The Children’s Place stock has short squeezed; time to buy?
The Children’s Place (PLCE) stock price has staged a strong comeback in the past few days, making it one of the best-performing companies in the retail industry. It soared to a high of $17.20, its highest point since March 6, and 233% above its lowest level this month.
Short squeeze continues
The Children’s Place has been one of the worst-performing companies in the retail industry in the past few years. After peaking at $155.30 in 2018, the stock dropped to a low of $4.66 earlier this month.
This crash happened as its sales growth decelerated and as its profits dropped, raising concerns that it may go bankrupt. Its sell-off has been in line with other specialty retailers, who are struggling as competition from general stores like Walmart and e-commerce platforms like Amazon rise.
For example, a pharmacy giant like Rite Aid has gone bankrupt while popular brands like CVS and Walgreens Boots Alliance are some of the top laggards in the industry.
Similarly, discount retailers like Dollar Tree, Dollar General, and Five Below are some of the worst-performing companies in the S&P 500 index as they plunged by almost 50% this year. Ulta Beauty, which focuses on cosmetics items has also dropped.
The Children’s Place stock has underperformed as its annual revenues dropped from $1.8 billion in 2020 to over $1.6 billion last year. In the same period, it has moved from being a profitable company into a loss-making one. It made a net loss of $154 million in the last financial year.
At the same time, the company’s balance sheet has been under pressure as its cash and short-term investments fell from $68.5 million in 2020 to $13.6 million in 2023. It had over $316 million in short-term loans and $165 million in long-term debt.
As such, the combination of rising debts and a weak balance sheet pushed many short sellers to short the company, pushing its short interest to over 22%.
Improved financial metrics
The ongoing PLCE stock price happened after the company published its financial results last week.
Its total revenue dropped by 7.5% in the third quarter to over $319 million because of its ongoing e-commerce division.
Like other retailers, The Children’s Place has been ramping up its e-commerce operations, which has led to more marketing spending. This revenue decline happened as the company reduced its marketing spending and other offers like free shipping.
The results also showed that its comparable retail sales dropped by 7.2% while its gross profit rose to $111.8 million.
The Children’s Place’s net sales for the first half of the year fell by 11% to over $587 million while its gross profit jumped to $204.5 million.
These results mean that the management is doing well to reduce its costs and improve profitability.
The risk, however, is that it has substantial inventories in its stores. These inventories rose from over $362 million in February to $520 million in the last quarter.
Also, there is a risk that the management will want to raise capital to boost its balance sheet. It has lease liabilities worth $45 million for the remainder of 2024 and $64 million in 2025. It will likely use its remaining revolving credit to pay this debt. Fortunately, it does not have any debts maturing in the remainder of this year, 2025, and 2026.
The Children’s Place stock price analysis
The weekly chart shows that the PLCE share price made a strong rebound recently. This recovery happened after it formed a falling wedge chart pattern, a popular bullish sign.
The stock has now soared above the 50-week and 25-week Exponential Moving Averages (EMA), a positive sign. Also, the two lines of the MACD indicator have made a bullish crossover while the Relative Strength Index (RSI) has tilted upwards.
Therefore, the stock will likely continue rising as buyers target the next psychological point at $20. In most cases, however, these short squeezes tend to be short-lived, meaning that it could lose momentum soon.
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