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Destination Maternity Reports Third Quarter And First Nine Months Fiscal 2016 Results

- Third quarter GAAP net loss of $1.5 million compared to net loss of $1.3 million for the third quarter of fiscal 2015

- Third quarter operating loss improved to $1.5 million compared to operating loss of $1.7 million for the third quarter of fiscal 2015

- 240 basis point gross margin improvement in third quarter

Dec 8, 2016

MOORESTOWN, N.J., Dec. 8, 2016 /PRNewswire/ -- Destination Maternity Corporation (NASDAQ: DEST), the world's leading maternity apparel retailer, today announced financial results for the third quarter and first nine months of fiscal 2016 ended October 29, 2016 compared to the third quarter and first nine months of fiscal 2015 ended October 31, 2015.

Third Quarter Fiscal 2016 Selected Financial Results (13 weeks ended October 29, 2016)

  • Comparable sales decreased 5.2%, compared to a 3.6% decline for the third quarter of fiscal 2015;
  • Gross margin improved 240 basis points to 52.9%, up from 50.5% in the prior year quarter;
  • SG&A declined $5.9 million to $54.6 million, a decrease of 9.7% from the third quarter of fiscal 2015;
  • Operating loss improved 13.5% to $1.5 million compared to operating loss of $1.7 million for the third quarter of fiscal 2015;
  • GAAP net loss was $1.5 million, or $0.11 per diluted share, compared to net loss of $1.3 million, or $0.09 per diluted share, for the third quarter of fiscal 2015;
  • Adjusted net loss was $1.2 million, or $0.09 per diluted share, compared to adjusted net loss of $0.6 million, or $0.05 per diluted share for the third quarter of fiscal 2015;
  • Adjusted EBITDA before other charges was $4.7 million compared to $5.1 million in the prior year quarter.

Anthony M. Romano, Chief Executive Officer & President stated, "While we continue to make progress on many of our initiatives, the third quarter was challenging as both our sales and earnings did not meet our expectations. Our third quarter results do reflect continued improvement in gross profit margin and reduction in SG&A driven by the ongoing traction of our strategic initiatives. Overall, sales and adjusted EBITDA trailed the year ago period reflecting reductions in leased department and licensed brand sales and were adversely impacted by sales disruption from both the Hanjin shipping bankruptcy and Hurricane Matthew. Our efforts over the past two years have provided significant improvement in our culture, in our focus on the customer, and in our overall retail disciplines, with improved tools and enhanced visibility.  This, in turn, has led to improved product assortment, elevated visual imagery both in stores and online, more disciplined inventory management, faster lead times and better product flow. While these improvements are not entirely visible in our latest quarter results, year-to-date earnings are improved and I remain confident that we are working on the right areas and are focused on the right strategic growth and efficiency initiatives to place us on the right path to deliver sustained long-term success."

Third Quarter Fiscal 2016 Financial Results 

  • Net sales were $102.6 million compared with $119.5 million for the comparable prior year quarter. The decrease was primarily driven by closure of Sears and Gordmans leased department locations, as well as reductions in Kohl's sales given the planned exit in 2017, and by a decline in comparable sales.
  • Comparable sales decreased 5.2%, compared to a 3.6% decline for the third quarter of fiscal 2015.
  • Gross margin for the third quarter of fiscal 2016 was 52.9%, up 240 basis points over the comparable prior year quarter gross margin of 50.5%.
  • Selling, general and administrative expenses ("SG&A") for the third quarter of fiscal 2016 decreased 9.7% to $54.6 million, compared to $60.4 million for the third quarter of fiscal 2015. As a percentage of net sales, SG&A deleveraged to 53.2% for the third quarter of fiscal 2016 compared to 50.6% for the third quarter of fiscal 2015.    
  • The Company incurred store closing, asset impairment and asset disposal expense of $0.7 million for the third quarter of fiscal 2016, compared to $0.6 million for the third quarter of fiscal 2015.
  • Other charges during the third quarter of fiscal 2016 were $0.5 million, primarily related to charges incurred in connection with discussions regarding a proposed business combination with the Company's largest shareholder, Orchestra-Premaman S.A., compared to $1.1 million in the third quarter of fiscal 2015, primarily for management and organizational changes and the Company's facilities relocations.  
  • Adjusted EBITDA before other charges was $4.7 million for the third quarter of fiscal 2016, compared to $5.1 million for the third quarter of fiscal 2015. Adjusted EBITDA before other charges is defined in the financial tables at the end of this press release.
  • GAAP net loss was $1.5 million, or $0.11 per diluted share, compared to net loss of $1.3 million, or $0.09 per diluted share, for the third quarter of fiscal 2015.   
  • Adjusted net loss was $1.2 million, or $0.09 per diluted share, compared to adjusted net loss of $0.6 million, or $0.05 per diluted share, for the third quarter of fiscal 2015.  For a reconciliation of GAAP to non-GAAP financial information refer to the financial tables at the end of this press release.

