Form 8-K Destination Maternity For: Dec 07
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): December 7, 2017
DESTINATION MATERNITY CORPORATION
(Exact name of Registrant as specified in Charter)
| Delaware | 0-21196 | 13-3045573 | ||
| (State or Other Jurisdiction of Incorporation or Organization) |
Commission File number |
(I.R.S. Employer Identification Number) |
232 Strawbridge Drive
Moorestown, NJ 08057
(Address of Principal Executive Offices)
(856) 291-9700
(Registrant’s telephone number, including area code)
Check the appropriate box below if the Form 8-K is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
| ☐ | Written communications pursuant to Rule 425 under the Securities Act |
| ☐ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act |
| ☐ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act |
| ☐ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule l2b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Item 2.02. Results of Operations and Financial Condition
On December 7, 2017, Destination Maternity Corporation (the “Company”) issued a press release and held a broadly accessible conference call to discuss its financial results for the quarter ended October 28, 2017. A copy of the press release is attached hereto as Exhibit 99.1 and is incorporated herein by reference. A copy of the script read by management during the conference call is attached hereto as Exhibit 99.2 and is incorporated herein by reference.
The press release contained non-GAAP financial measures within the meaning of the Securities and Exchange Commission’s Regulation G, including: (a) Adjusted net income (loss) together with the per share – diluted amount represented by this measure; (b) Adjusted EBITDA (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), together with the percentage of net sales represented by this measure; and (c) Adjusted EBITDA before other charges and effect of change in accounting principle, together with the percentage of net sales represented by this measure.
The Company 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 the Company’s level of achievement of Adjusted EBITDA before other charges and effect of change in accounting principle.
The Company provides these 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 or credits 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.
With respect to the non-GAAP financial measures discussed in the press release, the Company has provided, as an attachment to such press release, a reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures.
The disclosure in this Current Report, including in the Exhibits attached hereto, of any financial information shall not constitute an admission that such information is material.
Item 9.01. Financial Statements and Exhibits
The following exhibits are filed or furnished with this Form 8-K:
| Exhibit |
Description | |
| 99.1 | Press Release of the Company issued December 7, 2017. | |
| 99.2 | Script for December 7, 2017 Earnings Release Conference Call. | |
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned duly authorized.
| Date: December 8, 2017 | DESTINATION MATERNITY CORPORATION | |||||
| By: | /s/ David Stern | |||||
| David Stern | ||||||
| Executive Vice President & Chief Financial Officer | ||||||
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Exhibit 99.1
DESTINATION MATERNITY REPORTS THIRD QUARTER AND FIRST
NINE MONTHS FISCAL 2017 RESULTS
| • | E-commerce sales rise 54.3% from prior year third quarter |
| • | 50 basis point gross margin improvement in first nine months |
Moorestown, NJ, December 7, 2017 – 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 2017 ended October 28, 2017 compared to the third quarter and first nine months of fiscal 2016 ended October 29, 2016.
Third Quarter Fiscal 2017 Financial Results
| • | Net sales were $96.4 million compared with $102.6 million for the comparable prior year quarter. The decrease was driven by the closure of underperforming stores and exit of the Kohl’s® relationship, which was included in prior year results, partially offset by an increase in comparable sales. |
| • | Comparable sales increased 1.1%, compared to a 5.2% decline for the third quarter of fiscal 2016. |
| • | Gross margin for the third quarter of fiscal 2017 was 52.8%, down 10 basis points over the comparable prior year quarter gross margin of 52.9%. |
| • | Selling, general and administrative expenses (“SG&A”) for the third quarter of fiscal 2017 decreased 2.5% to $53.2 million, compared to $54.6 million for the third quarter of fiscal 2016. As a percentage of net sales, SG&A increased to 55.2% for the third quarter of fiscal 2017 compared to 53.2% for the third quarter of fiscal 2016. |
| • | The Company incurred store closing, asset impairment and asset disposal expense of $1.0 million for the third quarter of fiscal 2017, compared to $0.7 million for the third quarter of fiscal 2016. |
| • | Other charges during the third quarter of fiscal 2017 were $3.1 million for management and organizational changes and the now terminated merger, compared to $0.5 million in the third quarter of fiscal 2016, related to the now terminated merger. |
| • | Adjusted EBITDA before other charges was $2.0 million for the third quarter of fiscal 2017, compared to $4.7 million for the third quarter of fiscal 2016. Adjusted EBITDA before other charges is defined in the financial tables at the end of this press release. |
