This report is the opinion of the author. See disclosures and disclaimers.
1. The formula of (High Short / Low Float) + (Company Buybacks) + (Flawed Thesis). In June 2019, I published a very contrarian long thesis on Dillard’s when the share price was at $60.26. Within 20 trading days, the share price was already up by as much as 47% and is currently still up by 30%. The trade similarities between Dillard’s (DDS) and Children’s Place (PLCE) should be immediately obvious. I am long both of these stocks and I expect that Children’s Place could quickly rebound to $160 or higher. See disclosures and disclaimers.
2. Even a modest revision from peak bearishness could see Children’s Place rebound to $160 or above. Extreme bearish sentiment has caused short interest in Children’s Place to hit all time highs at 44% of float. But the short thesis is missing some very important details. Weak earnings from Children’s Place along with the bankruptcy of competitor Gymboree saw Children’s Place fall by nearly 50% from its highs above $160. Aside from causing negative sentiment, bankrupt competitors were liquidating inventory, putting real pressure on quarterly earnings for Children’s Place, creating a natural drag on the share price. But competitor liquidations have now largely passed. In addition, Children’s Place has been able to capitalize on competitor weakness, buying up assets and IP at distressed prices, and often becoming the only remaining local competitor in the space. This local consolidation by Children’s Place also benefits from the accelerating partnership with Amazon.
3. Short interest has spiked sharply…. even as share buybacks continue to shrink the float. Since January, short interest in Children’s Place is up sharply from 2.5 million shares to 6.7 million shares. Like Dillard’s, this rising short interest is being acutely compounded by an ongoing share buyback which is shrinking the share count. Children’s Place has consistently bought back 1-2 million shares per year using internally generated funds, including in 2018 at prices north of $150. Last year, share count at Children’s Place shrunk by 9% to just 15 million shares remaining, down from 22 million just a few years ago. Children’s Place has continued its share buyback into 2019, it has authorization to repurchase over 2 million more shares, and it has ample cash and cash flow to continue.
Important. After the plunge to the $80s, the share price has been steadily rising even against increasing pressure from short sales . Someone is clearly accumulating shares at a meaningful rate, more than offsetting the short sales (and in direct contradiction to the bear thesis). To the extent that the company buyback has been accelerating at lower prices, there is the possibility that the short interest is considerably higher against the smaller remaining share count.
4. Rising stock borrow volatility = rising short seller nervousness. Float dynamics can often predict eventual share price direction, but it is stock borrow spikes that predict the actual timing of price spikes. Stock borrow volatility takes most investors by surprise. For example, borrow on Dillard’s went from 2% to 30% in a short number of day days. It then quickly spiked from 30% to 60%. This unexpected spike in borrow cost directly preceded a one-day spike in the share price from the $60s to the $80s. In recent weeks, Children’s Place borrow has become visibly more volatile, identical to what was seen ahead of past spikes in Beyond Meat (BYND), Tilray (TLRY) and Dillard’s. (See graph of stock borrow volatility below).
5. Children’s Place is actively benefiting from the demise of its competitors. The market is beginning to realize that “mall-mageddon” is not a sector-wide extinction, instead it is a shakeout of the weak. Retailers such a Target are successfully capitalizing on the demise of competitors who were over-levered and under-nimble. Children’s Place has maintained low leverage and was an early mover into ecommerce, including partnering with Amazon. The bankruptcies of over-levered competitors has resulted in the closure of more than 1,000 competitor doors in this space. As many as 70% of these stores had previously been in the same malls as Children’s Place. In many cases, Children’s Place is now the only competitor left standing in those malls, leaving consumers with few local alternatives.
Bankruptcy liquidations from failing competitors caused some short term pricing pressure in the overall space, including on Children’s Place quarterly results. However, Children’s Place has taken advantage of this weakness to actively buy up competitor assets and brand rights at distressed prices, locking in consumers who now have few alternatives. Children’s place is effectively winning the war of attrition.
6. Partnership with Amazon is accelerating faster than expected and provides three ways to win. Children’s Place first announced its partnership with Amazon in 2014, long before its now-bankrupt competitors understood the need for such “co-opetition”. First, the near term benefits from the relationship have allowed Children’s Place to generate and sustain stronger revenues on higher margins, which is why it was able to outlast its now-bankrupt competitors. Second, ecommerce revenues have more than quadrupled from $120 million to $543 million, and now comprise nearly 1/3 of total revenues. This creates the potential for the share price to enjoy multiple expansion as the market increasingly treats its as a ecommerce play valued on P/S rather than a bricks and mortar retailer valued on P/E. Finally, it is not hyperbolic to view Children’s Place as a highly likely acquisition target for Amazon. The current partnership has been a testing of the waters which has clearly been going well for both sides over a five year period. Children’s Place precisely fits Amazon’s mold of a) acquiring recognized brand leaders who are b) in very specialty niche markets such as groceries, shoes, fabrics and education materials. And even prior to any potential acquisition, the partnership continues to deliver positive financial results for Children’s Place (and for Amazon).
7. Why the market is missing this. These data points should be easily findable for motivated analysts, and the extreme bullish tilt for the share price should be immediately obvious. But just as we saw with Dillard’s, both companies have only very limited sell side coverage and by analysts who have little incentive to swing for the fences on deeply out-of-favor retail stocks. Likewise, buy side analysts have largely taken a shotgun approach (“mall-mageddon”) towards the entire bricks-and-mortar sector, frequently missing significant rifle shot opportunities among the wider carnage.
This report is the opinion of the author. See disclosures and disclaimers. 1. The formula of (High Short / Low Float) + (Company Buybacks) + (Flawed Thesis). In June 2019, I published a very...
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