Children's Place Sees Stock Drop After Report of Gymboree Relaunch Troubles

Just yesterday, we got word in about Children's Place NASDAQ: PLCE about how its third-quarter report didn't boast any word of markdowns, though we were pretty clear that it was “only a matter of time” until the company did start marking down. We were right, and a lot sooner than most probably expected, as word emerged of a 23% drop in Children's Place shares thanks to some trouble with the Gymboree NASDAQ: GYMB relaunch.

Gymboree's Failure to Relaunch Has a Familiar Cause

The third-quarter reporting for Children's Place noted a “small top-line miss” for the third quarter, due to familiar bugaboos like unusually nice weather that was keeping people out of shopping malls and, of course, the increasing propensity for people to stay away from shopping malls in general. That's keeping foot traffic out of the high-end children's clothier, and severely hampering Children's Place's ability to sell togs to tots, or at least, tots' parents.

A point we mentioned in our coverage yesterday—the increasing moves customers are making toward retailers like Target NYSE: TGT—was not mentioned in Children's Place's guidance. That small omission didn't seem to help much, as in recent trading, Children's Place shares lost as much as 23% at one point.

A Target On Its Back

The news of Target's resurgence—and the resurgence of similar big-box retailers who have been stepping up their online game in recent months—came at a terrible time for Children's Place. Not only had it shelled out fully $76 million for Gymboree's intellectual property back in March, but it was set to stage a relaunch of the familiar Gymboree line in its own shops.

Children's Place had extensive plans for Gymboree, including a new and more powerful website as well as over 200 “shop-in-shop” locations slated to go live in the spring of 2020. Given that the purchase took place almost a year before the relaunch could even start up, Children's Place was already taking a substantial gamble that nothing would destabilize the somewhat fragile children's clothing market in that year, and indeed, something did just that.

The Silver Lining in the Ominous Black Cloud

However, Children's Place remains optimistic about the future, and it has good reason. It's already said to be taking on solid feedback over social media, reports from Marketwatch note, and the company has long had a rapport with millennial moms looking to outfit their offspring in grand style. Additionally, since 80% of Children's Place brand sales are coming from branded credit card and loyalty program sales, the company seems to have a pretty sound base that isn't likely to stray.

Gymboree, meanwhile, had neither of these, noted Children's Place CEO Jane Elfers. Moreover, Elfers could point to six new locations set to bring in $1 million in annual sales, and even spotted a set of 40 former Gymboree locations that both did well and were in areas without Children's Place presences, suggesting that further expansion may be in the cards.

Will Children's Place Act Fast Enough?

Here's the problem with what Elfers just said, however. She knows 40 places where Gymboree did well, but that have no Children's Place presence. And haven't had Gymboree presence since last March, either, by extension. It's a fairly safe bet that a lot of that traffic has already shifted, and probably started doing that shifting back around late August when shopping for school clothes started up. Even Elfers notes that Gymboree had no loyalty program or internal credit card operation, so what kept parents in that particular fold?

How much of this business has already migrated to Target? We've already seen how Target is keeping its connection fresh with improved online operations, as well as an increasing number of small-format stores to allow for increased market penetration. That combination is formidable, and for a mall-heavy retailer like Children's Place, it's an ongoing disaster. We're well into the holiday shopping season, after all, and there are plenty of parents, grandparents, and well-meaning godparents out buying supplementary kids' clothes, so that's one more opportunity for Target to cement its status as the place to buy kids' clothes.

A business that depends on mall traffic to survive has been on the decline for some time now almost universally; just look at Sears OTCMKTS: SHLDQ. Sears has been closing locations almost frantically for over a year, and before that, K-Mart, another Sears property, was similarly engaged. While the writing may not be on the wall for Children's Place just yet, the hand does at least look like it's limbering up.