What happened
Shares of The Children's Place (PLCE 0.14%) were trading down 10% as of 10:47 a.m. ET on Monday. The fourth quarter turned out to be more challenging than management expected. The Children's Place now expects to report a loss in the range of $52 million to $57 million.
Year to date, the stock is still up 19%, and there could be more upside despite the bad news today.
So what
Excluding higher consumer prices as a result of cost inflation, retail sales across the industry were down and below expectations in November and December of 2022. On top of weak retail spending, Children's Place faced the highest cotton costs in a decade, which is the company's largest input cost.
The good news is that cotton prices are down 40% year to date. Container costs are also starting to approach pre-pandemic levels, so the worst might be over for the leading children's apparel retailer. The company has seen its earnings per share recover nicely over the last few years, which might be undervalued by the market.
PLCE EPS Diluted (TTM) data by YCharts
Now what
Sales for the fourth quarter are expected to be between $454 million to $456 million, representing a decline of 10.2% to 10.6% over the year-ago quarter. This is below the company's prior guidance of $460 million, but the new year could see the company's financial results improve.
The Children's Place has a key advantage with its large digital presence, in which online sales make up half of total retail sales, up from 48% in 2021 and 37% in 2019. Management has spent the last few years closing underperforming stores as more customers have turned to shopping online. The company says that this has translated to improving profitability.
Overall, prospects for a return to growth in 2023 point to a better buying opportunity. The stock certainly offers good value, trading at a forward price-to-earnings ratio of 10.6 -- less than half the market average.
