and Macellum Advisors GP, LLC announced today that they have sent a letter to Mr. Norman S. Matthews, Chairman of The Children’s Place, Inc. (NASDAQ: PLCE). the letter, Barington and Macellum note that they believe, despite its leading position in the children’s apparel market, the Company’s shares trade at a modest valuation due to investors’ concern over the Company’s deteriorating operating performance since 2010 under the leadership of the current CEO, Ms. Jane Elfers.
Barington and Macellum are confident that there are multiple ways to improve shareholder value including improvements in the Company’s sales and margins, inventory management and capital allocation. and Macellum further believe that there are likely a number of strategic and financial buyers who would be interested in acquiring The Children’s Place at a significant premium to its current trading valuation in order to capitalize on the Company’s leading position in the children’s apparel market, its stable operating cash flow, and substantial opportunities for working capital and operating improvements. (“Barington”) and Macellum Advisors GP, LLC (“Macellum”) represent a group of shareholders of The Children’s Place, Inc. (“Children’s Place” or the “Company”) that collectively beneficially owns over two percent of the outstanding common stock of the Company. Barington and Macellum both have substantial experience investing in consumer and retail companies and assisting such companies improve their long term financial and share price performance. Barington’s historical investments include Collective Brands, Darden Restaurants, Dillard’s, Nautica, Payless ShoeSource, Steve Madden, Stride Rite, The Jones Group and Warnaco. cheap jerseys from china We believe that The Children’s Place is an attractive investment opportunity at its current trading valuation due to its leading market share in the children’s apparel market, its large store base coupled with a direct sourcing infrastructure that allows the Company to offer high quality and value products to its customers. The Company also has significant growth opportunities in e commerce and international markets.
Despite its leading market position, the Company 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. Since Ms. Elfers became CEO, EBITDA has declined from $210.7 million in the fiscal year ended January 2011 to $156.1 million in the twelve months ended November 1, 2014, a decline of 26%. Based on our analysis of publicly available information, we are confident that, under the right management team, The Children’s Place 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. We believe these results could be achieved through a combination of reinvigorated sales growth, increased margins, strong free cash flow generation through better inventory management and reduced capital expenditures, and aggressive share repurchases. Due, we believe, to its disappointing operating performance, the Company’s stock price has significantly underperformed its peers and the market as a whole over the past one, three and five years, as well as during Ms. Elfers’s tenure:
We believe the Company has lacked the effective Board oversight that is required to address its deteriorating operating and financial performance. Furthermore, the Company’s executives have received generous compensation despite poor results, reflecting a lack of alignment of pay with performance. We feel that a fresh perspective in evaluating performance is warranted and that, to this end, it is critical for the Company to add new independent directors.
We also believe The Children’s Place’s market leading position in the children’s apparel space and its opportunities for working capital and operating improvements would be of interest to potential strategic and financial buyers.
We therefore strongly urge the Board to promptly take the steps we have outlined below to improve the Company’s sales and margins, inventory management and capital allocation. Elfers’s leadership, the Company’s EBITDA has declined 26% from $210.7 million in fiscal 2011 to $156.1 million during the last twelve months ending November 1, 2014. Due, we believe, to numerous missteps under Ms. Elfers’s leadership, the Company has seen its gross margin fall by 460 basis points since 2009. Other key metrics have also declined as shown below.
We believe negative same store sales growth has been primarily due to a number of poor merchandising decisions by the Company’s current management. One of these numerous missteps, in our view, was emphasizing higher priced items. On the November 17, 2011 investor conference call, Ms. Elfers stated “[A]verage unit retail in the quarter increased in the mid teens with the highest AUR in girls.” Again on the March 7, 2012 investor conference call, Ms. Elfers stated that “AUR increased in the high single digits during fiscal 2011 Despite an increase in AURs, the Company’s gross margins nonetheless suffered declines in fiscal 2011 mainly due to markdowns, and the Company’s same store sales growth was negative and the number of customer transactions was down. In fact, The Children’s Place has experienced declining gross margins every year Ms. Elfers has been at the helm of the Company. These declines have been accelerating, culminating this year in the worst gross margin decline during her tenure. Inefficient Inventory Management
As shown in the table above, the Company’s inventory turnover has fallen from 4.9x in fiscal 2010 to 3.3x during the twelve months ending November 1, 2014. Ironically, Ms. Elfers specifically targeted improvement of inventory turnover as one of her five key initiatives during her first earnings call in March 10, 2010.
“The five key initiatives are strengthening the merchandise, accelerating new store growth with the focus on value centers, optimizing inventory management, sharpening our marketing message and driving e commerce growth.”