First Nine Months of Fiscal 2016 Financial Results (39 weeks ended October 29, 2016)

  • Net sales were $333.5 million compared with $380.5 million for the nine months ended October 31, 2015.  The decrease in sales was primarily driven by closure of 575 Sears and Gordmans leased departments, a reduction in licensed brand sales and by a decline in comparable sales.
  • Comparable sales decreased 4.5%, which follows a decrease of 1.0% for the nine months ended October 31, 2015.
  • Gross margin increased 370 basis points to 52.9% compared to 49.2% for the nine months ended October 31, 2015. The year-over-year increase in gross margin is driven by the Company's tightened inventory management and a shift in business mix to higher margin sales.
  • SG&A for the first nine months of fiscal 2016 declined $16.2 million to $170.0 million, or 51.0% of net sales, compared to $186.1 million, or 48.9% of net sales.
  • Store closing, asset impairment and asset disposal expense was $1.8 million, compared to income of $2.3 million for the nine months ended October 31, 2015, which included a one-time pretax cash benefit of $4.1 million from the termination of a store lease.
  • Other charges during the first nine months of fiscal 2016 were $2.0 million, primarily related to charges for the proposed business combination, as well as management and organizational changes, compared to $4.5 million in the first nine months of fiscal 2015, primarily for management and organizational changes and the Company's facilities relocations.
  • Adjusted EBITDA before other charges was $21.2 million for the first nine months of fiscal 2016 compared to $19.6 million for the first nine months of fiscal 2015.
  • GAAP net income was $26 thousand, or $0.00 per diluted share, compared to net loss of $1.4 million, or $0.10 per diluted share, for the nine months ended October 31, 2015.
  • Adjusted net income was $1.3 million, or $0.09 per diluted share, compared to adjusted net income of $1.4 million, or $0.10 per diluted share, for the nine months ended October 31, 2015.

Other Third Quarter Fiscal 2016 Financial Information

  • Capital expenditures totaled $9.6 million primarily driven by investments in stores and investments to support key systems projects.  Third quarter fiscal 2015 capital expenditures of $23.9 million were primarily driven by expenditures for new stores and the relocations of the Company's headquarters and distribution facilities.  
     
     
  • At October 29, 2016, inventory was $73.5 million, a decrease of $6.5 million compared to $80.0 million at October 31, 2015.  Overall unit inventory at the end of the third quarter was down 9% on a year-over-year basis.    

Real Estate and Partnerships

As previously announced, the Company's leased department relationship with Gordmans ended in the first quarter 2016, and the Company discontinued its Two Hearts® Maternity by Destination Maternity® line, ending its relationship with Sears® in June 2016. Additionally, the Company began to phase out production of its Oh Baby by Motherhood® line during fiscal 2016 after being informed that Kohl's® has elected to scale back, and ultimately discontinue, its exclusive license with the Company for this line in early fiscal 2017. These actions will allow the Company to direct resources to the highest return opportunities and further optimize its footprint while reducing costs. 

