Is investing really just for grownups? Not tomorrow, it isn't. On Thursday, all eyes on Wall Street turn to one of the premier purveyors of clothing for kids. Children's Place (NASDAQ:PLCE) struts its Q1 2006 numbers tomorrow.
What analysts say:
- Buy, sell, or waffle? Nine analysts follow Children's Place, with six of them rating the stock a buy, two a hold, and only one a sell.
- Revenues. Sales are expected to rise 15% tomorrow, to $423.4 million.
- Earnings. And analysts want to see even bigger profits -- they're expecting 39% growth to $0.50 per share.
What management says:
Did I say analysts were looking for 15% sales growth? Silly me. Or rather, silly them. Fact is, Children's Place has already reported its sales numbers for the quarter, and it surpassed that number easily. In its sales report earlier this month, the company announced 16% overall sales growth for the quarter, 9% same-store sales growth, and sales accelerating as time went on. In April, for example, Children's Place sales alone scored 19% comps growth (so expect a higher number for total sales growth in that month), and -- better sit down for this -- the company's Disney store hit a phenomenal pace of 34% comps growth.
It's based on these results, I presume, that analysts set their hurdle so high for tomorrow's earnings. Children's Place predicted that even after you net out stock options expensing, it would post between $0.48 and $0.50 per share in profits under generally accepted accounting standards.
What management does:
Meanwhile, the company's performance on the profit margins front remains uninspiring. Not horrible, exactly -- it just pales in comparison to this sales news. At last report, gross margins were about where they stood a year ago, and down from 18 months ago. On a net basis, the company is earning 20 more basis points on each dollar of sales. Nice, but not stellar.
|
Margins % |
10/04 |
1/05 |
4/05 |
7/05 |
10/05 |
1/06 |
|---|---|---|---|---|---|---|
|
Gross |
40.9 |
39.5 |
38.8 |
37.9 |
38.4 |
39.6 |
|
Op. |
6 |
6.4 |
5.7 |
4.1 |
4.5 |
6.2 |
|
Net |
3.7 |
3.7 |
3.2 |
2.3 |
2.8 |
3.9 |
The Fool says:
I see two possible theories for what's going on over at Children's Place. Theory one is that the company is sacrificing margins in an effort to move product. Cut prices, and you cut friction on the flow of goods out the door. It's just that you don't earn as much off the goods that way.
My other theory is considerably more optimistic, and based on the superb profits growth that everyone is expecting to see tomorrow. If that growth materializes, and if it is based on the 16% sales growth we've been promised, then the only realistic way Children's Place could grow profits at twice the rate of sales growth is to maintain or expand its profit margins and sell its goods at full price. That's what I think is happening. Tomorrow, we'll see just how educated a guess this is.
One final thought: whenever I see a retailer whose sales appear to be taking off, I like to make a quick reality check to see whether its wares' popularity is supported by quick bill collection and rapid drawing down of inventories. Rightly or wrongly, if I don't see those two things happening, I worry. And this is what worries me at Children's Place: sales grew about 32% year over year in the last six months, but inventories rose 56% and accounts receivable 47%. Perhaps it's nothing, but I'd suggest you check on these two lines tomorrow, just to confirm that the disparity is shrinking rather than growing.
Competitors:
- Wal-Mart (NYSE:WMT)
- Too (NYSE:TOO)
- Target (NYSE:TGT)
- Kohl's (NYSE:KSS)
- Gymboree (NASDAQ:GYMB)
- Gap (NYSE:GPS)
Wal-Mart and Gap are Motley Fool Inside Value recommendations. To find more top-shelf stocks at bargain-bin prices, sign up today for a free 30-day guest pass .
Fool contributor Rich Smith does not own shares of any company named above.
