Children's Place Cuts Profit View; Shares Fall

Children's Place Retail Stores Tuesday slashed its third-quarter earnings forecast, saying price cuts hurt margins and sales at stores open at least a year fell 3 percent in September.

The children's clothing retailer, whose shares tumbled nearly 22 percent in pre-market trade, said same-store sales fell 2 percent at The Children's Place chain and 6 percent at the Disney Store.

In light of the weak September sales and margins, and an expectation that these trends will continue into October, the retailer said it now expects third-quarter earnings to be at least 60 percent below the low end of its prior forecast of 94 cents to $1.02 per share.

The new outlook includes a charge of 7 cents per share related to severance payments to former Chief Executive Ezra Dabah, who was fired last month after a probe found he violated its stock-trading policies.

"Clearly we are disappointed with current business trends and our outlook for the second half of the year," said interim Chief Executive Chuck Crovitz. He said inventory levels at both brands were higher than he'd like because weak sales led to substantial markdowns and much lower than expected margins.

"At this time, we believe these trends are likely to continue through the remainder of the year," Crovitz said.

The company also blamed unseasonably warm weather, particularly in the last 10 days of September, for its weak sales.

Total sales for the five weeks ended Oct. 6 rose nearly 4 percent to $217.8 million from $210.3 million a year earlier.

The company said it was taking steps to reduce inventory levels where possible, noting, however, that adjustments would likely take several quarters because of long lead times.

Assuming that current sales and margin trends continue into the fourth quarter, the company said earnings per share would be "significantly" below the low end of its prior forecasts of $1.79 to $1.86 for the fourth quarter and $2.25 to $2.40 for the full year.

However, given its recent CEO change and a "challenging macro-economic environment," Children's Place said it is not planning to give further guidance for the fourth quarter or full year.

But it did say its poor outlook is leading it to reverse amounts that had been accrued in 2006 and the first half of 2007 for its long-term management equity compensation program.

The reversal will result in a non-cash gain of about 25 cents per share, which the company expects to be retroactive to the first half of fiscal 2007.

The company also said it has established a committee to oversee the search for a permanent chief executive and that the committee has chosen search firm Herbert Mines Associates to conduct the search.

Children's Place shares were down 17 percent at $20.10 in trading before the opening bell on Tuesday, after falling as much as 21.9 percent. The shares closed at $24.32 on the Nasdaq on Monday.