Capital Allocation

The Company remains focused on implementing key systems projects to have the tools needed to drive sustained profitable growth. To this end, in fiscal 2016 the Company has completed the implementation of a new best-in-class product allocation tool and is in the process of re-platforming its e-commerce sites with a best-in-class enterprise cloud commerce solution.

Proposed Business Combination 

The Company's largest shareholder, Orchestra-Premaman S.A., has expressed an interest in a transaction with the Company. Company management confirmed that discussions are ongoing.  However, there can be no assurances that there will be a transaction.

Guidance for Fiscal 2016

The Company updated its financial guidance for fiscal 2016 as follows:


  • Comparable retail sales to be down in the mid-single digit range for the full year;

     
  • Gross margin to increase approximately 280 to 320 basis points year-over-year, as inventory productivity initiatives continue to generate more profitable sales;

     
  • Selling, general & administrative expenses will continue to decline, but will deleverage as a percent of sales on a full-year basis;

     
  • Capital expenditures are projected to be in the $14 million to $16 million range, a reduction of $13 million to $15 million compared to last year. Excluding the prior year capital expenditures related to the relocation of our corporate headquarters and distribution center, current year projected capital expenditures are $4 million to $6 million below last year. Current year spend is primarily the result of modest store investments, as we optimize our real estate portfolio, as well as investments in systems. The  investments in systems mostly relate to our new inventory management approach as well as our web re-platform, and represent a measured and revenue-focused approach to capital expenditures that we will continue as we move forward;

     
  • The Company plans to open 10 new stores and close 32 stores during the fiscal year.

Retail Locations

The table below summarizes store opening and closing activity for the three and nine months ended October 29, 2016 and October 31, 2015, as well as the Company's total store, leased department and retail location count at the end of each fiscal period.


Three Months Ended


Nine Months Ended


October 29,


October 31,


October 29,


October 31,


2016


2015


2016


2015









Store Openings (1)

3



10



9



16














Store Closings (1)

3



8



19



26














Period End Retail Location Count (1)












Stores

526



554



526



554


Leased Department Locations

703



1,310



703



1,310


Total Retail Locations

1,229



1,864



1,229



1,864















 

1)

Excludes international franchised locations.  As of October 29, 2016 Destination Maternity has 239 international franchised locations, including 21 standalone stores operated under one of the Company's nameplates and 218 shop-in-shop locations.

 

Conference Call Information

As announced previously, the Company will hold a conference call today at 4:30 p.m. Eastern Time, regarding the Company's third quarter fiscal 2016 financial results. Interested parties can participate in this conference call by dialing (800) 219-6970 in the United States and Canada or (574) 990-1028 outside of the United States and Canada. Please call ten minutes prior to 4:30 p.m. Eastern Time. The conference call (listen only) will also be available on the investor section of the Company's website at http://investor.destinationmaternity.com. The passcode for the conference call is 20741025. In the event that you are unable to participate in the call, a replay will be available at 7:30 p.m. Eastern Time on Thursday, December 8, 2016 through 11:59 p.m. Eastern Time Thursday, December 15, 2016 by calling (855) 859-2056 in the United States and Canada or (404) 537-3406 outside of the United States and Canada. The passcode for the replay is 20741025.

About Destination Maternity

Destination Maternity Corporation is the world's largest designer and retailer of maternity apparel. As of October 29, 2016 Destination Maternity operates 1,229 retail locations in the United States, Canada, Puerto Rico and England, including 526 stores, predominantly under the trade names Motherhood Maternity®, A Pea in the Pod® and Destination Maternity®, and 703 leased department locations. The Company also sells merchandise on the web primarily through its brand-specific websites, motherhood.com and apeainthepod.com, as well as through its destinationmaternity.com website. Destination Maternity has international store franchise and product supply relationships in the Middle East, South Korea, Mexico, Israel and India. As of October 29, 2016 Destination Maternity has 239 international franchised locations, including 21 standalone stores operated under one of the Company's nameplates and 218 shop-in-shop locations.