| • | GAAP net loss was $7.5 million, or $0.55 per diluted share, compared to net loss of $1.5 million, or $0.11 per diluted share, for the third quarter of fiscal 2016. |
| • | Adjusted net loss was $2.7 million, or $0.20 per diluted share, compared to adjusted net loss of $1.2 million, or $0.09 per diluted share, for the third quarter of fiscal 2016. For a reconciliation of GAAP to non-GAAP financial information refer to the financial tables at the end of this press release. |
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First Nine Months of Fiscal 2017 Financial Results (39 weeks ended October 28, 2017)
| • | Net sales were $301.1 million compared with $333.5 million for the nine months ended October 29, 2016. The decrease in sales was primarily driven by a decline in comparable sales, the closure of underperforming stores, and the wind down of the Kohl’s, Sears and Gordmans relationships. |
| • | Comparable sales decreased 3.5%, compared to a decrease of 4.5% for the nine months ended October 29, 2016. |
| • | Gross margin increased 50 basis points to 53.4% compared to 52.9% for the nine months ended October 29, 2016. The year-over-year increase in gross margin is driven by reduced product costs and the exit from the leased department and licensed relationships, which generated lower than average gross margins. |
| • | SG&A for the first nine months of fiscal 2017 declined $8.3 million to $161.7 million, or 53.7% of net sales, compared to $170.0 million, or 51.0% of net sales. |
| • | Store closing, asset impairment and asset disposal expense was $3.6 million, compared to $1.8 million for the nine months ended October 29, 2016. |
| • | Other charges during the first nine months of fiscal 2017 were $3.7 million, primarily for management and organizational changes and the now terminated merger, compared to $2.0 million in the first nine months of fiscal 2016 for management and organizational changes and the now terminated merger. |
| • | Adjusted EBITDA before other charges and effect of change in accounting principle was $12.5 million for the first nine months of fiscal 2017 compared to $21.2 million for the first nine months of fiscal 2016. |
| • | GAAP net loss was $11.4 million, or $0.83 per diluted share, compared to net income of $26,000, or $0.00 per diluted share, for the nine months ended October 29, 2016. |
| • | Adjusted net loss was $5.2 million, or $0.38 per diluted share, compared to adjusted net income of $1.3 million, or $0.09 per diluted share, for the nine months ended October 29, 2016. |
Other Financial Information
| • | At October 28, 2017, inventory was $73.9 million, an increase of $0.4 million compared to $73.5 million at October 29, 2016. Overall finished unit inventory at the end of the third quarter was down 3.2% on a year-over-year basis. |
| • | Capital expenditures totaled $5.5 million and $9.6 million for the nine months ended October 28, 2017 and October 29, 2016, respectively, primarily driven by investments in stores and, to a lesser extent, investments to support key systems projects. |
| • | Debt, net of cash, was $39.3 million at October 28, 2017, a decrease of approximately $4.6 million compared to $43.9 million at October 29, 2016. |
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Commentary
Allen Weinstein, interim Chief Executive Officer stated, “Although we are not fully satisfied with our financial results, the third quarter was a productive period for our Company. After my initial few months of observations, I feel confident that we have many opportunities to improve our operations and performance, with the benefit of a strong and talented team and a solid infrastructure on which to grow. We also have a strong foundation to build on in our e-commerce business, with e-commerce sales rising over 54% in the quarter and nearly 34% year to date, and with increased momentum in the fourth quarter to date bolstered by record online sales during the Thanksgiving through Cyber Monday period. As to stores, although not yet positive, in the fourth quarter to date we have seen our comparable store sales improve 190 basis points to down 6.4%, with improving traffic. We also remain on track to achieve the approximately $10 million in annualized cost savings commencing in fiscal 2018 as we announced earlier in the quarter. In short, although we have much to do, we are moving in the right direction.”
Barry Erdos, Chairman of the Board, commented, “As a Board, we are encouraged by the progress Allen and the team have made in the past several months, in particular the great progress on e-commerce. In addition to supporting management over the last few months, the Board has been working diligently on key governance matters. First, as to our ongoing search for a new Chief Executive Officer, we are working hard to find the right leader who will build on our current momentum and we expect to continue the search process into the new year. Second, as discussed previously, our Board has been actively evaluating its composition and size. After significant study and engagement with stockholders, the Board has decided to add multiple additional Board members, with a focus on adding diverse individuals who possess additional skills and experience that will help further our turnaround and growth. Our Board is in the process of vetting many qualified individuals and we expect to announce new appointments shortly.”
