Children’s Place Retail Stores Inc. is ready to let the Walt Disney Co. take back control of about two-thirds of the 335 stores in the Disney Store chain.
About 115 remaining stores were expected to close. Disney handed ownership of the chain to Children’s Place in November 2004 with an agreement that Children’s Place would pay royalties after two years.
Stock in both companies rose following the announcement Thursday from Secaucus-based Children’s Place, which currently owns and operates 335 Disney Stores, in addition to 904 Children’s Place stores.
Children’s Place said it is in an “advanced phase of discussions” with Disney on how Disney would regain ownership and control of the stores. Children’s Place intends to disclose plans for exiting the stores “in the very near term,” it said.
The decision to quit came after “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.
Disney confirmed the talks, and said the Disney Stores “can be an important extension of the ‘Disney’ brand.”
In an interview, Gary Foster, senior vice president of Disney Consumer Products, said the talks centered on about two-thirds of the Disney Store chain in the U.S. and Canada.
“We believe that a smaller, more focused chain would be more economically sustainable and still cover the major markets that we would like to have Disney-branded outpost in,” he said.
If the talks succeed, the North American Disney Store operations would be added to the 120 Disney Stores that Disney owns and operates in Europe, and 40 that it licenses in Japan.
Analyst Jeffrey Logsdon with BMO Capital Markets said Children’s Place would be able to exit a capital-intensive business, while Disney could better leverage its larger number of brands on a smaller store base.
“It probably just never worked out as well as Children’s Place thought it could,” he said. “Disney gets something back, that they’re in a better position to leverage and they get less of them. It comes down now to product and execution.”
Conflict over a refurbishment plan put the companies at odds in recent years.
Last June, Children’s Place said it agreed to a new refurbishment schedule in response to Disney’s assertions that it had breached its licensing agreement. It committed $175 million to remodel 234 Disney stores by 2011 and redo 165 stores by this June.
Foster said by taking over the stores, Disney could better manage its growing portfolio of franchises, which now include High School Musical, Hannah Montana, and Pirates of the Caribbean.
“The company has done a phenomenal job of creating new franchises and has broadened our appeal to include boys and older kids,” Foster said.
“It’s much easier to launch franchises in Europe from a retail perspective if you have complete control, over the timing of the entertainment content, timing of the merchandise launches, and a retail outlet where you can really focus on those,” Foster said.
The Children’s Place announcement came as the company reported it swung to a loss in its fourth quarter mainly because of costs related to the pending Disney deal.
Sales at the company’s Children’s Place stores rose in the quarter, but revenue from the Disney Stores fell slightly.
The Disney Stores recorded an operating loss of $92.1 million for the quarter, and $107.3 million for the year.
Overall, for the three months ending Feb. 2, the company reported a loss of $58.5 million, or $2.01 a share, from a profit of $44.7 million, or $1.48, in the prior-year quarter.
Excluding asset impairment charges and other costs related to exiting the Disney business and costs associated with the decision to stop construction of a new headquarters building, the company earned $20.5 million, or about 70 cents per share.
Analysts polled by Thomson Financial expected earnings of 89 cents per share.
Fourth-quarter revenue rose 4 percent to $670.9 million, below analysts’ predictions of $675.2 million.
Quarterly same-store sales, or sales at stores open at least a year, rose 3 percent across all the company’s stores. Disney store same-store sales, though, fell 4 percent. Same-store sales is a key indicator of retailer performance since it measures growth at existing stores rather than new stores.
For the year, the company swung to a loss of $59.6 million, or $2.05 per share, versus a profit of $87.4 million, or $2.92, in the prior year. Revenue climbed 7 percent to $2.16 billion.