Reconciliation of Non-GAAP Financial Measures

This press release and the accompanying financial tables contain non-GAAP financial measures within the meaning of the SEC's Regulation G, including 1) adjusted net income (loss), 2) adjusted net income (loss) per share - diluted, 3) Adjusted EBITDA, 4) Adjusted EBITDA before other charges, 5) Adjusted EBITDA margin, and 6) Adjusted EBITDA margin before other charges. In the accompanying financial tables, the Company has provided reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures. The Company's management believes that each of these non-GAAP financial measures provides useful information about the Company's results of operations and/or financial position to both investors and management. Each non-GAAP financial measure is provided because management believes it is an important measure of financial performance used in the retail industry to measure operating results, to determine the value of companies within the industry and to define standards for borrowing from institutional lenders. The Company uses each of these non-GAAP financial measures as a measure of the performance of the Company. In addition, certain of the Company's cash and equity incentive compensation plans are based on our level of achievement of Adjusted EBITDA before other charges, and our Term Loan provides for achievement of specified minimum levels of "Consolidated EBITDA," which is substantially identical to our non-GAAP financial measure of Adjusted EBITDA before other charges (except that for purposes of the Term Loan, the amount of extraordinary, unusual or non-recurring items that may be excluded is limited as provided in the Term Loan). The Company provides these various non-GAAP financial measures to investors to assist them in performing their analysis of its historical operating results. Each of these non-GAAP financial measures reflects a measure of the Company's operating results before consideration of certain charges and consequently, none of these measures should be construed as an alternative to net income (loss) or operating income (loss) as an indicator of the Company's operating performance, as determined in accordance with generally accepted accounting principles. The Company may calculate each of these non-GAAP financial measures differently than other companies.

Forward-Looking Statements

The Company cautions that any forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) contained in this press release or made from time to time by management of the Company, including those regarding earnings, net sales, comparable sales, other results of operations, liquidity and financial condition, and various business initiatives, involve risks and uncertainties, and are subject to change based on various important factors. The following factors, among others, in some cases have affected and in the future could affect the Company's financial performance and actual results and could cause actual results to differ materially from those expressed or implied in any such forward-looking statements: the strength or weakness of the retail industry in general and of apparel purchases in particular, our ability to successfully manage our various business initiatives, our ability to successfully pursue, complete and manage any strategic transaction and related matters, adverse effects on the market price of our common stock and on our operating results because of a failure to complete any strategic transaction, failure to realize any benefits of any strategic transaction, the success of our international business and its expansion, our ability to successfully manage and retain our leased department and international franchise relationships and marketing partnerships, future sales trends in our various sales channels, unusual weather patterns, changes in consumer spending patterns, raw material price increases, overall economic conditions and other factors affecting consumer confidence, demographics and other macroeconomic factors that may impact the level of spending for apparel (such as fluctuations in pregnancy rates and birth rates), expense savings initiatives, our ability to anticipate and respond to fashion trends and consumer preferences, unanticipated fluctuations in our operating results, the impact of competition and fluctuations in the price, availability and quality of raw materials and contracted products, availability of suitable store locations, continued availability of capital and financing, our ability to hire, develop and retain senior management and sales associates, our ability to develop and source merchandise, our ability to receive production from foreign sources on a timely basis, our compliance with applicable financial and other covenants under our financing arrangements, potential debt prepayments, the trading liquidity of our common stock, changes in market interest rates, our compliance with certain tax incentive and abatement programs, war or acts of terrorism and other factors set forth in the Company's periodic filings with the U.S. Securities and Exchange Commission (the "SEC"), or in materials incorporated therein by reference. Although it is believed that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations will prove to have been correct and persons reading this announcement are therefore cautioned not to place undue reliance on these forward-looking statements which speak only as at the date of this announcement. The Company assumes no obligation to update or revise the information contained in this announcement (whether as a result of new information, future events or otherwise), except as required by applicable law.

