Children's Place: Betting Against Mithaq's Lifeline, But Wait For Likely Canada Exit

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Children's Place financial results have been terrible and worsening, notably for the Q4 holiday quarters. The future looks bleak, and guidance is being withheld.Competitive pressures in the company's ...

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The future looks bleak, and guidance is being withheld.Competitive pressures in the company's ...</p>\n\n<a href=\"https://seekingalpha.com/article/4696542-childrens-place-betting-against-mithaqs-lifeline-but-wait-for-likely-canada-exit\">Source Link</a>\n\n</div>\n","source":"seekingalpha","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Children's Place: Betting Against Mithaq's Lifeline, But Wait For Likely Canada Exit</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nChildren's Place: Betting Against Mithaq's Lifeline, But Wait For Likely Canada Exit\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-05-31 03:26 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4696542-childrens-place-betting-against-mithaqs-lifeline-but-wait-for-likely-canada-exit><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Children's Place financial results have been terrible and worsening, notably for the Q4 holiday quarters. The future looks bleak, and guidance is being withheld.Competitive pressures in the company's ...</p>\n\n<a href=\"https://seekingalpha.com/article/4696542-childrens-place-betting-against-mithaqs-lifeline-but-wait-for-likely-canada-exit\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"LU2360032135.SGD","symbol_name":"ALLSPRING GLOBAL EQUITY ENHANCED INCOME \"A\" (SGDHDG) INC","start_time":0,"source_url":"https://seekingalpha.com/article/4696542-childrens-place-betting-against-mithaqs-lifeline-but-wait-for-likely-canada-exit","article_id":"2439497677","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/82173231/image_82173231.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2439497677","pubTimestamp":1717097163,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Children's Place financial results have been terrible and worsening, notably for the Q4 holiday quarters. 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The future looks bleak, and guidance is being withheld.Competitive pressures in the company's target market are immense, leaving the company little road to profitability.An activist investor has recently taken control of the company and instituted a new interim CEO.The company will likely continue to shrink its retail footprint, and will likely close its Canadian stores. That might provide a short-term boost for shares, at which point a long-term downside bet using Put Options may be compelling.   Ryan McVay/DigitalVision via Getty Images I tend to be a contrarian investor, and kind of have a soft spot for retail. That should make me a prime target investor for Children's Place (NASDAQ:PLCE), but all signs point me away from this company. The negatives keeping piling up, and I've gone from neutral to now considering whether Children's Place is near the end of the line. The balance sheet is already a zero (no net book or economic value), and I see competitive pressures burying the business before new management can achieve a major overhaul. I'm unlikely to pull the trigger on any downside bet right at this point, but I'll be kicking the tires on it. I'm also waiting for a possible short-term upside catalyst before entering any bearish trade. Let's review the company first, and then tackle the flurry of recent developments. The Children's Place Business View Along with Carter's (CRI), Children's Place is one of the best known apparel companies that cater exclusively to kids. Children's Place was founded in 1969, underwent a couple of ownership changes in the 1980s, and went public in 1997. The company has been led by Jane Elfers since 2010, although that ended earlier this month (May 2024) when Elfers stepped-down for a small payout. Mr. Muhammad Umair has been appointed interim CEO. Children's Place Aside from the fact that the company website incorrectly still presents Children's Place as woman-led, my other observation is that the depiction as a \"specialty portfolio of brands\" seems gratuitous. As a father of an 8-year-old, I'm very familiar with Children's Place stores, and would describe them as just another apparel retail chain. There's nothing particularly unique or special about its products, and that's one of the problems here. Revenues have been on the slide, but most troubling are the tumbling margins. The worst part is that gross margins for Q4 (which covers the holiday season) have been alarmingly weak, and in fact annual low-points for the past couple of years. The Q4's are depicted by the red circles below. Ycharts This is strong evidence that Children's Place has been having trouble getting product out the door, even during the busy holiday shopping season. By comparison, Carter's has been seeing steady, or slightly higher gross margins in its holiday quarters (north of 45% by the way). Children's Place has seen net losses in 5 of the past 7 quarters, and the only reason Operating Cashflows aren't negative is, because the company has been burning through inventories. Seeking Alpha Results seem highly unlikely to improve in the near term either, as the company's chairman recently stated that they will not be issuing financial guidance, nor hold quarterly conference calls. Promotions and Discounting I was prompted to write this article after passing a Children's Place location a few days ago. Everything about the storefront screamed ~\"going out of business\", and I had to do a double-take to realize that it wasn't actually a store closing sale. No wonder my son's mother recently presented me with a stack of new graphic t-shirts for him, even though we didn't need any! Author's Photo (Full Disclosure: I live in Canada, and the image above is of a Canadian Store. I guess that makes the \"tees and tanks\" about USD $5.90) Frankly, I guess this is almost run-of-the-mill for Children's Place. Although this recent clearance sale struck me as particularly desperate, in recent years, it seems like the sales and discounts have been constant at the chain. Be it a strategic mistake or not, I think Children's Place shoppers are conditioned to always expect discounts, and may leave the store empty-handed if there are none. I don't know how any niche retailer can be profitable at these prices, which probably explains why they're not! Things aren't much different online either, as evidenced below. Children's Place online sales are also subject to strong competition, from the likes of Temu and others. Children's Place The fact that consumers are stretched these days and trying to dodge inflation is a big problem. People are trading down and may find children's shopping cheaper and more convenient at big box retailers like Walmart (WMT) and Target (TGT), or discount stores. Without a significantly differentiated product assortment, it's truly hard to see how Children's Place's retail stores can stay competitive and be profitable at the same time. I'm a little curious why a company like Carter's has managed to do so much better by comparison. Again drawing on my status as a parent, it's occurred to me that new parents may be less likely to trade down for a precious newborn baby or young toddler (~\"Our baby deserves better than Walmart!