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Analysis: Increased momentum for Children’s Place moving forward

The Children's Place has capped a solid fiscal year with a glittering set of sales numbers. A comparable uplift of 8.2% is robust enough, but when it comes off the back of a prior year increase of 6.2%, it highlights the company's significant momentum. Underlining this is the fact this is the fourth consecutive year of positive comps.

While all is bright on the top line, the bottom line is gloomier. This quarter, Children's Place posted a net loss of $9.9 million against a profit of $34.2 million last year. As unfortunate as this is, we do not believe it reflects the company's underlying performance. Rather, it is a consequence of some one-off expenses including provisions for new tax legislation, some restructuring costs, and asset impairment and legal fees. Even so, the dint has been sufficient to undo the profit gains made over prior quarters, leaving the group's annual net income down 17% over the preceding year.

Operating income is more representative of actual performance, and this increased by 6.6% during the quarter. In our view, margin gains from better sourcing, improved economies of scale and less discounting all helped to ease up operating performance. Despite this being the twelfth consecutive quarter of product margin expansion, we believe that Children's Place can make further gains as it moves into its new fiscal year. A point underscored by management's 12% operating margin target by the end of 2020. One-off expenses notwithstanding, this makes us optimistic about the medium-term outlook for profits.

The prospects for the sales line look equally favorable, and we think several dynamics will aid Children's Place over the next few years.

One of these is the failure of Toys “R” Us. Although apparel represented a small part of the sales mix and was usually sold in partnership with Carter's, we see a small benefit for Children's Place once Toys “R” Us stores close. We also see the closure as detrimental to the Carter's brand, at least in terms of exposure.

Also significant is the exclusive license agreement for the Greater China market which Children's Place has signed with Zhejiang Semir Garment Company. Via its Balabala brand, Zhejiang Semir is China’s largest specialty children’s apparel retailer.

Under the agreement, at least 300 Children's Place franchised stores will open over the next five years; these will be joined by a digital presence on third-party platforms, such as Tmall, JD, and Management believes that this venture could add up to $150 million a year to sales by year five of the agreement. We see this as feasible and also forecast that the boost to volumes will aid margin expansion. In essence, the deal gives Children's Place accelerated, low-risk access to a very lucrative market.

The third benefit to sales comes from continued product innovation, especially with regards to design. The Children's Place offer is unique and compelling, and this helps it to differentiate it from rivals. The extensive amount of choice also means there is something to suit all tastes, which has made it a destination for parents and older kids alike.
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