Before our first baby was born 18 months ago, my wife and I were deluged (like most expecting parents) with a barrage of helpful comments, anecdotes, and suggestions. We were often forewarned of the mounting expenses associated with the basics: diapers, formula, and baby food. While these items can (and still do) take a toll on the family budget, perhaps the biggest expense is one that I overlooked -- baby clothes.
My wife has yet to find an outfit or pair of shoes that doesn't look "adorable" on our son, only to have him grow out of it after a single use. As an investor, though, the experience has forced me to take a closer look at Children's Place (Nasdaq: PLCE ) -- which just posted second-quarter results that topped expectations -- and rival children's retailers such as Gymboree (Nasdaq: GYMB ) , Gap (NYSE: GPS ) , and Toys "R" Us (NYSE: TOY ) .
Losses for the seasonally weak second quarter steepened to $9.9 million, or $0.37, from last year's $9.4 million decline but were still narrower than both Wall Street estimates and company forecasts. Revenues jumped 19% to $189.2 million, driven by a double-digit increase in same-store sales and the addition of 16 new units in the quarter. Comps rose 10%, below the torrid 16% increase seen several months ago but well ahead of the 3% gain from last year's second quarter, as well as the 5% decline suffered by Gap.
Children's Place has been expanding rapidly, adding new stores at a 30% clip the last few years. Though this pace has slowed, a net of 24 new locations went into operation during the past six months, lifting the total store count to 715. As frequently happens, the ambitious growth strategy hit a few snags along the way -- in this case, inventory management problems, issues with product quality, and frequent merchandise markdowns. Of course, these concerns are not exclusive to Children's Place; lately Gymboree has had a few of its own.
Many of these wrinkles appear to have been ironed out. Aside from the impressive strength in same-store sales, inventory seems to be in line with demand, early reports on back-to-school apparel look good, and management has cited improvements in store traffic and conversion rates. Children's Place will need to keep these trends intact if and when it reaches a definitive agreement to take over Disney's (NYSE: DIS ) stores.
Furthermore, gross profit margins have improved 80 basis points year-to-date to 36.2%, and SG&A expenses have fallen a full percentage point, helping to swing last year's $3.8 million midpoint loss to a $1.6 million gain. With a price/sales multiple of .58, an enterprise value-to-free cash flow ratio of less than 12, and reinforced earnings guidance projecting 40% growth this year, Children's Place may have something to offer adults as well as children.
Want to share your trials, tribulations, and triumphs as a new parent? Try the Fool's Parents and Expecting Parents Discussion Board
Fool contributor Nathan Slaughter is afraid his second child may wear hand-me-downs exclusively. He owns none of the companies mentioned.
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