Activist Lightweight Attacking Children\’s Place
I like being an activist myself, but a special kind. I like attacking financial activists who assume they understand the businesses they are attacking, yet build stories based on the only thing they do understand: numbers. These stories are all about creating greater shareholder value, but mask the real objective, which is to make tons of money for themselves. Sadly, 90% of them don’t know what the word strategy means and couldn’t operate their way out of a paper bag, much less lead the process. Most of them destroy more value than they create.
Which brings me to Jonathan Duskin, the current poster child activist lightweight, whose track record could only be described as “failing upward” as he became CEO of Macellum Advisors. Somehow he got Barington Capital Group to collaborate with him (I guess he needed their now questionable credibility) in sending an \”attack\” letter to Norman Matthews, revered industry veteran and Chairman of the Board of Children\’s Place (PLCE). The delusional letter, penned by Macellum and Barington, was sent from out of the blue (or black) the night before Children\’s Place’s 4th-quarter earnings call (March 12th), attacking the company’s operating and leadership performance under its CEO, Jane Elfers. The “delusional duo” of Macellum and Barington (the delusion revealed below), with a 2 percent share of Children\’s Place, had not uttered a peep of discontent during any of the four previous investor calls throughout 2014 — or even two months prior to the attack letter. Perhaps Duskin was trumping up the delusion in a dark room somewhere before luring Barington into the deal? Who knows?
The letter, in typical “financialeze,” was described in a PR Newswire: “Barington and Macellum are confident that there are multiple ways to improve shareholder value including improvements in the Company\’s sales and margins, inventory management and capital allocation. Barington and Macellum further believe that there are likely a number of strategic and financial buyers who would be interested in acquiring The Children\’s Place at a significant premium to its current trading valuation in order to capitalize on the Company\’s leading position in the children\’s apparel market, its stable operating flow, and substantial opportunities for working capital and operating improvements.” Yada, yada, yada!
The letter was then followed by a discussion between Norman Matthews and the duo regarding the composition of the board. There are three board members who are up for re-election on May 22: Chairman Norman Matthews, who, according to one major operating CEO (and four or five others) I spoke to, cited him as a 10 on a scale of one to five. The other two are Kenneth Reiss (Chair of the Audit Committee) and Stanley Reynolds (member of the Audit Committee).
The duo pushed for representation on the board (read: replace three of yours with three of ours — with the implication: we’ll then dump Elfers). Matthews rejected their request on April 9th, and the next day the duo fired a letter to Children\’s Place nominating their three new board members — Janet Grove (who later deferred), Seth Johnson and Robert Mettler.
So it appears that either Seth Johnson (who, in my opinion, drove Pacific Sunwear into the ground during his tenure as CEO, from 2005 to 2006, with shares declining 45%, but then jumping up 7% upon his abrupt resignation –helloooo!!), or Robert Mettler (no creds on running specialty retailing, international experience, children’s apparel, or omnichannel) could replace Norman Matthews as the new CP Chairman. With Matthews’ impeccable track record in retailing, this is laughable.
The Back Story
And while I’m talking about credentials, let’s briefly revisit Duskin’s track record, the delusional duo’s point man who seems to be leading the charge. As a board member of the now bankrupt Wet Seal, he was ousted in 2012 with 63% of the outstanding shares voting against him. He was also on the boards of KB Toys, Whitehall Jewelers and PLVTZ, (holding company of Levitz Furniture) when they went belly up. That last one certainly wouldn’t instill a lot of confidence in me regarding his ability to guide companies for growth. And my off-the-record sources tell me that his performance while at SAC Capital Advisors and Lehman Brothers wasn’t so hot either.
Following Matthews’ rejection and the duo’s nomination letter, Matthews issued the following statement: “Our board and management team have made great progress in transforming The Children’s Place over the last five years, which has allowed us to maintain the number-one market share in children’s specialty apparel and position the Company for the future while also re-purchasing $481 million of The Children’s Place common stock and initiating our first ever dividend. We believe our current, highly qualified Board of Directors has the right mix of expertise, experience and independence, and we urge our shareholders to re-elect our nominees so we can continue this strong progress.”
A Short History of CEO Jane Elfers
Now let me give you the macro picture of Jane Elfers’ entry as CEO in 2010, and a snapshot of her performance (details below) leading up to the duo’s nastily timed attack. To cut to the chase, Elfers inherited a mess. Supply chain technology, systems and processes, including planning, allocation and replenishment were of the last century, as well as global sourcing, logistics and distribution. On top of this, the omnichannel progress was in its embryonic stage at best.
Outside the company’s four walls, the bumbling economy continued on. The Internet was beginning to have its effect on time-starved mothers who found the convenience and speed of shopping online for their kids’ clothes. Birth rates would decline by 7% between 2010 and 2013, while stores carrying children’s apparel increased by 14%.
