Struggling clothing retailer faces bankruptcy, cash crisis
The company has shared that it's reviewing its options when it comes to continued operations.
When a retail chain falls into a hole, a lot of things need to go right in order for it to recover. That's especially true in the current climate where cash has gotten both expensive and hard to come by.
Adding debt onto debt creates its own set of problems but without liquidity, a retailer can't make changes. If you're stuck with merchandise nobody wants but can't afford to make major inventory changes then you'll be driven to bankruptcy faster by that than by added debt servicing.
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Struggling retailers also face the added issue that consumer habits have changed and it's not clear how much. Top-tier malls have remained strong while second and third-tier shopping centers have struggled to retain tenants.
That, of course, becomes a sinking ship that drags down businesses that are otherwise healthy. If a retail chain has too many locations in sinking malls that customers have abandoned that can take down the entire brand.
Children's Place (PLCE) , to its credit, has been working to get itself out of leases at dying malls. The chain has closed 250 locations over the past year driving more of its business to its website and its digital storefront on Amazon.
That's probably the right strategy, but the retailer may run out of cash before it can fully correct its business. Image source: Getty Images
Children's Place has very little cash
It takes money to turn around your business. Children's Place has very little of that.
Total liquidity as of Feb. 3, 2024 is expected to be approximately $45 million (including approximately $13 million of cash and cash equivalents and approximately $32 million of excess availability under the company’s credit facility after excluding all necessary reserves and excess availability requirements)," the company shared in advance of fourth quarters earnings release.
And, while the company has very little cash, it did share some good news when it comes to its overall debt load.
"As previously anticipated, total indebtedness is expected to decrease by more than $100 million versus the third quarter of fiscal 2023 and, as of February 3, 2024, is expected to be approximately $277 million as compared to $408 million as of the end of the third quarter of fiscal 2023," Children's Place added.
The company, however, knows it's in a dire position based on its available cash.
"The company has been working to improve its liquidity position and strengthen its balance sheet to best position the company for the future. The company is working with its advisors (including Centerview Partners), lenders, and potential lenders to obtain new financing necessary to support ongoing operations, and is considering strategic alternatives in the event that the company is unable to consummate new financing," it shared.
Children's Place needs inventory
Children's Place's sales came in lower than the company's guidance at between $454 and $456 million. The company expects its loss for the quarter to be between 8% and 9% of sales.
"The adjusted operating loss reflects the impact of lower-than-expected merchandise margin resulting from more aggressive promotions in an effort to maximize sales, higher than anticipated split shipments to meet customer e-commerce demand, and increased inventory valuation adjustments," the company shared.
Children's Place will also end the year with 16%-20% less inventory than it had the year before. The company presents that as a positive, but you can argue that having less to sell is worse than having inventory that needs to be discounted.
The challenge is that without new cash being raised, Children's Place may struggle to get its vendors to ship orders.
Rapid Ratings has called the company a "high default risk" and has warned companies to mitigate their risk.
"A Core Health Score of 29 suggests low levels of efficiency and a performance which is not sustainable over the long-term. Within the Resilience Indicators we see significant weakness, and at this Core Health level these Resilience Indicators are critical in determining default risk. Companies with this combination of Core Health and Resilience have a troubling short and medium-term outlook that will require a lot of work," the website reported.
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