Shares of The Children's Place, Inc. (PLCE) surged dramatically in November 2016, rising 37 percent during the month following a strong earnings report. The stock climbed again in March 2017, with another batch of results sending shares 23 percent higher to $121. This marked 51 percent appreciation over a 12-month period. This rapid ascent has been driven by improving fundamentals and rising valuation, which can complicate matters for shareholders and prospective buyers.

PLCE Revenue

Children's Place exceeded analyst expectations and management guidance in each quarter of fiscal 2016. After three straight years of revenue contraction, Children's Place reversed the trend and grew revenue 3.45 percent in fiscal 2016. The company is beating expectations on strong comparable-store sales, which grew 4.6 percent for the third quarter of fiscal 2016 and 6.9 percent for the fourth quarter. Top-line strength is impressive in a retail landscape dominated by Amazon.com, Inc. (AMZN​), which has changed consumer behaviors and put pressure on pricing and margins. (See also: 5 Stocks in Limelight on Explosive Relative Price Strength.)

PLCE Gross Margin

Children's Place delivered gross margin of 37.6 percent in fiscal 2016, the highest level since 2012. Operating margin climbed three full percentage points to 8.26 percent, which was its best result of the decade. This was aided by lower selling, general and administrative expenses, which more than offset a $4 billion asset impairment charge. Rising revenue and falling expenses propelled Children's Place earnings per share (EPS) to levels unseen in the preceding decade.

PLCE MarginsPLCE EPS

The company also displayed impressive efficiency metrics. Asset turnover reached its highest level since 2012 at 1.97, as did inventory turnover at 4.01. Financial health metrics do not raise any red flags. Children's Place had a current ratio of 1.86, which was a decade low but still suggests sufficiently high liquidity to assuage concerns. A quick ratio of 0.81 follows a similar trend, but that's a sound enough ratio for a business with high inventory turnover. Financial leverage was high relative to recent years, but this was also well within the responsibly manageable zone. (See also: Measuring Company Efficiency.)

PLCE Financial Health MetricsPLCE Inventory Turnover

Children's Place indicated a strong outlook by issuing EPS guidance at $6.50 to $6.65, well above previous analyst expectations. The company also announced that it would be doubling the dividend in 2017, moving the quarterly payout to $0.40 per share. Fundamental results and outlook for Childern's Place are almost universally positive. However, the company will be faced with the same headwinds and disruptions as every other retailer, so investors should be vigilant when monitoring valuation.

PLCE Historical PEPLCE EV/EBITDA History

Despite experiencing rapid appreciation, the stock's price-to-earnings ratio is roughly in the middle of its trailing-12-month range. However, it is approaching the high end of its trailing-five-year enterprise-value-to-EBITDA range. (See also: Key Financial Ratios for the Retail Industry.)

PLCE Valuation Table

The stock is consistently expensive relative to peers across a number of valuation metrics. Price-to-book of 4.3 is much higher than the peer average of 2.5. Forward price-to-earnings is reasonable at 16.5, but peers are materially lower at 12.1. Adjusting for five-year forward growth estimates, Children's Place has a PEG ratio of 2.1, which is high. A forward dividend yield of 1.6 percent lags peers, and its enterprise-value-to-EBITDA is a significant outlier. Shareholders are paying a premium for growth potential and strong margins. (See also: Analyzing Retail Stocks.)

PLCE Operations and Outlook Table

The Gordon Growth Model can be used to determine the long-term dividend growth rate implied by a market price of $121.50. Assuming analyst consensus estimates for the next two years are valid, five-year compounding growth of 8 percent and a stable 30 percent dividend yield, then the terminal dividend growth rate implied by the market price is just under 6.4 percent. This is an achievable figure, but it largely disregards the risk associated with ongoing retail market interruptions. (See also: What Are the Advantages and Disadvantages of the Gordon Growth Model?)

PLCE Gordon Growth Model

Children's Place has performed exceptionally well in a weak environment, with comprehensively positive financial results. The stock has become undeniably expensive as investors flood to positive results in a struggling industry. Bull and bear cases can easily be made, but investors should understand what they are implicitly predicting based on their buy or sell actions, and those decisions should reflect risk tolerance. (See also: 5 Strong Buy Earnings Growth Stocks to Boost Your Portfolio.)

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