Children's Place has gotten torched over the last six months - since October 2024, its stock price has dropped 37.9% to $8.85 per share. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.
Is there a buying opportunity in Children's Place, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Even though the stock has become cheaper, we're sitting this one out for now. Here are three reasons why there are better opportunities than PLCE and a stock we'd rather own.
Why Do We Think Children's Place Will Underperform?
Offering sizes up to young teens, The Children’s Place (NASDAQ: PLCE) is a specialty retailer that sells its own brands of kid’s apparel and accessories.
1. Shrinking Same-Store Sales Indicate Waning Demand
Same-store sales is an industry measure of whether revenue is growing at existing stores, and it is driven by customer visits (often called traffic) and the average spending per customer (ticket).
Children's Place’s demand has been shrinking over the last two years as its same-store sales have averaged 11.3% annual declines.
2. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for Children's Place, its EPS declined by 37% annually over the last four years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.
3. High Debt Levels Increase Risk
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Children's Place’s $454.2 million of debt exceeds the $13.64 million of cash on its balance sheet. Furthermore, its 78× net-debt-to-EBITDA ratio (based on its EBITDA of $5.63 million over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Children's Place could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope Children's Place can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
Children's Place doesn’t pass our quality test. Following the recent decline, the stock trades at 8.9× forward price-to-earnings (or $8.85 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are superior stocks to buy right now. We’d recommend looking at one of our top software and edge computing picks.
Stocks We Would Buy Instead of Children's Place
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