The Children’s Place (Nasdaq: PLCE) is the largest children’s specialty apparel retailer in North America, selling apparel, footwear and accessories for newborns up to teenagers. It also happens to be one of the most shorted apparel retail stocks in the US, with 29% of its free float sold short. So far, management’s investments in a wide range of self-help initiatives have been a source of frustration for the short sellers. Will the shorts eventually be vindicated, or will PLCE become a standout case study for surviving the retail shakeout?
PLCE is one of several specialty footwear and apparel retailers that we have been following over the last year. When we first visited the stock last October at $75 a share (short interest was “only” 24% then), we concluded that PLCE was not an attractive short at the time because it had a competent, forward-thinking management team, strong same-store-sales momentum and had invested heavily in self-help initiatives that were either coming online or expected to do so within the coming year.
The following self-help initiatives now appear to be having a positive impact on the company’s performance:
- A new inventory allocation and replenishment tool went live during back-to-school in 2015 and drove a material improvement in gross margin vs 2014. The tool enables the allocation of merchandise to stores closer to need, increases allocation frequency and lowers the average units allocated per allocation cycle.
- An assortment planning tool to optimise overall buys and better match the breadth of PLCE’s assortment of merchandise with the depth of inventory. The tool is intended to vary the assortment carried by each store with a view to optimise profitability. Management expects this tool to drive down unit receipts by mid-single digits in H2 2017, and has already reduced all-door SKUs to 52% of total assortment from 59% last year.
- An order planning and forecasting tool was launched in Q3 2016 to automate and enable greater precision and timeliness in the reordering of basics, a critical category for the back-to-school season and one which PLCE has historically missed sales due to being out-of-stock.
- The size and pack initiative was launched in Q3 2016 as well, to increase the number of pack configurations by 35%, which is expected to result in less stranded inventory and increased inventory productivity.
- Finally, if the above inventory management tools aren’t enough to maintain clean inventory, a markdown optimisation tool is being rolled out this year to help drive profitable and timely liquidation of excess inventory.
As the graph below shows, PLCE’s margins have improved significantly since the introduction of these initiatives.
The key thing to note about these self-help initiatives is that they were in development from as early as 2015, back when other retailers were still frantically expanding their store fleets in an already-overstored retail sector. In addition, CEO Jane Elfers had the foresight to embrace, rather than resist, the rise of Amazon. The company established a wholesale partnership with Amazon in 2014, and launched a replenishment program with the e-commerce giant in 2016 which has now expanded to 4,000 SKUs.
We recently revisited PLCE after it settled in the $100-$110 range to see if there was any value left in the business, or if the stock had finally been priced to perfection. While a share price in the $100’s is not cheap by any means, the market is certainly not expecting PLCE to shoot the lights out for the rest of time either. One broker relayed to us that the short sellers he’d spoken to were predominantly short because PLCE was a specialty apparel retailer, and specialty apparel retailers were bad businesses by default in the current retail environment. Best to remain on the sidelines on this one, we think.