Why Children's Place Stock Was Falling Today

What happened

Shares of Children's Place (NASDAQ: PLCE) were sinking today after the children's apparel retailer turned in a strong third-quarter earnings report, but surprisingly cut its full-year earnings outlook, as the company focuses on market-share gains in the fourth quarter. As a result, the stock was down 15.7% today as of 1:05 p.m. EST.

So what

Children's place said comparable sales in the back-to-the-school quarter jumped 9.5%, driving overall revenue growth of 6.6% to $522.5 million, which beat estimates at $511.2 million. Revenue in the quarter was slower than comparable sales due to a handful of store closures, a shift in the calendar, and a change in the revenue recognition standard.

The company's e-commerce initiatives continued to pay off as digital sales jumped 38% in the quarter, making up 29% of total revenue, and adjusted earnings per share (EPS) jumped from $2.58 to $3.07, matching expectations.

CEO Jane Elfers summed up the performance, saying, "Our strategy to take market share continues to produce meaningful results; we delivered positive traffic in our brick-and-mortar stores and generated positive comps every month in the quarter. Importantly, our customer file increased 5% in Q3, which provides us with increased visibility into future sales."

Now what

Despite the strong report, management cut its earnings guidance for the full year as it now sees adjusted EPS of $7.69 to $7.79, down from a previous range of $8.09 to $8.29. The company did raise its revenue guidance slightly from $1.945 billion-$1.955 billion to $1.955 billion-$1.96 billion, and maintained expectations of mid-single-digit comparable sales growth.

For the fourth quarter, the retailers sees low-single-digit comparable sales growth, revenue of $547 million to $552 million, and adjusted earnings per share of $2.07 to $2.17, down from $2.52 a year ago.

While the slowdown in earnings growth seems like a warning sign, CEO Elfers explained on the earnings call that the company plans to compete aggressively for market share as rival Gymboree closes hundreds of stores, meaning liquidation sales are likely to follow. In fact, Elfers underscored opportunities to take market share from several rivals, including Sears, Kmart, and Bon-Ton Stores, which should pay off over the long run.

Children's Place is executing its strategy effectively, and it looks like a mistake to punish the company for pursuing market share during a key industry shift. The market's shortsightedness offers a buying opportunity as earnings growth should bounce back next year.

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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.