Investors Give Children's Place a Time-Out

Shares of the apparel retailer sank Monday after it widened its second-quarter loss estimate

The Children's Place Retail Stores (PLCE) shares got knocked down on July 9 after the chain warned that sales were weak last month, and that it will post a larger loss than it previously thought for its second quarter. The company said sales came in below expectations at both its Children's Place and Disney Store brands and it took significantly more markdowns.

The Secaucus (N.J.)-based seller of kids' clothing said comparable-store sales in June fell 4%, while total sales rose 2% from the same period a year ago to $154.7 million. So far in its current quarter (ending July), consolidated comparable-store sales are approximately flat compared to last year's 14% increase, it said.

Given the weak trends, Children's Place sees a second-quarter loss of $0.94-$0.98 -- below analysts' forecast for a loss of $0.59. That number includes $2 million in pretax costs related to an investigation into the company's stock-option practices.

"In the month of June, sales came in below our expectations at both brands," said Ezra Dabah, CEO of the Children's Place in a release. "As a result, we took significantly more markdowns which are negatively impacting our gross margin. We believe our assortments at both brands were not as focused and compelling as last year, which has been compounded by continuing mall traffic declines."

"As we look at our back-to-school and holiday assortments at both brands, we remain cautiously optimistic about the second half. Our merchandise is focused and we remain true to our formula of fashion, quality and value," Dabah said.

The company noted that inventory per square foot at the end of the second quarter is anticipated to be in-line to below previous guidance at The Children's Place and in-line with guidance at Disney Store, as previously stated.

Children's Place shares lost 9.9% to $47.34 in heavy trading on the Nasdaq on July 9, after touching a new 52-week low of $47 earlier in the session. The shares traded as high as $71.81 back on Nov. 13.

"We believe these disappointing results reflect a lack of key volume drivers at both chains," said Standard & Poor's equity analyst Jason Asaeda in a note. (S&P, like BusinessWeek, is owned by The McGraw-Hill Companies [MHP].) Given heavy summer clearance markdowns and "merchandising risk we see for the upcoming back-to-school season," Asaeda lowered his fiscal year 2008 (January) EPS estimate by $0.45 to $2.95. He kept his sell opinion on the stock, and cut his 12-month target price by $4 to $45, based on his revised peer-p-e model.

Asaeda recently said in a research report that he thinks the company "is doing a good job of remerchandising Disney Store, as an expanded apparel assortment is driving growth in customer traffic and conversion," adding that The Children's Place "remains a top shopping destination for value-seeking moms."

"However, with trend-right fashions also critical to the brand's appeal, we are concerned about recent sales weakness in girls' apparel," Asaeda wrote. "We believe clearance sales held in April negatively impacted full-price sales of early summer product, and we see risk of a lack of key volume drivers as the summer selling season unfolds."

On July 9, the company added that it expects to become current in its quarterly and annual filings with the SEC by the end of August. Its filings were delayed due to an investigation into its stock-option granting practices, but said it is making progress toward completing past financial statements to reflect correct measurement dates for the grants.

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