Tuesday, B.Riley downgraded The Children's Place (NASDAQ:PLCE) shares from Neutral to Sell, significantly reducing the price target to $4 from the previous $19. The decision comes amid concerns over the company's financial health and the potential for unfavorable outcomes for equity holders.
The downgrade reflects the firm's analysis of The Children's Place's current financial situation, which includes a run-rate EBITDA of approximately negative $3.5 million and net debt around $265 million. The retailer also faces limited availability on its credit line and an estimated seasonal funding need of $50 million to $75 million. These challenges have been exacerbated by the company's recent financial decisions made to maintain its credit agreement, which are not typically seen as beneficial for shareholders.
B.Riley's revised valuation assumes The Children's Place will generate $77 million in EBITDA for the fiscal year 2024 and will be able to raise $50 million in senior equity capital, leading to a 50% dilution of current equity. Based on these projections and a valuation of 4 times the estimated FY24 EBITDA, the firm estimates a share price of around $4 in the next 12 months and $11.31 in the following 24 months, based on an EBITDA estimate of $113 million for FY25.
The analysis suggests that there is a significant risk that The Children's Place may not be able to raise capital on the terms projected, with a 50% chance of this outcome, and a 33% chance that the company will not achieve the $77 million EBITDA target for FY24. While there is a possibility of a favorable deal with Amazon (NASDAQ:AMZN) that could boost share prices to $19 in 2024 and $39 in 2025, the firm assigns less than a 10% probability to such an event. Given these factors, B.Riley sees a high probability of the share price reaching $4 or less in the next year and does not view the potential for upside as sufficient to outweigh the speculative nature of investing in the company at this time.
InvestingPro Insights
As The Children's Place (NASDAQ:PLCE) navigates its current financial challenges, insights from InvestingPro provide a deeper look into the company's recent performance and stock activity. With a PRONEWS24 coupon code, readers can access additional InvestingPro Tips that may further inform investment decisions.
InvestingPro Data reveals a market capitalization of $204.5 million, reflecting the market's current valuation of the company. The negative P/E ratio of -2.69, adjusted to -3.38 for the last twelve months as of Q3 2024, indicates that the company is not currently profitable. Moreover, the revenue has declined by 8.89% over the last twelve months as of Q3 2024, which could be a contributing factor to the concerns raised by B.Riley. The stock price has also experienced significant volatility, with a 1-week total return of -17.64% and a 1-year total return of -63.53%, underscoring the stock's instability and uncertain future.
Among the InvestingPro Tips, the fact that management has been aggressively buying back shares could signal confidence in the company's future, despite the current financial strain. However, this is contrasted by the concern that the company may have trouble making interest payments on its debt, an issue that is particularly relevant given the high net debt and negative EBITDA figures highlighted in the downgrade report. For investors looking for more comprehensive analysis, there are 18 additional InvestingPro Tips available that provide further context on the company's financial health and stock performance.
These data points and insights serve to underscore the precarious position of The Children's Place in the market, as well as the potential risks and opportunities for investors considering this stock. Access to InvestingPro's full suite of tools and analysis, including more detailed tips, can be obtained with the promo code PRONEWS24, offering an additional 10% off a yearly or biyearly Pro and Pro+ subscription.
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