Is This Children's Apparel Retailer a Good Buy?

Recently, I came across a small-cap retailer of children apparel and accessories that has enjoyed a decent historical operating performance since 2003. This retailer has produced profits and positive free cash flow in nine out of the past ten years. It also has a strong debt-free balance sheet. That retailer is Children's Place Retail Stores (NASDAQ: PLCE  ) . Let's take a closer look to determine how attractive Children's Place is at its current trading price.

Share buybacks on a strong balance sheet
Children's Place focuses its activities on children's apparel in North America under the "The Children's Place," "Place," and "Baby Place" brand names, operating more than 1,000 stores in both the U.S. and Canada. In the third quarter, the retailer managed to grow its adjusted EPS by 11% to $1.89. The company's consolidated retail comp sales experienced a decline of 0.70%, however, due to a 0.6% drop in average transaction value in the competitive promotional retail environment.

The double-digit EPS growth was partly due to share repurchasing by the company. In the past twelve months, Children's Place has spent $96 million to buy back shares. In the third quarter, it repurchased $7 million in stock. The company still has $26 million in authorized share buyback funding remaining, giving investors a buyback yield at 2.17%.

What I like about Children's Place is its strong balance sheet. As of November 2013, it had more than $194.2 million in cash and short-term investments and no debt.

3 initiatives to drive growth
Looking forward, Children's Place will rely on three key strategic and operational initiatives to drive the retailer going forward. The first is to optimize its store outlet. The company plans to close around 100 stores through 2016, and an additional 70 stores are under review for closure. Second is the system implementation and transformation. Children's Place estimated that it would complete its ERP implementation in the second quarter of fiscal 2014 with the rollout of pricing and core merchandising volume. Last but not least, Children's Place will expand its international and wholesale distribution channels. The company expects to have around 55-60 stores in the Middle East and Israel by the end of fiscal 2014. 

How does it compare to Gap and Carter's?
What might make investors excited is the fact that Children's Place has a relatively lower valuation than peers such as Gap (NYSE: GPS  ) and Carter's (NYSE: CRI  ) . At $53.80 per share, Children's Place is valued at only 5.78 times its EV/EBITDA (enterprise value/earnings before interest, taxes, depreciation and amortization.) Gap has a bit higher EBITDA multiple at 6.76, while Carter's is the most expensive among the three with an EBITDA multiple of 11.60. The low valuation of Children's Place might be due to its lack of a dividend. Both Carter's and Gap are offering investors dividends with yields at 0.90% and 1.90%, respectively.

Gap and Carter's are committed to returning cash to shareholders
Gap recently announced a $1 billion share repurchase authorization. This announcement came after it returned $1.1 billion in both dividends and share buybacks. As Gap is worth $18.36 billion, a $1 billion share repurchase represents a 5.4% share buyback yield for its shareholders. For the full year, Gap expects to grow its bottom line by 12% with EPS guidance of $2.57-$2.65. 

Carter's high valuation could be explained by its recent market outperformance stemming from a record level of sales and profitability. In the third quarter, the company experienced higher demand in all three of its product markets: Baby, Sleepwear, and Playwear. This drove its wholesale business to grow by 16%. The retail business also experienced a 16% increase in sales, due to both door growth and a 50+% growth in e-commerce sales.

Besides dividends, Carter's is also committed to returning cash to shareholders through share buybacks. In the third quarter, the company executed an accelerated share buyback transaction worth $400 million. It still has around $267 million under its remaining authorization as well. In fiscal 2013, the company expected to return more than $400 million to its investors through both dividends and share repurchases, representing a total yield of more than 10.4%. 

My Foolish take
Children's Place will not disappoint investors in the long run with its debt-free balance sheet, a decent operating performance, and low valuation. Among the three retailers featured here, though, I love Gap the most as it also has a low valuation, a good dividend yield, and has a strong commitment to returning cash to shareholders. 

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