Is a Children’s Place Turnaround in the Cards?

Key Points

• Iconic specialty children's apparel retailer The Children's Place operates under brands Gymboree, Baby Place, PJ Place, Place, Super & Jade and The Children's Place.
• Inventory glut, shrinking margins, many promotions, heavy debt financing costs, shrinking revenues, and squandering $300 million to buy back shares that lost over 60% of their value might be the match in a kerosene-soaked warehouse.
• Saudi family office value fund Mithaq Capital acquired a 54% stake in The Children's Place and extended interest-free loans to buy the company some time.

The Children's Place Inc. NASDAQ: PLCE stock has had a wild ride in 2024. Shares surged from a swing low of $8.30 on Feb. 9, 2024 to a swing high of $38.03 on Feb. 15, 2024. Since the swing high, shares have cascaded down to $11.54 on funding and bankruptcy concerns as the company breached debt covenants.

The consumer discretionary sector retailer sells children's specialty apparel under the brands Gymboree, Baby Place, Sugar & Jade, PJ Place, Place, and its namesake The Children’s Place. Its competitors include Macy’s Inc. NYSE: M, Kohl’s Co. NYSE: KSS, Walmart Inc. NYSE: WMT and Target Co. NYSE: TGT.

How Did The Children’s Place Fall So Low?

The Children’s Place has seen revenues continue to decline since the pandemic surge. Falling revenues, surging inventories and heavy discounts lead to shrinking margins and rising debt financing, a potential matchstick lit in a kerosene-soaked warehouse situation. To add to the burden, management spent $300 million to buy back shares that continued to sink more than 60%. It didn't come as a big surprise when the company reported it could breach debt covenants in its Q4 2023 pre-release, which sank shares by 52%. This news also caused concern among its suppliers, who cut back on extending payables credit.

Mithaq Capital to the Rescue?

Mithaq Capital, a Saudi Arabia-based Al-Rajhi family office value fund, has scooped up nearly 54% of The Children's Place shares, taking over as the largest shareholder after the company warned of potential loan defaults. Mithaq started accumulating shares at $11 and kept buying.

Mithaq also provided an interest-free loan of $78.6 million while renegotiating financing. On Feb. 29, 2024, the loan comprised an initial $30 million, with an additional $48.6 million to be issued on Mar. 29, 2024. The company also secured a non-binding $130 million loan in March 2024. Analysts believe Mithaq is planning on raising its stake to 75% through equitization.

Al-Rajhi Bank is the largest bank in Saudi Arabia and the Middle East, with total assets of $213.3 billion. Mithaq has four board seats and has replaced its chairman; a new board is expected during the May shareholder meeting. 

Reshaping the Board

Mithaq Capital replaced the Chairman of the Board with an Al-Rajhi family member and three other directors. Mithaq also requires four directors on the Board to resign and announced it has 11 new directors ready to be voted in during the May 2024 shareholder meeting. Mithaq also requested a $90 million rights registration, enabling every shareholder to purchase a pre-priced share to raise more capital directly from the shareholders without incurring more debt financing expenses. At $90 million, the company could issue $15 shares at 6 million rights. Mithaq could buy all the rights to raise its stake to nearly 75%. 

Is a Short Squeeze Coming?

The Children's Place has a tiny 11.8 million share float with a 22.12% short interest. This has the makings of a short squeeze on bullish news. Traders will be watching earnings reactions, news relating to financing, and details on the upcoming board vote and shareholder meeting.

Daily Descending Triangle  

The daily candlestick chart on PLCE illustrates a descending triangle pattern. The series of lower highs has been very transparent since peaking most recently at $25.50 levels on Feb. 29, 2024. The flat-bottom lower trendline awaits at $10.51 for a possible retest. As shares get closer to the apex, The Children's Place will either break out through the descending trendline or break down through the lower flat bottom trendline. The daily relative strength index (RSI) has stalled on its bounce attempt at the 34-band. Pullback supports are at $10.51, $8.30, $7.55 and $5.67.