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Children's Place Pummeled

TSC Staff

Shares of Children's Place (PLCE Quote) were tumbling early Thursday after the kids' clothing retailer cut its profit outlook and warned of troubles with its licensing pact with Disney(DIS Quote).

For the second quarter ended Aug. 4, Children's Place recorded a loss of $27.1 million. The company didn't give per-share results, saying that because its results are preliminary and yet to be filed with the Securities and Exchange Commission, it won't provide the full figures.

Sales rose 7% to $424.3 million. Same-store sales, or sales at stores open at least a year, slipped 1%.

Children's Place had warned during the quarter that it had to take more markdowns than expected, weighing on margins, amid merchandise missteps and declining mall traffic. The company had projected a loss of 94 cents to 98 cents a share for the period.

For the year, Children's Place forecast earnings of $2.25 to $2.40 a share, well below its May projection of $3.45 to $3.55. Analysts surveyed by Thomson Financial had an average estimate for earnings of $2.83 a share.

"We remain cautiously optimistic regarding the second half and are pleased with month-to-date sales trends," said CEO Ezra Dabah in a press release. "However, in view of the sales and margin trends we have experienced through the first half, we believe it's best to take a conservative view for the remainder of the year.''

The company also said it has been unable to meet certain deadlines required under its licensing agreement with Disney, potentially allowing Disney to terminate the pact. It also puts the company in default of its credit agreement for the Disney Store chain.

Children's Place operates the Disney Store chain under a licensing agreement with the entertainment behemoth. In June the two parties agreed to a modified contract that requires Children's Place to remodel 234 stores, among other items.

Children's Place said Thursday that it has been unable to meet several of the deadlines set forth in the June agreement, and it expects it will likely miss deadlines in the third and fourth quarters.

In every instance except for the most recent one, Disney has said the missed deadlines don't constitute a breach of the agreement. But unless an amendment to the agreement is signed, the company will be in breach of the pact.

The parties have been talking about changing the requirements of the agreement that would postpone the remodel obligations and change Disney's ability to grant direct licenses. If the two sides don't reach a deal, then Disney has the right to exercise certain options under the agreement, including terminating the agreement.

Children's Place also said it doesn't expect to file its already-delayed SEC filings until the Disney matter is resolved. In addition, the company said an ongoing review into its internal controls has found violations of company procedures by two executives.

Shares of Children's Place were down $5.72, or 17%, to $27.30 in recent trading.