared to $10.9 million, or $0.52 per diluted share, compared to the previous year. On a constant currency basis, adjusted net income per diluted share zoomed 160% to $1.35 during H1 FY16.

During H1 FY16, gross profit rose to $289.2 million compared to $267.1 million last year. Adjusted gross profit was $289.2 million, or 36.6% of net sales, leveraging 190 basis points compared to the year-ago period.

For H1 FY16, the Company’s adjusted results exclude charges of approximately $2.6 million, compared to excluded charges of $14.8 million in H1 FY15, comprising certain items which the Company believes are not reflective of the performance of its core business. These excluded charges are primarily related to asset impairment charges in H1 FY16 and proxy and legal settlement costs in H1 FY15.

Other highlights

Children’s Place closed 2 stores and opened 2 stores during Q2 FY16, and ended the quarter with 1,064 stores. Square footage decreased by 2% to 4.967 million compared to the prior year period. The Company’s international franchise partners opened 13 points of distribution in Q2 FY16, and the Company ended the quarter with 123 international points of distribution open and operated by its 6 franchise partners in 16 countries.

Share repurchase and dividend

c4During Q2 FY16, the Company returned approximately $39 million to shareholders through the repurchase of 454,711 shares and its quarterly dividend payment of $0.20 per share. As of the end of H1 FY16, the Company returned approximately $86 million to shareholders compared to approximately $68 million last year. At the end of Q2 FY16, approximately $192 million remained available for future repurchases under the Company’s existing share repurchase program.

Additionally, the Company’s Board of Directors authorized a quarterly dividend of $0.20 per share, payable October 6th, 2016 to shareholders of record at the close of business on September 16th, 2016.

Guidance for full year FY16

For Q3 FY16, Children’s Place expects adjusted net income per diluted share to be between $1.93 and $2.01, inclusive of an estimated $0.03 negative impact from foreign exchange. This compares to adjusted net income per diluted share of $1.93 in Q3 FY15. This guidance assumes a positive low single-digit increase in comparable retail sales for the quarter.

The Children’s Place updated its outlook for FY16 and now expects adjusted net income per diluted share to be in the range of $4.60 to $4.70, inclusive of a $0.08 negative impact from foreign exchange. The guidance assumes a positive low single digit increase in comparable retail sales for FY16. Moreover, the guidance for adjusted net income per diluted share excludes year-to- date charges of approximately $2.6 million primarily related to asset impairment charges that the Company believes are not reflective of the performance of its core business.

Stock Performance

c5The Children’s Place’s stock ended the day at $81.40, slipping 2.06%, at the close on Wednesday, August 31st, 2016, having vacillated between an intraday high of $83.44 and a low of $81.04 during the session. The stock’s trading volume was at 448,822 for the day. The Company’s market cap was at $1.55 billion as of Wednesday’s close.

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