Conference Call Information
As announced previously, the Company will hold a conference call today at 9:00 a.m. Eastern Time, regarding the Company’s third quarter fiscal 2017 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 9:00 a.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 7488866. In the event that you are unable to participate in the call, a replay will be available at 12:00 p.m. Eastern Time on Thursday, December 7, 2017 through 12:00 p.m. Eastern Time Thursday, December 14, 2017 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 7488866.
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About Destination Maternity
Destination Maternity Corporation is the world’s largest designer and retailer of maternity apparel. As of October 28, 2017 Destination Maternity operates 1,147 retail locations in the United States, Canada and Puerto Rico, including 501 stores, predominantly under the trade names Motherhood Maternity®, A Pea in the Pod® and Destination Maternity®, and 646 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 28, 2017 Destination Maternity has 208 international franchised locations, including 16 standalone stores operated under one of the Company’s nameplates and 192 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 and effect of change in accounting principle, 5) Adjusted EBITDA margin, and 6) Adjusted EBITDA margin before other charges and effect of change in accounting principle. 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 effect of change in accounting principle. 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
4
our various business initiatives, 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.
– Financial Tables to Follow –
| CONTACT: | Allison Malkin |
| Caitlin Morahan |
| ICR, Inc. |
| [email protected] |
| 203-682-8225 |
5
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 28, | October 29, | October 28, | October 29, | |||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Net sales |
$ | 96,354 | $ | 102,582 | $ | 301,060 | $ | 333,541 | ||||||||
| Cost of goods sold |
45,453 | 48,294 | 140,167 | 157,151 | ||||||||||||
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| Gross profit |
50,901 | 54,288 | 160,893 | 176,390 | ||||||||||||
| Gross margin |
52.8 | % | 52.9 | % | 53.4 | % | 52.9 | % | ||||||||
| Selling, general and administrative expenses (SG&A) |
53,234 | 54,573 | 161,689 | 169,967 | ||||||||||||
| SG&A as a percentage of net sales |
55.2 | % | 53.2 | % | 53.7 | % | 51.0 | % | ||||||||
| Store closing, asset impairment and asset disposal expenses |
1,011 | 724 | 3,649 | 1,772 | ||||||||||||
| Other charges |
3,100 | 459 | 3,746 | 2,003 | ||||||||||||
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| Operating income (loss) |
(6,444 | ) | (1,468 | ) | (8,191 | ) | 2,648 | |||||||||
| Interest expense, net |
1,006 | 981 | 2,989 | 2,606 | ||||||||||||
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| Income (loss) before income taxes |
(7,450 | ) | (2,449 | ) | (11,180 | ) | 42 | |||||||||
| Income tax provision (benefit) |
73 | (943 | ) | 259 | 16 | |||||||||||
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| Net income (loss) |
$ | (7,523 | ) | $ | (1,506 | ) | $ | (11,439 | ) | $ | 26 | |||||
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| Net income (loss) per share – Basic |
$ | (0.55 | ) | $ | (0.11 | ) | $ | (0.83 | ) | $ | 0.00 | |||||
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| Average shares outstanding – Basic |
13,800 | 13,702 | 13,777 | 13,696 | ||||||||||||
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| Net income (loss) per share – Diluted |
$ | (0.55 | ) | $ | (0.11 | ) | $ | (0.83 | ) | $ | 0.00 | |||||
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| Average shares outstanding – Diluted |
13,800 | 13,702 | 13,777 | 13,705 | ||||||||||||
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| Reconciliation of Net Income (Loss) to Adjusted Net Income (Loss): |
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| Net income (loss), as reported |
$ | (7,523 | ) | $ | (1,506 | ) | $ | (11,439 | ) | $ | 26 | |||||
| Add: other charges for management and organizational changes |
2,636 | 36 | 2,633 | 707 | ||||||||||||
| Add: other charges for proposed business combination |
464 | 423 | 1,113 | 1,296 | ||||||||||||
| Less: income tax effect of other charges |
(1,163 | ) | (176 | ) | (1,405 | ) | (766 | ) | ||||||||
| Less: effect of change in accounting principle |
— | — | (764 | ) | — | |||||||||||
| Add: income tax effect of change in accounting principle |
— | — | 284 | — | ||||||||||||
