The Children’s Place is a Free Cash Flow Machine

Highlights

• The Children's Place has been a consistent generator of free cash flow during its time as a public company.

• Due to higher inventory costs, both its balance sheet and earnings have taken a hit in 2022.

• The Children's Place looks poised for a recovery in 2023 that could drive significant price appreciation.

 Brief Commentary

The Children’s Place (PLCE) is a specialty apparel retailer, primarily selling through its own E-Commerce efforts, Amazon, and a fleet of 658 stores.

PLCE consistently generates free cash flow, an average of $101m per year since 2009. Almost dollar for dollar, every cent of free cash flow since 2009 was used for share repurchases. PLCE has reduced their share count by 15.8m shares since 2008 at an average cost of $91.27 per share (2.6x the current share price).

The Children’s Place is one of many retailers with deteriorating FY22 financial results, holding expensive inventory after a record-breaking FY21. However, its future working capital benefit, flexible lease base, ample liquidity, history of share repurchases, and inventory cost tailwinds set up PLCE for a spectacular reversion to the mean trade.

If PLCE continues their share repurchase strategy of the past 15 years, our FY23 FCF projection suggests they could repurchase around half of the current outstanding shares. Even if the Company held back the working capital benefit to reduce leverage (leaving $105m for buybacks in FY23), they could still repurchase about a quarter of the current market capitalization.

Can PLCE generate over $200m of free cash in FY23 and plow it all into buybacks? It certainly seems possible, which would likely produce a three-figure share price within the next twelve months.

Click Here to read the full article, including our FY23 Estimates and discussion of Risks.