Why The Children’s Place Stock Just Crashed 52%

Shares of kids clothier The Children’s Place (PLCE -48.43%) are getting spanked this morning, down 52.2% through 11:30 a.m. ET, after the company preannounced “preliminary, unaudited” financial results for its fiscal fourth quarter of 2023. While unofficial at this point and subject to revision, the news certainly doesn’t look good.

Analysts were already expecting The Children’s Place to report a weak quarter, with sales up only 1.5% year over year at $462.9 million. Management warned today, however, that it’s probably actually going to report sales of no more than $456 million, and potentially as bad as $454 million.

The Children’s Place earnings day

And the bad news doesn’t end there. Turning to earnings, analysts note that The Children’s Place lost $3.87 per share in Q4 2022. They’ve been hoping that things turned around a bit in Q4 2023, however, and that the retail chain could report at least a non-GAAP (adjusted) profit of $0.22 per share.

No such luck.

Instead, says management, Children’s Place will report an adjusted operating loss of between 8% and 9% of sales. Best-case, therefore, that works out to $36.3 million in operating losses — that’s $2.90 per share — and the actual loss could be worse than that.

Management noted that the final result according to generally accepted accounting principles (GAAP) will be affected by “certain non-recurring costs” including “the gain from the settlement of a lawsuit, and non-cash asset impairments.” But big-picture, it looks like after cost-cutting to move inventory, higher shipping costs, and increased write-downs to revalue inventory, The Children’s Place is going to report a pretty huge loss when the final quarterly announcement comes out.

Is The Children’s Place stock a sell?

If there’s any good news to report today, it’s that The Children’s Place appears to be setting itself up to take a so-called “big bath,” in which it loads as many losses as possible into a single quarter, so that future quarters will look better by comparison. For example, management says that after taking big write-downs on inventory and selling off a lot of its stock of goods, it hopes to come out of Q4 in a “clean inventory position,” with no more goods than it can sell easily, and at reasonable prices.

With any luck, this will set up the company to report growing sales and improved profit margins going forward. For the time being, however, investors just have to hold their breath and wait to see just how horrible the final Q4 earnings number will be. (Official earnings are due out March 14, by the way).

Judging from how the stock price looks this morning, though, it seems few investors are interested in waiting around another whole month for nothing but bad news.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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