Not Following SAC Into The Children's Place

 | Aug 09, 2013 | 10:00 AM EDT
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According to a recent 13G filing, SAC Capital Advisors owns 1.1 million shares of The Children's Place (PLCE), a $1.2 billion market cap retailer of children's apparel.

SAC, which is managed by billionaire Steve Cohen and his team, has been receiving a number of redemption requests from outside investors, although a sizable portion of the fund's assets under management is employee money, so it continues to be an active trader.

The fund has bought almost all of these shares since the beginning of April, when it only had about 20,000 shares of The Children's Place in its portfolio, according to the 13F filing.

The Children's Place operates about 1,100 retail stores that sell apparel, accessories, and shoes for boys and girls under 10 years of age. The first quarter of its fiscal year ended in early May, and the company reported a 6% decrease in comparable-store sales from the same period in the previous fiscal year.

The company has opened a number of new locations recently, and as a result the decline in revenue was only 4%, but the comparable-store numbers suggest that conditions have been getting worse for The Children's Place. Since the increased number of locations has hindered the company in reducing costs, earnings fell 22% from their levels a year ago. Cash flow from operations has declined as well.

At its current valuation, The Children's Place trades at 22x trailing earnings. This level would normally be associated with good growth prospects and preferably moderate growth in profits on a historical basis. The demographic situation for the retailer is also not particularly favorable, given continued low birth rates, which would generally not be considered positive for future results either.

Wall Street analysts do expect the company to improve in the next fiscal year, forecasting earnings per share of $3.61 for the fiscal year ending in January 2015. That target places the current price at a forward P/E of 15, and so even if the retailer performs in line with expectations, it would need to continue to grow profits beyond that point to make sense in earnings terms.

However, it should be noted that The Children's Place has no debt and a significant amount of cash on hand. In cash-flow terms, it is valued at 6.3x trailing EBITDA, which is not low enough to be a pure value stock, but it could attract attention if EBITDA does pick up a bit. Defensive-minded investors should also note that the stock's beta is 0.2.

We would compare The Children's Place to Carter's (CRI), which designs and retails children's apparel under the OshKosh and Child of Mine brands. Carter's' retail business saw operating income increase strongly in percentage terms last quarter compared with the second quarter of 2012, offsetting decreases in the wholesale business. However, higher corporate expenses caused the company as a whole to report a small decline in earnings.

On a P/E basis, Carter's is valued at a small premium to The Children's Place; trailing and forward P/Es are 26 and 18 respectively. This makes sense, as Carter's has been performing better recently, but over the long term the two companies are tied into essentially the same trends. Carter's does have a much higher enterprise-value-to-EBITDA multiple, however.

We don't believe it's a good idea for investors to imitate SAC's move here. The Children's Place is dependent on either some kind of special situation which takes advantage of the company's cash flow -- a speculative reason to buy a stock -- or significant earnings growth, something which we do not see in the company's recent results. Given the valuation at Carter's, it appears that the market is aggressively valuing companies that are involved in children's apparel, and we are skeptical that that industry is in fact poised for high growth or higher margins.  

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