The Children's Place (NASDAQ:PLCE) is trading near 52-week lows on concerns over competition from value retailers, declining mall traffic, and the success of the Gymboree relaunch. Investors sent the stock down over 20% after the retailer's third-quarter earnings report on Dec. 11. Analysts also cited concerns that Target's (NYSE:TGT) strong share gains might hurt Gymboree's future sales growth.

However, with shares of the consumer discretionary company trading lower, and the upcoming relaunch of well-loved children's brand Gymboree, could this be a good time to consider buying shares in The Children's Place?

Clothing from The Children's Place

Image source: The Children's Place.

Recent results and future growth prospects

The Children's Place recently reported third-quarter results that were roughly in line with analyst expectations. However, fourth-quarter guidance came in below analyst estimates, resulting in lower full-year guidance. The specialty retailer cited marked weakness in mall traffic as the main reason for the decreased guidance for the holiday quarter. Executives also mentioned a highly promotional environment and warmer fall weather as headwinds in the third quarter.

Research company RetailNext measured shopping activity at malls and shopping centers on Black Friday, which may be a good predictor for holiday-season activity. The company saw overall traffic down 2.1% and overall sales declining 1.6%. Meanwhile, e-commerce retailers, discount retailers, and those with strong omnichannel strategies did well; e-commerce retailers saw digital sales up about 20%. There was also a 43% increase in "buy online, pick up in-store."

While mall traffic may continue to stagnate, Children's Place executives are closing unproductive stores and plan to continually monitor productivity. CFO Mike Scarpa said, "We're armed with meaningful flexibility in our real estate portfolio with an average lease term of 2.5 years ... which leaves us nimble and well-equipped to close additional doors."

Meanwhile, the children's retailer is succeeding in omnichannel, with omnichannel customers increasing by 14% in the third quarter. The company sees this segment ramping up quickly, aided by the $50 million it plans to invest in digital transformation.

What's working well for The Children's Place

A bright spot for The Children's Place in the latest quarter was e-commerce, which was up 23% year over year, to 35% of total revenue. In the first quarter of this year, e-commerce provided 29% of total sales. Management sees this growing to over 50% within a few years. The company has integrated a third-party logistics provider to "dramatically improve shipping times," according to executives; this move helps address consumer complaints about the company's e-commerce shipping.

The Gymboree relaunch still presents an opportunity for sales growth at The Children's Place. Prior to Gymboree's 2017 bankruptcy, that company had sales of $1.25 billion and operating income of $42 million. Children's Place will likely be able to capture at least a portion of Gymboree's share of the children's apparel market. Furthermore, the overall U.S. market for kids' clothing is expanding, increasing over 4% in 2018.

CEO Jane Elfers said that adding a strong loyalty program and private-label credit card initiative at Gymboree would provide a nice boost to sales. She noted: "Approximately 80% of The Children's Place brand sales come from our My Place Rewards and our private-label credit card loyalty members."

Risks and increasing competition

The Children's Place faces risks to its growth. Aside from the continued decrease in mall traffic, there's increasing competition in the kids' clothing segment. Target's highly successful Cat & Jack line of kids' clothing, launched in 2016, reached over $2 billion in sales in just over a year. In 2018, Walmart launched its own kids and toddlers' brand, Wonder Nation, while Amazon started Spotted Zebra. Stitch Fix also expanded into children's wear last year. All this fierce competition may hurt the Gymboree relaunch, and the ability of The Children's Place to take market share.

Meanwhile, executives declined to give 2020 guidance on the third-quarter call. While Children's Place shares are trading at an appealing forward price-to-earnings ratio of 8 (compare this to the S&P 500's forward P/E of 19), I would wait for more confirmation that the company's growth strategy is yielding results before adding shares.