Morgan Stanley On Children's Place: 'The Kids Are Just Fine'

Morgan Stanley maintains its Overweight rating on Childrens Place Inc PLCE after the company reported better-than-expected results for the first quarter.

The company's $1.32 first quarter EPS grew 59 percent year-over-year and "handily beat the Street's $1.04 estimate as well as the market's likely lower view." The retailer delivered a 5.1 percent comp with 170 bps of gross margin improvement.

"We also believe the strong, high-quality 1Q beat shows PLCE's self-help story is fully intact. This, in our view, causes the P/E to recover some of the 3 turns it lost over the last month and the stock's 8.8 percent free cash flow yield to head lower," analyst Jay Sole wrote.

Related Link: Children's Place Pops 9% On Q1 Results And Upbeat Forecast

The company also raised FY16 EPS guidance to $4.17–$4.27 from $4.00–$4.10 (the Street: $4.09), and the analyst said the outlook is conservative. The company maintained its positive low-single-digit comp guide.

"PLCE is lapping a very easy-3.5 percent comp in 2Q. Assuming PLCE was comping 1 percent on a two-year basis exiting 1Q, this implies it can achieve a 4.5 percent 2Q comp even if the environment remains weak," Sole highlighted.

Meanwhile, Children's Place's second-quarter guide calls for only a 1–2 percent comp increase.

Sole noted that the bottom line would benefit from gross margin improvements and growth in international and wholesale businesses.

"[W]e think there is more 2Q gross margin upside than the Street is forecasting and guidance implies. The Street is modeling roughly 100 bps of GM expansion, but if the two-year trend holds, PLCE could deliver 285bps. PLCE's FY16 gross margin guidance as of last quarter was a +80–90bps change," Sole added.

Children's Place closed Tuesday's normal trading session up 4.13 percent at $71.05; shortly after the closing bell, the stock was up by a few cents in after-hours trading.