 

 

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

Consolidated Statements of Operations

(in thousands, except percentages and per share data)

(unaudited)



Three Months Ended


Nine Months Ended



October 29,


October 31,


October 29,


October 31,



2016


2015


2016


2015















Net sales

$

102,582


$

119,548


$

333,541


$

380,466


Cost of goods sold


48,294



59,147



157,151



193,354















     Gross profit


54,288



60,401



176,390



187,112


     Gross margin


52.9

%


50.5

%


52.9

%


49.2

%

Selling, general and administrative













     expenses (SG&A)


54,573



60,445



169,967



186,121


     SG&A as a percentage of net sales


53.2

%


50.6

%


51.0

%


48.9

%

Store closing, asset impairment and asset disposal expenses (income)


724



601



1,772



(2,342)


Other charges


459



1,052



2,003



4,497















     Operating income (loss)


(1,468)



(1,697)



2,648



(1,164)


Interest expense, net


981



374



2,606



1,147















     Income (loss) before income taxes


(2,449)



(2,071)



42



(2,311)


Income tax (benefit) provision


(943)



(797)



16



(890)















     Net income (loss)

$

(1,506)


$

(1,274)


$

26


$

(1,421)















Net income (loss) per share – Basic

$

(0.11)


$

(0.09)


$

0.00


$

(0.10)


Average shares outstanding – Basic


13,702



13,591



13,696



13,585















Net income (loss) per share – Diluted

$

(0.11)


$

(0.09)


$

0.00


$

(0.10)


Average shares outstanding – Diluted 


13,702



13,591



13,705



13,585















Reconciliation of Net Income (Loss) to Adjusted Net Income (Loss):













Net income (loss), as reported

$

(1,506)


$

(1,274)


$

26


$

(1,421)


Add: other charges for management and     

     organizational changes


36



505



707



1,829


Add: other charges for proposed business

     combination


423





1,296




Add: other charges for relocations




547





2,641


Add: other charges for fiscal year change








27


Less: income tax effect of other charges


(176)



(401)



(766)



(1,720)


Adjusted net income (loss)

$

(1,223)


$

(623)


$

1,263


$

1,356















Adjusted net income (loss) per share – diluted

$

(0.09)


$

(0.05)


$

0.09


$

0.10


 

 

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(in thousands)

(unaudited)




October 29,

2016


January 30, 

2016


ASSETS









Current assets:









Cash and cash equivalents


$

2,756


$

2,116



Trade receivables, net



8,441



10,154



Inventories



73,532



72,509



Deferred income taxes



12,044



13,803



Prepaid expenses and other current assets



10,186



9,792



Total current assets



106,959



108,374



Property and equipment, net



86,236



92,673



Other assets



18,223



18,027



    Total assets


$

211,418


$

219,074












LIABILITIES AND STOCKHOLDERS' EQUITY









Current liabilities:









Line of credit borrowings


$

6,500


$

28,400



Current portion of long-term debt



5,917



2,897



Accounts payable



14,525



21,738



Accrued expenses and other current liabilities



33,124



39,488



Total current liabilities



60,066



92,523



Long-term debt



34,195



9,302



Deferred rent and other non-current liabilities



23,564



24,351



Total liabilities



117,825



126,176



Stockholders' equity



93,593



92,898



Total liabilities and stockholders' equity


$

211,418


$

219,074



 

Selected Consolidated Balance Sheet Data

(in thousands)

(unaudited)



October 29,


January 30,


October 31,



2016


2016


2015









Cash and cash equivalents

$             2,756


$             2,116


$             2,066


Inventories

73,532


72,509


80,047


Property and equipment, net

86,236


92,673


94,028


Line of credit borrowings

6,500


28,400


31,600


Total debt

46,612


40,599


44,508


Stockholders' equity

93,593


92,898


98,383


 

 

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)




Nine Months Ended




October 29,

October 31,




2016


2015


Operating Activities








Net income (loss)


$

26


$

(1,421)


Adjustments to reconcile net income (loss) to net cash provided by operating activities:








Depreciation and amortization



13,583



12,721


Stock-based compensation expense



1,273



2,139


Loss on impairment of long-lived assets



1,406



1,598


Loss on disposal of assets



289



47


Grow NJ award benefit



1,138




Deferred income tax benefit



(463)



(1,908)


Amortization of deferred financing costs



231



136


Changes in assets and liabilities:








