Like most apparel retailers, Children's Place (NASDAQ:PLCE) stock was hit hard during the market crash in March when the pandemic first struck. Shares of the retail chain fell from a closing price of $69.18 on February 21 all the way to a low of $9.25 on March 18, though the stock has since recouped most of those losses, a sign that investors are optimistic about a recovery.
Children's Place presented its first quarterly report since the pandemic started last Thursday, and the stock whipsawed over the following two sessions as investors struggled to interpret the news. As expected, the retailer's results for the first quarter were dismal. Revenue fell 38.1% to $255.2 million, and it posted an adjusted loss per share of $1.96, compared to a per-share profit of $0.36 a year ago. The company closed stores on March 18 and began reopening them on May 19, meaning they were closed for about half of the quarter. As of June 8, it had 61 locations open, and it expects to have a majority open by July.
Children's Place is accelerating its store optimization plan and said it would close 300 stores over the next two years, about 200 this year and 100 in 2021, which would leave it with about 620 stores. While other retailers are closing stores out of weakness, Children's Place is accelerating its store rationalization as part of a long-standing strategy: The company has been gradually shuttering stores over the last several years in order to invest in e-commerce and build up its digital channel. That strategy has been successful -- the company generated 31% of its sales from the online channel last year, and has purposely signed leases that were easy to get out of in case of an event like this.
Given the headwinds that malls and other retail corridors are facing as the pandemic plays out, accelerating those store closings makes sense. The company said its goal was for mall-based brick-and-mortar locations to generate less than 25% of its revenue by 2022.
In addition to its strength online, where it has one of the highest digital penetration rates in the industry, there are other reasons to bet on Children's Place's recovery.
Sales have already bounced back
In the second quarter, which began on May 3, the company said sales were up low double digits. And unlike other recently reopened retailers like TJX Companies and Michaels that have reported strong in-store growth, Children's Place has done this with the vast majority of its stores closed -- its e-commerce sales have jumped 300% quarter-to-date. As CEO Jane Elfers said, "As demand for our essential children's clothing continues to surge, our omni-channel advantages are clear."
While demand for most clothing has subsided during the pandemic as office workers have stayed home and social events have been canceled, children are still growing up and need new clothes as they age out of old ones and the seasons change. That difference favors Children's Place over competitors that don't specialize in children's clothes and haven't made the same investments in digital capabilities.
It's still the industry leader
Children's Place is the largest pure-play specialty retailer of children's apparel. For several years Gymboree was its chief rival, but that chain was forced into liquidation after filing for bankruptcy last January. Children's Place scooped up much of its intellectual property and relaunched the brand in February. Though that timing may have proven less than ideal, it underscores the strong position the company has in children's apparel, especially with its digital initiatives.
Elfers also saw the pandemic as hastening a reckoning in the apparel industry, with a number of chains closing stores and declaring bankruptcy. She said on the earnings call, "We anticipate that the lingering impact of COVID-19 will continue to accelerate the shift to digital, putting enormous pressure on the already-stressed brick and mortar channel, resulting in accelerated store closures."
In other words, as department stores like J.C Penney and Stage Stores declare bankruptcy, and as other chains like Macy's and Gap accelerate store closings, a large percentage will be up for grabs in children's apparel. And with consumers already shifting to e-commerce, Children's Place seems poised to win a lot of those potential customers.
With stores still reopening, it will likely take Children's Place at least a few quarters to return to its pre-COVID levels of performance, but the company seems poised to emerge from the crisis in a stronger competitive position. Double-digit sales growth thus far in the second quarter and a 300% jump in e-commerce sales should further reassure investors that the stock can return to its former heights.