During the same call, she remarked:
“In addition to focusing on getting the right merchandise into the right store at the right time, we’re taking a hard look at how much inventory we need to drive top line sales and how to optimize inventory wholesale nfl jerseys flow into the store. I have a bias for lean inventories, and there is clearly an opportunity at The Children’s Place to reduce inventory levels and better manage flow to the stores.”
Fast forwarding to 2014, the Company is carrying 47% more inventory on a comparable sales level in the third quarter of 2014 than it did in the third quarter of 2010. Ms. Elfers has not only failed to meet her publicly stated objective of efficient working capital management, but under her leadership, it has actually significantly worsened. Poor inventory management is also likely related to the Company’s delay in implementing a planning and allocation system. believe Ms. Elfers has been leading an unsuccessful effort to reengineer the Company’s planning and allocation processes since March 2010 when she stated on an investor conference call: “I think if you look at the many, many companies that have come before us and have forged ground on merchandise planning and allocation, you will also see that payback is almost immediate. So we’re excited about the opportunity.”
She continues to promise the benefits of a new planning and allocation system even after 4.5 years and said the following during the most recent earnings call in November 2014:
“Progress continues on our seamless retail initiative in advance of the deployment of sophisticated assortment planning, allocation and replenishment tools. We remain on track targeting the back half of 2015 to start to see the results of these initiatives.”
We estimate that Ms. Elfers’s failure to manage inventory is costing the Company an additional $110 million of working capital which could have been better utilized to maximize shareholder value. In addition, we believe the Company’s poor inventory management is interrelated with its declining same store sales and declining gross margins, as slow turning inventory leads to greater reliance on markdowns.
Poor Capital Allocation on Expansion of Domestic Store Footprint
During Ms. Elfers’s tenure, capital spending has exceeded depreciation and amortization by $77 million. Notably, the Company has expanded its store footprint from 947 stores in January 2010 to 1,117 stores in November 2014. While many “best in class” retailers were already working to shrink their North American store footprints and migrate sales to the internet, the Company was accelerating store growth. At a point when it was already one of the largest specialty retailers in North America, the Company proceeded to grow stores by another 18% since 2010 and as recently as two years ago initiated a plan to grow to 1,250 1,300 stores, or 18 22% more than the existing number of stores at the time. On the November 15, 2012 investor conference call Ms. Elfers stated ” completed an extensive market analysis in the first quarter of 2012, which indicated a fleet potential of 1,250 to 1,300 stores in North America.” Then a mere seven months later in June of 2013, the then Chief Financial Officer of the Company, Mr. Michael Scarpa, updated investors that ” have made the decision to close approximately 100 underperforming stores through 2016 including 45 this year.”
This abandoned North American expansion plan was a tremendous loss of time and energy as well as capital expenditure. It is our belief that the Company would have been far better served accelerating international store growth rather than expanding its store base in North America.
We are concerned by the significant amount of turnover among top level executives at The Children’s Place. believe wholesale nfl jerseys that constant executive turnover has been a major contributor to the Company’s disappointing financial and share price performance. after Ms. Elfers was appointed to the CEO position in 2010, she made a number of management changes. the March 7, 2012 investor conference call Ms. Elfers reported that since she joined the Company, ” have replaced and upgraded over half of our headquarter staff including key roles such as Chief Operating Officer, Head Merchant, Head of Design, Chief Marketing Officer, and Head of International.” Four of the five key positions Ms. Elfers highlighted three years ago are no longer held by the same executives.
Since 2010, the Company is on its fourth CFO, third Head of Design, second Head of Planning and Allocation, third Head of Sourcing, second Head of Merchandising and second Chief Operating Officer. Furthermore, the Chief Marketing Officer and Chief Information Officer, both hired during Ms. Elfers’s tenure, have also left and have not been replaced.
We question Ms. Elfers’s managerial expertise and whether she is capable of identifying and retaining the appropriate talent to improve the Company’s performance.
CEO has been richly compensated despite poor operating performance
Despite the Company’s poor operating results and the Company’s stock price lagging all relevant market benchmarks during Ms. Elfers’s tenure, compensation for Ms. Elfers has been, in our opinion, egregious. In 2014, leading proxy advisory firm Glass Lewis stated:
“The Company has been deficient in linking executive pay to corporate performance, as indicated by the ‘F’ grade received by the Company in Glass Lewis’ pay for performance model. A properly cheap jerseys structured pay program should motivate executives to drive corporate performance, thus aligning executive and long term shareholder interests. In this case, the Company has not implemented such a program.”Articles Connexes：