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Tickers in this Article: PLCE, WMT, TGT, M, JCP, DIS
Specialty clothing store Children's Place (Nasdaq:PLCE) is having a pretty tough go these days. Retailers of all shapes and sizes are cashing in on the demand for children's clothes and this is cutting into the company's core business.

Go to virtually any store, from Macy's (NYSE:M) or JC Penney (NYSE:JCP) to discounters such as Wal-Mart (NYSE:WMT) and Target (NYSE:TGT) and you'll see racks and racks of children's clothes - often at marked down prices. It's a well-served market with deep-pocketed players, and Children's Place is having a tough time competing.

Next, on Children's Place's list of woes comes its licensing agreement with Disney (NYSE:DIS). The deal allows Children's Place to operate Disney stores for the big mouse. I like this deal; however, in the recent past the company has had trouble meeting deadlines to remodel some of the stores, and investors seem to be wondering whether Disney might seriously modify the agreement or even cancel it as a result.

Children's Place is said to be in talks with Disney to amend the agreement, and to give it more time to remodel, but there's no guarantee an agreement will be reached. This could be a problem, given that roughly 30% of its latest quarter's sales came from Disney.

D.E. Shaw Relationship Going Sour
Another somewhat worrying sign: a group of funds managed by investment firm D.E. Shaw & Co recently reduced their stake in the company from about 9.7% to about 4.1%. In the past, D.E. Shaw indicated it might actually acquire the company and/or take it private. The fact that D.E. Shaw is now bailing indicates to me that such a transaction probably isn't in the cards. Frankly, I'm worried that perhaps it knows something that we don't!

Of course, from an earnings standpoint, things aren't hot either. In conjunction with its second quarter results the company lowered its full year earnings estimates. It now expects to earn between 94 cents and $1.02 per share in the third quarter, and to earn between $1.79 and $1.86 per share in Q4. For the full year, it expects total EPS to come in between $2.25 and $2.40 per share. Analysts had previously expected the company to earn $1.31 in Q3, $1.98 in Q4, and $2.82 for the year. (For more insight, see How To Evaluate The Quality Of EPS.)

The reported reasons for the lower guidance? Weak mall traffic, a somewhat sluggish response to the company's summer line (particularly in girl's fashions) and lackluster same store sales.

On The Plus Side
When mall traffic and department stores start to rebound, I expect foot traffic at Children's Place should rebound, too. The company does have a good name, and its clothes are well made. Another potential positive is that, if the company is able to work out a deal with Disney to remodel those stores, the stock could pop up.

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