Chopped & Screwed: Barington Capital Letter To Children’s Place via Stock Pucker
Barington Capital has taken a liking to the children’s apparel retailer The Children’s Place. They forwarded a lengthy 3,200-word letter to the company. In it, Barington lays out the case that PLCE trades at a hefty discount to its peers given the lackluster performance under current CEO Jane Elfers. But Barington also notes that there are various ways to improve performance, including boosting margins, improved inventory management and capital allocation. But Barington also believes there’s a number of buyers that could snatch up PLCE.
Below is our chopped & screwed version:
Barington Capital and Macellum Advisors owns two percent of The Children’s Place. It’s an attractive investment opportunity given its valuation and leading market share in the children’s apparel, large store base and a direct sourcing infrastructure.
It trades at a modest valuation of 6.0x enterprise value to EBITDA. We believe this discounted valuation is due to investors’ concern over the Company’s deteriorating operating performance since 2010 under the leadership of the current CEO, Ms. Jane Elfers.
We believe it can more than double its earnings per share (EPS) within the next three years compared to the consensus estimate for fiscal 2014 of $3.04 per share. The Company has lacked the effective Board oversight that is required to address its deteriorating operating and financial performance. These issues need fixing:
- Deteriorating Operating Performance
- Merchandising mistakes have led to a deterioration in same-store sales and profitability
- Inefficient Inventory Management
- Poor Capital Allocation on Expansion of Domestic Store Footprint
- High Management Turnover
- CEO has been richly compensated despite poor operating performance
We believe that the Company’s operating margins can improve as e-commerce grows and as the Company takes advantage of numerous upcoming lease expirations to close underperforming stores.
The Children’s Place is a relatively mature retailer in North America and, in our view, needs to allocate capital resources accordingly.Accordingly, we would expect that capital expenditures should be less than depreciation and amortization in the future. We believe these share repurchases would be highly accretive and would help the Company to achieve our target of more than doubling its earnings per share.
Finally, the buyout. We believe the Board should also use this opportunity to explore opportunities for a sale of the Company. With its market leading position in the children’s apparel space and its direct sourcing infrastructure, larger companies could benefit from its low-cost sourcing opportunities. Private equity buyers would also likely be interested given its stable operating cash flow.