Children's Place Taking Over Disney Stores

Updated from 9:43 a.m.

Children's Place (PLCE - Cramer's Take - Stockpickr) jumped after agreeing to take the Disney Store chain off Disney's (DIS - Cramer's Take - Stockpickr) hands.

The Secaucus, N.J., kids' clothing retailer will buy Disney's retail arm in North America and operate 313 stores under a long-term, exclusive licensing arrangement with Disney.

Children's Place, which is acquiring the assets in return for an unspecified "working capital adjustment payment" to Disney, says it will invest up to $100 million in the remodeling and operations of the Disney Store North America chain.

On Wednesday morning, Children's Place shares jumped $1.99 to $26.95, and and Disney fell 12 cents to $24.77.

The deal, which comes more than four months after the companies originally acknowledged they were in negotiations, appears to fulfill both Children's Place's desire for growth opportunities and Disney's long-stated desire to exit the retailing business and target its consumer products efforts elsewhere.

"By combining the Disney brand with our retail expertise, we believe we can increase sales, produce significant margin expansion and leverage operating expenses -- resulting in increased earnings power for our shareholders," Children's Place CEO Ezra Dabah said in a statement. "Assuming a November closing, we anticipate that the transaction will be accretive to earnings in fiscal 2004 and on an annualized basis in fiscal 2005."

Dabah noted that both Disney Store and Children's place are mall-based, vertically integrated specialty retailers, and they share a "comparable customer demographic."

The sale, said Disney Consumer Products Chairman Andy Mooney in a statement, is a step in the ongoing process of refocusing resources and expertise toward developing and building what Disney calls "character franchises." These character franchises range from stalwarts such as Mickey Mouse to Disney Princess, a line of products targeted at girls and based on such animated heroines as Belle from Beauty and the Beast, Ariel from The Little Mermaid and the title character in Pocahontas.

As part of that refocusing, Disney has embarked on a program of developing direct distribution agreements with major retailers including Wal-Mart (WMT - Cramer's Take - Stockpickr) and Target (TGT - Cramer's Take - Stockpickr).

Disney has also launched a new line of consumer electronics and appliances, ranging from a child-targeted personal computer to a popcorn popper.

On Thursday, Merrill Lynch analyst Jessica Reif Cohen raised her revenue estimate for Disney's consumer products division to $605 million for the quarter ended Sept. 30, representing 8% growth instead of the 5% growth she had previously forecast. Operating income, she forecasts, will grow 27% to $130 million. Disney is expected to report results for the September quarter, its fiscal fourth quarter, on Nov. 18.

Retail sales generated by the Princess line should grow 25% in fiscal 2005, forecast Cohen, off an estimated $2 billion in retail sales this past fiscal year.

The trend toward direct distribution to major retailers "enhances margins by streamlining distribution, enhances the retail displays and dovetails well with the company's exit from the traditional retail store busienss," writes Cohen. The analyst has a neutral rating on Disney; her firm has done recent investment banking business for the company.