Key points
- Iconic specialty children’s clothing retailer The Children’s Place operates under the brands Gymboree, Baby Place, PJ Place, Place, Super & Jade and The Children’s Place.
- Excess inventories, squeezed margins, numerous promotions, heavy debt financing costs, shrinking revenues and the squandering of $300 million to buy back shares that have lost more than 60% of their value could be the solution of a warehouse soaked in kerosene.
- Saudi family office value fund Mithaq Capital has taken a 54% stake in The Children’s Place and has been making interest-free loans to buy the company for some time.
- 5 titles we prefer to Children’s Place
Children’s Place Inc. NASDAQ: PLCE shares have had a wild ride in 2024. Shares went from a low of $8.30 on February 9, 2024 to a high of $38.03 on February 15, 2024. Since the high, shares have fallen to $ 11.54 on financing and bankruptcy concerns as the company violated debt agreements.
The consumer discretionary retailer sells specialty children’s 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. New York Stock Exchange: KSS, Walmart Inc. New York Stock Exchange: WMT AND Target Co. New York Stock Exchange: TGT.
How could the children’s home have fallen so low?
The Children’s Place has seen revenues continue to decline following the pandemic surge. Falling revenues, rising inventories and deep discounts lead to shrinking margins and increased debt financing, a potential lit match in a kerosene-soaked warehouse situation. Adding to the burden, management spent $300 million buying back shares that continued to fall more than 60%. It wasn’t a big surprise when the company reported it may breach debt covenants in its fourth-quarter 2023 pre-release, which sent shares down 52%. This news has also caused concern among its suppliers, who have reduced the granting of credit on debts.
Capital Mithaq to the rescue?
Mithaq Capital, a Saudi Arabia-based Al-Rajhi family office value fund, has picked up nearly 54% of The Children’s Place’s shares, becoming the largest shareholder after the company warned of potential loan defaults. Mithaq started accumulating shares at $11 and continued buying them.
Mithaq also provided an interest-free loan of $78.6 million during the financing renegotiation. On February 29, 2024, the loan included an initial $30 million loan, with an additional $48.6 million to be issued on March 29, 2024. The company also obtained a $130 million non-obligatory loan in March 2024. Analysts believe that Mithaq is planning on increasing its stake to 75% through equitisation.
Al-Rajhi Bank is the largest bank in Saudi Arabia and the Middle East, with total assets of $213.3 billion. Mithaq has four seats on the board and has replaced its chairman; a new board of directors is expected at the May shareholders meeting.
Reshape the Council
Mithaq Capital replaced the board chairman with a member of the Al-Rajhi family and three other directors. Mithaq is also requesting that four directors of the Board step down and has announced that he has 11 new directors ready to be voted on at the May 2024 shareholder meeting. Mithaq has also requested a $90 million rights registration, allowing each shareholder to purchase a pre-priced share to raise more capital directly from shareholders without incurring additional debt financing expenses. At $90 million, the company could issue $15 shares with $6 million in rights. Mithaq could buy all the rights to increase its stake to almost 75%.
Is a short squeeze coming?
The Children’s Place has a float of 11.8 million shares with short interest of 22.12%. This has the makings of a short squeeze on bullish news. Traders will watch earnings reactions, financing news 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 reaching the most recent high at $25.50 levels on February 29, 2024. The flat-bottomed lower trendline awaits at $10.51 for a possible retest. As the stock approaches the top, The Children’s Place will break above the descending trend line or break below the flat lower trend line. The daily relative strength index (RSI) has stalled in its attempt to rebound at the 34 band. Pullback supports are at $10.51, $8.30, $7.55 and $5.67.
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