Children's Place: Not Safe for Adults

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Based on its earnings news and troubles with the SEC, Children's Place (Nasdaq: PLCE) is best avoided by any investing adult who cares about his or her money. Even though the stock fell by nearly 17% yesterday, it's still no bargain. Let's take a closer look.

It's not just the earnings -- or lack of them -- that makes me queasy. No, losing $27.4 million for the quarter is not exactly child's play. And it's not great news that same-store sales declined 1% and margins contracted because of markdowns. The big problem here is what caused a lack of earnings-per-share figures: The SEC is investigating stock-option grants.

But wait -- it gets even worse. Children's Place is trying to renegotiate its pact with Disney (NYSE: DIS), with which it has a licensing agreement to run Disney's retail stores. It agreed to renovate the stores back in June, but it missed the deadline and expects to continue missing them. Unless another agreement is reached, Children's Place will be in violation of its debt covenants, and lenders could put the company in default. Even if a new agreement is reached n time, it will be on less favorable terms to Children's Place. It could, for instance, allow Disney to grant licenses to other companies.

Yet despite the delayed filings, poor controls, an uncertain outcome with Disney, a possible default, and the generally lousy performance, management feels "cautiously optimistic regarding the second half and are pleased with month-to-date sales trends." It feels so good, in fact, that it's slashing its guidance for the year to $2.25-$2.40 a share, from $3.45-$3.55 just back in May. How's that for optimism?

The company may cater to children, but this company has some grown-up problems. Competitor Gymboree (Nasdaq: GYMB) just reported another solid quarter, and that seems to be the place to play if you want to put your investing dollars to work in this sector.

Related Foolishness:

• Gymboree Grows While Competition Wilts
• Nobody's Home at Children's Place
• Fool on the Street: Children's Place Lost in the Woods

Disney is a Motley Fool Stock Advisor recommendation. See what other picks Tom and David Gardner have made by taking the market-beating newsletter service for a free 30-day trial run.

Fool contributor Lawrence Rothman is happy to receive feedback, and he promises to read it when he's not being wrestled by his three children. He doesn't have any positions in the companies mentioned.