| Add: deferred tax valuation allowance related to cumulative losses |
2,855 | — | 4,352 | — | ||||||||||||
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| Adjusted net income (loss) |
$ | (2,731 | ) | $ | (1,223 | ) | $ | (5,226 | ) | $ | 1,263 | |||||
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| Adjusted net income (loss) per share – diluted |
$ | (0.20 | ) | $ | (0.09 | ) | $ | (0.38 | ) | $ | 0.09 | |||||
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DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands)
(unaudited)
| October 28, 2017 |
January 28, 2017 |
|||||||
| ASSETS |
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| Current assets: |
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| Cash and cash equivalents |
$ | 2,217 | $ | 2,859 | ||||
| Trade receivables, net |
6,901 | 5,683 | ||||||
| Inventories |
73,936 | 69,040 | ||||||
| Prepaid expenses and other current assets |
6,420 | 9,464 | ||||||
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| Total current assets |
89,474 | 87,046 | ||||||
| Property and equipment, net |
72,232 | 83,029 | ||||||
| Other assets |
4,718 | 5,912 | ||||||
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| Total assets |
$ | 166,424 | $ | 175,987 | ||||
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| LIABILITIES AND STOCKHOLDERS’ EQUITY |
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| Current liabilities: |
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| Line of credit borrowings |
$ | 8,200 | $ | 4,600 | ||||
| Current portion of long-term debt |
8,173 | 6,948 | ||||||
| Accounts payable |
18,121 | 17,656 | ||||||
| Accrued expenses and other current liabilities |
33,242 | 31,359 | ||||||
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| Total current liabilities |
67,736 | 60,563 | ||||||
| Long-term debt |
25,190 | 31,485 | ||||||
| Deferred rent and other non-current liabilities |
22,957 | 22,789 | ||||||
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| Total liabilities |
115,883 | 114,837 | ||||||
| Stockholders’ equity |
50,541 | 61,150 | ||||||
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| Total liabilities and stockholders’ equity |
$ | 166,424 | $ | 175,987 | ||||
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Selected Consolidated Balance Sheet Data
(in thousands)
(unaudited)
| October 28, | January 28, | October 29, | ||||||||||
| 2017 | 2017 | 2016 | ||||||||||
| Cash and cash equivalents |
$ | 2,217 | $ | 2,859 | $ | 2,756 | ||||||
| Inventories |
73,936 | 69,040 | 73,532 | |||||||||
| Property and equipment, net |
72,232 | 83,029 | 86,236 | |||||||||
| Line of credit borrowings |
8,200 | 4,600 | 6,500 | |||||||||
| Total debt |
41,563 | 43,033 | 46,612 | |||||||||
| Stockholders’ equity |
50,541 | 61,150 | 93,593 | |||||||||
DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
| Nine Months Ended | ||||||||
| October 28, | October 29, | |||||||
| 2017 | 2016 | |||||||
| Operating Activities |
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| Net income (loss) |
$ | (11,439 | ) | $ | 26 | |||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
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| Depreciation and amortization |
13,259 | 13,583 | ||||||
| Stock-based compensation expense |
858 | 1,273 | ||||||
| Loss on impairment of long-lived assets |
3,267 | 1,406 | ||||||
| Loss on disposal of assets |
283 | 289 | ||||||
| Grow NJ award benefit |
1,096 | 1,138 | ||||||
| Deferred income tax benefit |
— | (463 | ) | |||||
| Amortization of deferred financing costs |
375 | 231 | ||||||
| Changes in assets and liabilities: |
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| Decrease (increase) in: |
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| Trade receivables |
(1,218 | ) | 1,713 | |||||
| Inventories |
(4,896 | ) | (1,023 | ) | ||||
| Prepaid expenses and other current assets |
3,110 | (394 | ) | |||||
| Other non-current assets |
(59 | ) | 1 | |||||
| Increase (decrease) in: |
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| Accounts payable, accrued expenses and other current liabilities |
2,474 | (12,185 | ) | |||||
| Deferred rent and other non-current liabilities |
23 | (569 | ) | |||||
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| Net cash provided by operating activities |
7,133 | 5,026 | ||||||
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| Investing Activities |
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| Capital expenditures |
(5,484 | ) | (9,616 | ) | ||||
| Proceeds from sale of property and equipment |
— | 2 | ||||||
