What happened

Shares of Children's Place (NASDAQ:PLCE) were falling today after the children's apparel retailer badly missed estimates in its fourth-quarter earnings report and issued a disappointing outlook for fiscal 2019. The main culprit was the bankruptcy of rival Gymboree, which is closing around 800 stores. Though Children's Place had signaled in its third-quarter earnings report that there would be impacts from competitor liquidations, the degree has turned out to be greater than expected.

As a result, the stock was down 10.8% as of 12:35 p.m. EST.

Check out the latest earnings call transcript for Children's Place.

A reflection in a mirror of a boy trying on a coat.

Image source: Getty Images.

So what  

Comparable sales in the fourth quarter declined 0.6% and U.S. comparable-store sales plunged 8.2%, which seemed to be due to a combination of pressures from the Gymboree liquidation and the company's decision to speed up its own reduction of seasonal inventory in preparation for Gymboree's complete liquidation in the first quarter. U.S. retail store comparable traffic fell 11% in the weeks leading up to Christmas, though it wasn't immediately clear why.

Overall revenue was down 6.9% in the quarter to $530.6 million, though most of that decline was due to an extra week in the previous fiscal year. Nonetheless, that result was significantly worse than the analyst consensus at $554.2 million.

Adjusted gross margin fell 550 basis points to 31.5% due to the company's decision to accelerate its seasonal liquidation. Meanwhile, adjusted operating margin dropped from 10% to 4.1%, and adjusted earnings per share came in at $1.10, all the way down from $2.52 a year ago. Wall Street had expected a profit of $2.12 per share.

Children's Place CEO Jane Elfers underscored the shock of the Gymboree liquidation, saying, "We have never experienced a total liquidation of a direct competitor of the size and proximity of Gymboree. We overlap with nearly 70% of the approximately 800 Gymboree and Crazy 8 stores, all of which will complete their liquidation events and close within the next 60 days."

Now what

Despite the immediate headwinds, Children's Place is capitalizing on Gymboree's bankruptcy by acquiring its intellectual property, which includes that of the brand Crazy 8, for $76 million. Elfers said the move would open up another avenue for growth.

The Gymboree liquidation again weighed on Children's Place's outlook as the company guided toward a loss of $0.70 to $0.40 per share, down from a profit of $1.87 the year before.

Still, the company should return to growth once the liquidation ends, and Elfers called for improved performance in the back half of the year. As I've argued before, investors seemed to be overreacting to the impact of the Gymboree bankruptcy, which should set up a buying opportunity for long-term investors.