P$nkophiles do not miss this turdly opportunity. PLCE rated T3/f
The Children's Place May Be Too Big for Its Britches
By Suzanne Kapner
Senior Writer
8/24/99 7:00 AM ET
The Children's Place (PLCE:Nasdaq), a clothing retailer for kids, has shown it can
multiply profits.
But now two short-sellers say the numbers don't add up. They point to red flags in
the company's financial data that they say raise questions about the quality of those
earnings. They also question the abrupt cancellation of an advertising campaign that
was set to launch this fall and was much ballyhooed by Children's Place executives.
Children's Place says the questions have no merit. And for now, the company looks
like it's doing plenty right. It sells miniature-adult styles for tykes, a departure from
the path competitors like Gymboree (GYMB:Nasdaq) have chosen. And Children's
Place's strategy is the one kids and parents like.
But questions have dogged the Secaucus, N.J.-based company since its early days,
thanks in part to its chief executive's past.
CEO Ezra Dabah's father founded Gitano, a clothing manufacturer that filed for
bankruptcy and was liquidated in 1994 amid allegations that the company misstated
aspects of its financial condition. Ezra Dabah was in charge of design and
merchandising during his 20-year stint with the firm. His brothers, Haim and Issac,
pled guilty to violating U.S. customs laws when they falsely reported the country of
origin of $2.7 million worth of Gitano blouses.
In 1989, Ezra Dabah and some members of his family bought Children's Place.
Dabah became CEO in 1991.
Shortly after its 1997 IPO, Children's Place missed analysts' earnings estimates,
and investors crushed the stock. A shareholder lawsuit followed.
But since then, the fortunes of the 261-unit retailer have improved. In the second
quarter ended July 31, the company earned $1.4 million, or 5 cents a share,
compared with a loss of $500,000, or 2 cents a share, a year earlier. Total sales
climbed 54% to $73.9 million, while the all-important sales at stores open at least
one year jumped 19%.
The stock has followed, climbing 109% for 1999 through July 15, when it hit 52 9/16,
though it recently has been hit like all retailers by interest-rate concerns. Monday it
jumped 5 1/16 to 39 1/16.
Nevertheless, the short-sellers say the recent financial data point to some curious
trends. They wonder why investments in property, plant and equipment climbed to
$70.9 million in the fiscal second quarter, from $55.4 million in the fiscal first quarter
ended May 1. But during the same period, depreciation declined to $2.9 million from
$3.3 million. Since depreciation is a noncash charge that records the aging of
assets, it typically grows when assets increase.
The short-sellers also point to decreasing inventory turns, the cost of goods sold
divided by inventory, that can signal a company is having trouble selling all of its
goods. "It tells you there's something rotten in the woodshed that will eventually have
to [be sold] at lower gross margins than the company's average," says one of the
short-sellers, who specializes in retail firms and asked to remain anonymous.
Another measure, inventory yield (gross profit divided by inventory), also has been
flashing red on short-sellers' radar screens. In many cases, a declining inventory
yield can foretell declining profits, because it means that the company's return on its
inventory is decreasing. Put another way, it requires larger quantities of merchandise
to generate the same profits.
Seth Udasin, Children's Place's chief financial officer, chalks up the disconnect
between property, plant and equipment and depreciation to the timing of its opening
of a distribution center and office building, which became operational at the quarter's
end. Investments in the facility were recorded in the period, but depreciation won't
show up until the fiscal third quarter, he says. Also, the company has been
refurbishing stores, which requires removing old fixtures and replacing them with new
ones. So, depreciation on the old fixtures was increased in past quarters so they
could be written down to zero when they were replaced, Udasin says. This inflated
depreciation in the fiscal first quarter.
He says declining inventory turns are the result of a strategy begun last July to push
merchandise into stores more smoothly. The plan requires the company to hold the
pint-sized shirts, pants and sweaters at its distribution center for a longer period
before shipping to stores to ensure that color-coordinated ensembles arrive in sync.
As the company passes the anniversaries of these changes, inventory turns should
stabilize, he adds.
As for inventory yield, Udasin says he doesn't track the measure.
Also striking the shorts as odd was the cancellation of an advertising campaign that
Children's Place executives had talked up recently, including during a conference
last spring. "Our vision is to have a place in everyone's mind," Dabah said in
interview earlier this year. "To do that, we'll begin marketing extensively this fall."
The Della Femina/Jeary & Partners agency had developed a test campaign last
spring and was given the go-ahead to create TV commercials for fall, says Michael
Jeary, a partner. Then, abruptly, after paying Della Femina roughly $2 million (of the
planned $6 million) to cover creative costs, Children's Place ended the relationship,
citing creative differences.
Short-sellers figure Children's Place canceled the campaign to save money. Says
Udasin, "We didn't cancel this for the sake of saving money. That is a big lie."
The short-seller says the proof will ultimately be in the numbers. "I've done 500
models, mostly in the retail sector," he says. "The correlation between numerical
issues and stock under-performance is very high."
Send letters to the editor to letters@thestreet.com.
Top
Read our conflicts and disclosure policy.
Mr. P-nk |