| Additions to intangible assets |
(18 | ) | (72 | ) | ||||
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| Net cash used in investing activities |
(5,502 | ) | (9,686 | ) | ||||
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| Financing Activities |
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| Decrease in cash overdraft |
(461 | ) | (544 | ) | ||||
| Increase (decrease) in line of credit borrowings |
3,600 | (21,900 | ) | |||||
| Proceeds from long-term debt |
3,401 | 32,000 | ||||||
| Repayment of long-term debt |
(8,493 | ) | (2,964 | ) | ||||
| Deferred financing costs paid |
(277 | ) | (1,275 | ) | ||||
| Withholding taxes on stock-based compensation paid in connection with repurchase of common stock |
(45 | ) | (21 | ) | ||||
| Proceeds from exercise of stock options |
— | 3 | ||||||
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| Net cash (used in) provided by financing activities |
(2,275 | ) | 5,299 | |||||
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| Effect of exchange rate changes on cash and cash equivalents |
2 | 1 | ||||||
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| Net (Decrease) Increase in Cash and Cash Equivalents |
(642 | ) | 640 | |||||
| Cash and Cash Equivalents, Beginning of Period |
2,859 | 2,116 | ||||||
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| Cash and Cash Equivalents, End of Period |
$ | 2,217 | $ | 2,756 | ||||
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DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES
Supplemental Financial Information
Reconciliation of Net Income (Loss) to Adjusted EBITDA(1)
and Adjusted EBITDA Before Other Charges and Effect of Change in Accounting Principle,
and Operating Income (Loss) Margin to Adjusted EBITDA Margin
and Adjusted EBITDA Margin Before Other Charges and Effect of Change in Accounting Principle
(in thousands, except percentages)
(unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| October 28, | October 29, | October 28, | October 29, | |||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Net income (loss) |
$ | (7,523 | ) | $ | (1,506 | ) | $ | (11,439 | ) | $ | 26 | |||||
| Add: income tax provision (benefit) |
73 | (943 | ) | 259 | 16 | |||||||||||
| Add: interest expense, net |
1,006 | 981 | 2,989 | 2,606 | ||||||||||||
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| Operating income (loss) |
(6,444 | ) | (1,468 | ) | (8,191 | ) | 2,648 | |||||||||
| Add: depreciation and amortization expense |
4,371 | 4,656 | 13,259 | 13,583 | ||||||||||||
| Add: loss on impairment of long-lived assets |
821 | 673 | 3,267 | 1,406 | ||||||||||||
| Add: loss on disposal of assets |
167 | 74 | 283 | 289 | ||||||||||||
| Add: stock-based compensation expense |
28 | 305 | 858 | 1,273 | ||||||||||||
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| Adjusted EBITDA (1) |
(1,057 | ) | 4,240 | 9,476 | 19,199 | |||||||||||
| Add: other charges for management and organizational changes |
2,636 | 36 | 2,633 | 707 | ||||||||||||
| Add: other charges for proposed business combination |
464 | 423 | 1,113 | 1,296 | ||||||||||||
| Add: effect of change in accounting principle |
— | — | (764 | ) | — | |||||||||||
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| Adjusted EBITDA before other charges and effect of change in accounting principle |
$ | 2,043 | $ | 4,699 | $ | 12,458 | $ | 21,202 | ||||||||
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| Net sales |
$ | 96,354 | $ | 102,582 | $ | 301,060 | $ | 333,541 | ||||||||
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| Operating income (loss) margin (operating income (loss) as a percentage of net sales) |
(6.7 | )% | (1.4 | )% | (2.7 | )% | 0.8 | % | ||||||||
| Adjusted EBITDA margin (adjusted EBITDA as a percentage of net sales) |
(1.1 | )% | 4.1 | % | 3.1 | % | 5.8 | % | ||||||||
| Adjusted EBITDA margin before other charges and effect of change in accounting principle (adjusted EBITDA before other charges and effect of change in accounting principle as a percentage of net sales) |
2.1 | % | 4.6 | % | 4.1 | % | 6.4 | % | ||||||||
| (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. |
# # #
Exhibit 99.2
Destination Maternity
Third Quarter Fiscal 2017
Results Conference Call
12/07/17
David L. Courtright, Senior Vice President & Chief Accounting Officer:
Thank you, operator. Good morning everyone, and welcome to Destination Maternity’s third quarter fiscal 2017 earnings call. The earnings release that was disseminated this morning is available on the investor section of our website. Additionally, we will file our 10-Q today with the SEC.
