Children’s Place Inc. shares sank 13.4% in Thursday trading after the kids clothing retailer reported an earnings beat, but rang up almost too many online purchases.
E-commerce sales rose 38% in the third quarter, making up 29% of total net sales of $522.5 million.
While company executives talked up the efforts to grow its customer base and drive online business, they acknowledge the high price for these efforts.
“[T]he outsized growth of our digital business has caused low levels and stock-outs of e-commerce inventory, and has forced us to make brick-and-mortar inventory available to our digital customers online in order to meet their demand,” said Chief Financial Officer Michael Scarpa on the earnings conference call, according to a FactSet transcript.
“The fulfillment costs associated with ship-from-store and the fulfillment of store inventory carries a higher cost per unit than shipments made via our distribution center,” he said. Children’s Place introduced the buy-online-pickup-in-store service in the third quarter of 2017 in the U.S. and in the third-quarter of 2018 in Canada.
Even though this is a problem, analysts are upbeat.
“Unforeseen digital growth is wreaking havoc on the supply chain,” wrote Wolfe Research in a note. “Although it is concerning that unforeseen digital demand resulted in execution issues, we think this is a good problem insofar as it proves the $50 million committed investment is working. This issue may persist through 1H19 but is both identifiable and fixable. Furthermore, given the evidence that they can successfully fulfill from stores, we see no need for Children’s Place to build an additional distribution center.”
Children’s Place PLCE, -4.12% has 988 stores in the U.S., Canada and Puerto Rico.
Wolfe Research rates Children’s Place shares outperform with a $135 price target.
With customers shifting online, it makes sense that Children’s Place, like nearly every other retailer, is focused on capturing e-commerce customers, and using digital capabilities to create a personalized experience to keep shoppers loyal.
However, Children’s Place has an even bigger reason for focusing on customer acquisition and retention.
“One hundred percent of our customers eventually grow out of our product,” Chief Executive Jane Elfers said on the call. “Our highest-value customers continue to generate 15 times more value than that of new or infrequent customers.”
Children’s Place’s efforts to capture new customers have been helped by challenged competitors. Gymboree emerged from bankruptcy last Septemberand Sears Holding Corp. SHLDQ, +0.00% is going through a bankruptcy now.
“We continue to believe we are the best-positioned retailer to gain market share from Gymboree,” Elfers said. “We have targeted a $100 million market share opportunity from Gymboree inclusive of the $30 million opportunity detailed from the stores they have already closed.”
Children’s Place thinks Sears, Kmart and bankrupt Bon-Ton Stores Inc.BONTQ, +0.00% generated between $425 million and $475 million in children’s apparel volume in the past year.
“We estimate the market-share opportunities from this collective group is large, possibly five to 10 times as large as a single player like Gymboree or Sears,” said Elfers.
Children’s Place shares are down 29.6% for the year to date, while the S&P 500 index SPX, -2.33% has gained 1.5% for the period.
Children’s Place Inc. shares were unchanged in after-hours trading Friday. Year-to-date, PLCE has declined -28.84%, versus a 0.06% rise in the benchmark S&P 500 index during the same period.
This article is brought to you courtesy of MarketWatch.