\"), than for a school-aged child. It could also simply be better management execution, but from my vantage point, things are extraordinarily grim for retail stores dedicated to mainstream children's clothing for ages 5-12, which is a big chunk of Children's Place's target market. It's worth noting that Walmart does sell both Children's Place and Carter's merchandise, but I couldn't imagine the companies yielding much profit margin from those sales. Walmart undoubtedly has a huge bargaining power over suppliers. Statista estimates the size of the U.S. children's apparel market at ~$54 billion. Children's Place is but a small player, with revenues below $2 billion (globally). Balance Sheet and Enter Mithaq Capital Shareholders have become worried not just about the business performance, but also regarding the company's deteriorating financial situation. There's no better proof of that, than when your stock rises 30+% after securing a loan. The company has net debt of more than $250 million, more than PLCE's market cap. Eventually, Children's Place will have to reinvest in inventory, putting its finances under further strain. Back in mid-February, shares of PLCE skyrocketed (to as high as $38) after it was revealed that Mithaq Capital had acquired a majority stake. Mithaq is also the party that extended Children's Place the $90 million term loan, at a rate of SOFR +4%, currently equating to about 9.3%. According to fellow Seeking Alpha analyst Quipus Capital, this financing replaced what would have been a SOFR +9% high-interest loan. That's quite an interest rate savings. The 5% lower rate will save the company $4.5 million annually if the whole $90 million is drawn (part of the loan facility is a LOC), and as a ~55% owner of PLCE, Mithaq would be saving itself ~$2.5 million on the equity side. Said another way, Mithaq is charging Children's Place $4.5 million less in annual interest than the next best available option, but it's only truly costing Mithaq about $2 million annually. It's pretty clearly not an economically priced loan, but it's certainly a nice perk for other shareholders for now. I do expect the full $90 million to be drawn, by the way, as inventory will need to be replenished, and any forthcoming business transition may be costly as well. What To Expect From Mithaq Children's Place leases all of its retail stores in North America, with leases extending to 2032, but with an average term of 1.8 years. Curiously, that average lease term is up from just 0.9 years, when the company released their last year's 10-K in March 2023. The carrying balance of long-term capital leases jumped more than 50% from $76.6 million to $118.1 million between 2023 Q3 and the recently reported 2023 Q4. So although the company's store count had declined by 90 stores over the year, I believe that recently departed CEO Jane Elfers and the former board of directors were set on continuing forward with Children's Place's retail footprint, for the most part. I don't at all expect that to be the case under the new ownership/direction. I find it particularly instructive, that Mithaq instituted an interim Chief Executive Officer with no evident retail experience. Children's Place website Likely Canada Exit I fully expect Children's Place to exit Canada. According to the 10-K, the Canadian store count recently stood at 63.   Children's Place 10-K Why am I so sure about a Canada exit? The Canadian retail landscape is littered with failures by U.S. companies, including Nordstrom (JWN) and Target, even though many of them continued to operate profitably south of the border. The word on the street is that Canadian retailing and Canadian consumers are substantially different than those in the U.S. Numerous U.S. retailers think they can just export their business strategy to Canada, but learn that it doesn't work so well. Now, PLCE has been operating Canadian stores since 2002, so it's had a more successful stint than many others (Children's Place's \"International\" segment has been more profitable than the U.S. segment, but the trend is the same and those profits have dried up). But the need for a distinct strategy, in addition to other arrangements and investments in Canada, is something Mithaq will likely decide isn't worth the 63 stores (~12% of total). Especially for a CEO with no evident retail experience. Also, Children's Place didn't renew the lease for a 95,000 sq. ft. Canadian distribution center, moving those operations to Alabama. I think the company's new majority owner and management is destined to leave the Canadian retail market (the bricks and mortar) like many others, and that it might be one of their first major moves in trying to right the ship. Long-Term Expectations While an announced exit from Canada would likely boost shares of PLCE, especially on the back of the high short interest, I'm not optimistic about the long-term potential for this business in any North American market. Like assessed above, I don't think there's enough unique value, product or convenience that Children's Place offers consumers. In fact, I wouldn't be surprised if things get worse for this business, and I offer no fair value price target here. In my opinion, bankruptcy is not impossible in the medium to longer term. Part of it depends on the size of the lifeline Mithaq extends. The Trade I don't think I'd ever have the courage to Short shares of PLCE, no matter how dire my outlook for the company. Short Interest is high, and the stock may feature as part of short squeeze efforts by groups of retail traders. Long-term Put Options would be my game, but I wouldn't enter this trade yet. I'd like to see another round of enthusiastic buying (or squeezing) of PLCE shares, most likely on an announced exit from the company's Canadian operations sometime in 2024. Once (if) that happens, I'll be looking to enter a bearish trade using options (no naked exposure, of course!).  Right now, Put Options on PLCE are available out to January 2026. Open interest isn't non-existent, but the bid-ask spreads are wide. Implied volatility (IV) is above 100%, so investors might be buying a lot of time value for OTM options. Given this, and the likelihood IV increases further on any news-driven share spike, I might end up purchasing some ITM puts when (if) the time comes. Upside Risks  Mithaq could decide to take Children's Place private, buying up the remaining ~45% of shares. But right now, it sounds like the plan is to issue additional equity. A short-squeeze / gamma-squeeze, as mentioned, remains possible, especially given the high short interest. 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