The earnings release contains definitions of various financial terms, as well as reconciliations of certain non-GAAP financial measures, we will be discussing in today’s call. If non-GAAP financial information is provided on this call, a reconciliation of the non-GAAP information to the most comparable GAAP financial measure is available in our press release.
This call will include certain forward-looking statements within the meanings of the federal securities laws. These statements relate to expectations, beliefs, projections, trends, and other matters that are not historical facts, and are subject to risks and uncertainties that might affect future events or results. Descriptions of these risks are set forth in the Company’s SEC filings.
Also, I would like to remind you that today’s call cannot be reproduced in any form without the expressed written consent of Destination Maternity.
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Joining me on the call today is Allen Weinstein, our interim Chief Executive Officer, David Stern, our Executive Vice President & Chief Financial Officer, and Ronald Masciantonio, our Executive Vice President & Chief Administrative Officer. Allen will open with an overview of the quarter followed by additional commentary by Dave on our financial results. Afterward, Allen, Dave and Ron will be available to take your questions. It is now my pleasure to turn the call over to Allen.
Allen Weinstein, Interim Chief Executive Officer
Thank you, Dave, and good morning to all. I am happy to speak to you today to update you on our progress since I stepped in as interim CEO about three months ago.
First, I am excited to share some encouraging recent operating results with you:
| • | We are seeing continued improvement in both the stores and e-commerce channels. For Q3, our comparable sales were up 1%, versus a down 3% in Q2, on the strength of a 54% increase in e-commerce sales partially offset by a down 8% in stores. So far in Q4 our comparable sales are up 9% with e-commerce sales of up 71%, partially offset by a down 6% in stores. |
So, we are making improvement, but we have much work to be done.
As for my initial observations: we have a strong team and a solid infrastructure on which to grow, with many opportunities to improve our operations and performance.
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Since joining in early September, I have been working closely with the entire team in stores, in our distribution center and in our corporate office. I am confident we have depth of talent at every level of the Company, all focused on improving our business.
Importantly, the investments made over the last few years have established a solid foundation upon which to grow. Some are:
| • | Our new websites, built on the Demandware platform and operated and supported expertly by our team, are allowing us to drive results in the digital channel that are exceeding even our loftiest expectations; |
| • | We have excellent facilities including a state-of-the-art and flexible distribution center which was built to service our business for today and in years to come; and |
| • | The investments in the planning and allocation organization and the JDA allocation tool will help us better match inventory to store and web demand and will also provide valuable information to help us make improved buying decisions. |
With a strong team and a solid foundation upon which to build, we are already making good progress on many opportunities. I would like to give you a flavor of some of these opportunities, how we are attacking them, and the progress we have made to date.
First, we have identified and acted on important Organizational and Process Improvements. Over time our Company became too complicated, bureaucratic, and slow to act. Immediately upon my arrival, and with the support of the entire management team and our Board, we took quick action to streamline our
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organizational structure and business processes. We will continue to improve and simplify the manner in which we operate so that Destination Maternity can evolve into a more nimble and efficient organization. These actions included delayering management in our corporate office and changes to our field organization, as well as the implementation of many process changes across the Company. Apart from the operational benefits, which should yield better results, these changes will deliver approximately $10 million in run-rate savings beginning in fiscal year 2018.
We have also identified opportunity to drive improved sales results across all our channels. Overall our goal is to make great product available to our customer wherever, whenever and however she chooses to shop, whether that be online, or in store.
Starting with e-commerce: The investments we have made in our e-commerce platform this year have generated significant positive momentum, as evidenced by the channel’s 54% rise in comparable sales for the third quarter and even higher growth in Q4 so far. Our customer is responding well to the online merchandise offering as well as the new platform, especially the mobile presentation of our sites which have shown significant growth both in importance and conversion since launch. We expect continued momentum in online sales and we will continue to invest in our digital platform, its functionality, content, and our team. We believe the future of our Company is heavily dependent on our ability to compete online.
Our stores channel is also central to our success and is, in fact, an important differentiator in an increasingly digital environment. We believe a store presence is very important for the maternity customer, particularly the first-time mom, who
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may be uncertain of her sizing while pregnant and who can benefit from the expert guidance of our knowledgeable team members. While performance in the stores channel has been challenging so far this year, we believe we can improve performance through operational changes as well as developing greater connectivity between the stores and e-commerce allowing a renewed focus on the customer. We are also encouraged by the recent comparable store sales trend in Q4 to-date which has improved by 200 basis points to down 6%, versus the down 8% for Q3. That said, we know we have much room for improvement and much work to do.