Decrease (increase) in:








Trade receivables



1,713



(1,884)


Inventories



(1,023)



(4,288)


Prepaid expenses and other current assets



(394)



2,494


Other non-current assets



1



(217)


Increase (decrease) in:








Accounts payable, accrued expenses and other current liabilities



(12,185)



(6,598)


Deferred rent and other non-current liabilities



(569)



(422)


Net cash provided by operating activities



5,026



2,397










Investing Activities








Capital expenditures



(9,616)



(23,947)


Proceeds from sale of property and equipment



2



35


Additions to intangible assets



(72)



(144)


Net cash used in investing activities



(9,686)



(24,056)










Financing Activities








Decrease in cash overdraft



(544)



1,318


(Decrease) increase in line of credit borrowings



(21,900)



31,600


Proceeds from long-term debt



32,000




Repayment of long-term debt



(2,964)



(2,092)


Deferred financing costs paid



(1,275)



(151)


Withholding taxes on stock-based compensation paid in connection with repurchase of common stock



(21)



(62)


Cash dividends paid





(8,301)


Proceeds from exercise of stock options



3



69


Net cash provided by financing activities



5,299



22,381


Effect of exchange rate changes on cash and cash equivalents



1



(5)


Net Increase in Cash and Cash Equivalents



640



717


Cash and Cash Equivalents, Beginning of Period



2,116



1,349


Cash and Cash Equivalents, End of Period


$

2,756


$

2,066


 

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES

Supplemental Financial Information

 

Reconciliation of Net Income (Loss) to Adjusted EBITDA(1)

and Adjusted EBITDA Before Other Charges,

and Operating Income (Loss) Margin to Adjusted EBITDA Margin

and Adjusted EBITDA Margin Before Other Charges

 (in thousands, except percentages)

(unaudited)




Three Months Ended


Nine Months Ended



October 29,


October 31,


October 29,


October 31,



2016


2015


2016


2015















Net income (loss)


$

(1,506)


$

(1,274)


$

26


$

(1,421)


Add: income tax (benefit) provision



(943)



(797)



16



(890)


Add: interest expense, net



981



374



2,606



1,147
















Operating income (loss)



(1,468)



(1,697)



2,648



(1,164)


Add: depreciation and amortization expense



4,656



4,582



13,583



12,721


Add: loss on impairment of long-lived assets



673



544



1,406



1,598


Add: loss on disposal of assets



74



33



289



47


Add: stock-based compensation expense



305



587



1,273



2,139
















Adjusted EBITDA (1)



4,240



4,049



19,199



15,341


Add: other charges for management and 
    
organizational changes



36



505



707



1,829


Add: other charges for proposed business
     combination



423





1,296




Add: other charges for relocations (2)





547





2,408


Add: other charges for fiscal year change









27


Adjusted EBITDA before other charges


$

4,699


$

5,101


$

21,202


$

19,605
















Net sales


$

102,582


$

119,548


$

333,541


$

380,466
















Operating income (loss) margin (operating 
      income (loss) as a percentage of net sales)



(1.4)%



(1.4)%



0.8%



(0.3)%


Adjusted EBITDA margin (adjusted EBITDA as a
      percentage of net sales)



4.1%



3.4%



5.8%



4.0%


Adjusted EBITDA margin before other charges
     (adjusted EBITDA before other charges as a
     percentage of net sales)



4.6%



4.3%



6.4%



5.2%


 

(1)

Adjusted EBITDA represents operating income (loss) before deduction for the following non-cash charges: (i) depreciation and amortization expense; (ii) loss on impairment of tangible and intangible assets; (iii) loss on disposal of assets; and (iv) stock-based compensation expense.



(2)

Other charges related to the Company's relocations of its headquarters and distribution operations, excludes accelerated depreciation expense of $233 for the nine months ended October 31, 2015.

SOURCE Destination Maternity Corporation

For further information: Allison Malkin, Caitlin Morahan, ICR, Inc., DestinationMaternityIR@icrinc.com, 203-682-8225


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