After struggling for more than three years to turn around the Disney Store retail chain in the US and Canada, The Children's Place Retail Stores Inc has now decided to cut its losses and hand control of the shops back to the Walt Disney Co. The move is widely seen as a positive one for both companies, and comes amid a strategic review designed to return Children's Place to profit.

The negotiations currently underway propose to transfer ownership of 220 of the 335 stores in the Disney store chain back to Disney, with the 115 remaining stores likely to close.
 
The move is widely seen as a positive one for both companies.

Buckingham Research analyst John Zolidis said in a note to investors that US clothing retailer Children's Place had made a "bold decision" to exit the Disney Store business, but that it should result in "an overall boost in profitability for the company and improved returns for shareholders."

Likewise, The Walt Disney Co says it believes the Disney Stores can be an important extension of the "Disney" brand, and that a smaller more focused chain would be more economically viable.

The North American operations would be added to the existing Disney stores the company operates in Europe and licenses in Japan.

Ill-fated deal
The ill-fated license deal between the two companies has been dogged with problems since it was agreed in October 2004.

At the time the Disney Store chain, which sells apparel and toys based on Walt Disney's famous cartoon characters, was estimated to be losing $50m a year after over-expansion and problems with the product mix.

However, Secaucus, New Jersey-based Children's Place has been unable to turn the division around, with most recent results showing that fourth quarter sales fell 4% at Disney stores.

Just as worrying, the distraction provided by Disney meant Children's Place took its eye off its own 904 namesake stores, which have lately encountered problems amid increased competition and a weak retail environment.

Late last year, the company admitted all was not well and that it was to review its operations, including a reorganisation or sale, and look at strategic options for the Disney Store.

It decision to finally quit the chain was based on "a thorough review of the operation, its potential for earnings growth, its capital needs and its ability to fund such needs from its own resources," Children's Place said last week.

Quarterly losses
The Children's Place announcement came as the company reported a fourth quarter loss of $58.5m, or $2.01 a share, mainly due to costs of $80.3m relating to the imminent Disney deal. In the prior year quarter the company posted a profit of $44.7m, or $1.48 per share.
 
Sales rose 4% to $670.9m, with revenues from The Children's Place brand up 6% year-on-year but flat at Disney stores.

Same-store sales - a key indicator of retailer performance since it measures growth at existing stores rather than newly opened ones - rose 3% across all the company's stores, but fell 4% at Disney stores.

For the year, it swung to a loss of $59.6m, or $2.05 per share, versus a prior year profit of $87.4m, or $2.92 per share. Revenue rose 7% to $2.16bn.

The Disney Stores, operated by the Children's Place subsidiaries Hoop Holdings LLC and Hoop Holding Canada Inc, recorded an operating loss of $92.1m for the quarter and $107.3m for the year.

Hoop Holdings filed for Chapter 11 bankruptcy protection on 26 March, with a wind-down targeted for 30 April once its exit from the Disney Stores business is complete.

Refurbishment loggerheads
Whether the two companies could ever have operated in harmony must be open to question.

In recent years they have been at loggerheads over a store refurbishment plan agreed under their original licensing arrangement.

Last August Children's Place violated the deal by missing deadlines to remodel 234 Disney Stores into a new format, although it eventually committed to remodel 236 existing stores by 2011 and refresh a further 165.

Matters can't have been helped by Children's Place also falling foul of the Securities and Exchange Commission for failing to file up-to-date quarterly reports dating back to June 2006 - although this particular dispute was eventually resolved last December.

Where does this leave Children's Place?
As well as exiting the Disney Stores in North America, Children's Place says it plans to cut spending by more than half in fiscal 2008 and eliminate 130 jobs - including 80 in its shared-services workforce.

It also intends to reduce its inventory to more manageable levels after merchandise failed to "resonate with the consumer."

Chuck Crovitz, interim chief executive officer, said he is confident the moves will "drive profitable growth over the long-term." In particular, he sees mid-single-digit sales growth for the coming year, with 30 new store openings.

And perhaps with the distraction of the Disney Stores finally out of the way, management will finally be able to focus on building the Children's Place brand.

However, there still remains one thorn in the retailer's side: its former chief executive Ezra Dabah.

Dabah, who has a 17.9% stake in Children's Place, was axed last September amid allegations that he violated the company's code of conduct on securities trades. But he has hinted - most recently in February of this year - that he wants to make an offer to buy the retailer.

By Leonie Barrie.