Hey, I’m not feeling sorry for Elfers. There are a few other great CEOs (the operative word being few) who have turned big messes around. This is just the context for why she developed a five-year strategic turnaround plan. Keep that word strategic in mind. Because strategy is something that obviously the duo short-term thinkers simply do not understand.
Even with this immensely challenging backdrop, Elfers managed to increase the stock price by 110% over the last five years (currently trading near an eight-year high), and delivered a total shareholder return of 117%, outperforming the S&P 500 of 113% and specialty retail peers of 83% — Gymboree, Justice and OshKosh (Carter’s is not among Children\’s Place’s competitors – as they are mainly wholesalers, primarily serving the baby market). She has also maintained their position as the largest pure play children’s specialty apparel retailer in North America, with the #1 ranking of share and brand awareness.
With 1097 stores in North America doing close to $2 billion in revenues, Elfers launched an international franchise business in 2012 with two partners and 12 stores, which has grown to five partners and 72 stores in 2014. She also launched a wholesale business in 2012 with one account and ended 2014 with eight accounts. And Elfers has stepped up omnichannel efforts, resulting in e-commerce growing from 7% of total sales in 2009 to 16% of total sales in 2014 (she obviously gets the convenience-for-mom thing).
In the operational end of the business, Elfers is well into elevating the systems and processes utilizing leading edge technologies. In 2014 she launched an ERP (enterprise resource planning) system, built a global sourcing portal, upgraded the U.S. and Canadian websites, launched state of the art assortment planning tools that will gain greatest delivery impact during the 2015 back to school selling season. She is currently implementing state of the art inventory allocation and replenishment tools.
The Delusional Duo’s Attacking Points and CP’s Facts
Let’s take a step back and look at the points of contention. Here are the main targets of the delusionary incoming missiles compared to the actual Children’s Place rebuttals:
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The Delusion Is Over Jon … Boohoo for You and Adios!
For those of you who understand the word strategy (long-term), you might remember in the early 2000s when Allen Questrom informed Wall Street not to expect any great top or bottom line growth during his five-year plan to turn around JC Penney. This gives greater context for Jane Elfer’s five-year turnaround plan. More importantly, this explains why the major operational systems she initiated are now just beginning to yield profitable growth, much of it in the last half of 2015.
As of this writing (5/6/15 at 8:00 AM), Children’s Place released a pre-announcement of Q1 2015 financial results. Q1 adjusted earnings per share are expected to be $0.81 to $0.83 vs. their guidance range of $0.60 to $0.65, exceeding last year’s adjusted EPS by 21%. Yes, Jon, that\’s 21%. It also compares to adjusted EPS of $0.68 in the first quarter of 2014. Sounds like Elfers five-year plan is starting to take off.
How does that work for you, Jon?
But I’m not through yet. The Spring ‘15 line was clearly on trend, driving positive comp store sales of 0.7% (the 4th consecutive quarter of positive comp store sales) and a robust gross margin. They expect total sales of about $405 million in the quarter and adjusted gross margin to increase by 130 to 150 basis points compared to last year, plus up significantly from their guidance of down 20 to up 10 basis points. They expect SG&A expense to be flat, delivering 20 to 40 basis points compared to last year, which would result in an expected increase in adjusted operating margin of approximately 100 to 110 basis points compared to last year.
This is called momentum, coming off of Elfers solid turnaround plan. Their inventories are in excellent shape, down about 7% from last year’s first quarter. They managed through the West Coast ports debacle without any additional costs and achieved 100% on-time delivery of merchandise.
And during all this time, capital and effort put into implementing their assortment planning tool is paying off as well. Reduced costs and greater efficiencies, as well as a more responsive supply chain and improved inventory management, boosted their margin in the quarter. Their inventory allocation and replenishment tool are on track to go live for the upcoming back-to-school season. Also, their digital initiatives are gaining traction and improving customer acquisition, retention and engagement.
The capital return program update was stellar, returning about $43 million to shareholders through repurchase of 647,700 shares and its quarterly dividend payment.
Jon, I sense you may be covering your eyes by about now, not wanting to read any more of this.
Okay, I’ll end the pain with one final very upbeat quote from Ms. Elfers herself:
“We continue to make the necessary investments in technology with the goal of accelerating our channel expansion through our international, wholesale and ecommerce channels. We believe that as we further develop our relationships with our international and wholesale partners and realize these technology enhancements, we will accelerate growth in these channels. In addition, our fleet optimization efforts remain on track.”
She concluded, “Our ongoing business transformation is generating strong momentum across the board, and we expect to continue to drive substantial, sustainable improvements in 2015 and over the long term.”
A Final Note to Shareholders
Children’s Place has been transformed into the 21st century under the great leadership and strategic acumen of its current CEO, the board, the executive team and all of its thousands of employees. I think it’s pretty well documented in this article.
So don’t be deluded by the “delusionary duo” on May 22.