We are focusing our store efforts on driving traffic and improving conversion. As to traffic, we are strengthening our promotions and marketing to better meet the needs and expectations of our customers. We have also worked to reduce in-store tasks to enable our store team members to focus more on providing excellent customer service. For example, we have recently streamlined the communications to our stores, reduced the frequency and timing of floor sets, and altered the shipping cadence to stores. We expect these initiatives will free up our store team members to focus on serving the customer better.
It is also imperative that we build from our strength in the digital channel by continuing to maximize the connectivity between our digital and store channels, creating a seamless retail experience with a high level of personal service for our customers. In Q3 we furthered this strategy by successfully expanding ship-from-store fulfillment to all Company stores. As a next step we will roll out buy-online-pick-up-from store by the end of January, and we look forward to implementing additional enhancements over time. We believe these initiatives will drive traffic to our stores and ultimately result in additional sales.
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While we work to improve the business both online and in stores, we have the rare opportunity to modify our store network, including closing unprofitable stores. This ability to alter our fleet is fueled by our very liquid real estate portfolio. By the end of fiscal 2018, we have lease decision dates which will allow us to exit or re-negotiate terms on about 40% of our locations, and by the end of fiscal 2019 that opportunity extends to a total of 66% of all stores, or 330 of our 501 stores. This flexibility will allow us to evolve our business model to address customer demand.
In the Merchandising area, we are encouraged by the improvement in Q3 sales trend, particularly the Fall assortment. Compared to Fall selling a year ago, sales are stronger, sell-through is improved and we expect to exit Fall much cleaner than last year. In addition, where we added inventory to up trending categories the customer rewarded us with improved sales in line with our inventory investment.
We have identified several merchandising, planning and allocation focused opportunities, the majority of which will impact FY18, some of which are:
| • | Better aligning our merchandising purchase plan with our financial plan which will optimize receipt flow and inventory levels and, therefore, improve sales and margin. |
| • | We are also working diligently to shorten our lead time for product development which will increase our ability to stay on trend. |
| • | We have changed our store shipping cadence to smooth weekly receipts and to deliver to stores earlier in the week. This will allow product to be received on the selling floor earlier and ahead of the busy weekends. |
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| • | We are applying a more disciplined mark down cadence to allow us to clear product faster and more profitably; and finally |
| • | We have reduced major floor sets to limit tasking in stores and to enable a better customer experience, and we are confident we can do this without sacrificing the “freshness” of the presentation to our customer. |
In summary, we are moving with urgency to improve our business from every angle and believe these initiatives and others will help us further solidify and expand Destination Maternity’s position in the marketplace and deliver long run sustained profitable growth for the benefit of all our shareholders.
I also wanted to provide a brief update on a couple key governance items:
As previously announced, our Board has been actively evaluating its composition and size. After significant study and engagement with stockholders, the Board has decided to add Board members with a focus on selecting diverse individuals who possess skills and experience which will help further our turnaround and guide our growth. Our Board is in the process of vetting many qualified individuals and we will expect to announce new appointments shortly.
As to our CEO search, the Board is working diligently to identify candidates and expects to continue that work into the new year. The Board is excited by the progress we have made in the past several months and expects such progress to continue.
I would now like to turn the call over to our CFO, David Stern, for the financial update. Dave?
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David Stern, Executive Vice President & Chief Financial Officer
Thank you, Allen, and good morning to everyone on the call.
This morning I will review our fiscal 2017 Third Quarter results and key items on our balance sheet and cash flow.
Sales for the third quarter were $96.4 million, a decline of $6.2 million, or 6.1% from the comparable quarter last year. This decrease in sales was primarily driven by the wind down of a licensed brand relationship in the prior year and the net closure of 25 stores over the past twelve months. This was partially offset by an increase in comparable retail sales of 1.1%, which reflects the net effect of a 54.3% increase in e-commerce sales and an 8.3% decrease in comparable brick and mortar sales.
Gross margin for the third quarter was 52.8%, a decrease of 10 basis points from the comparable quarter last year. This was primarily driven by an increase in web promotional activity, which was largely offset by the exit from prior leased and licensed brand relationships, which historically generated lower than average gross margins. Gross profit for the third quarter was $50.9 million, a decline of $3.4 million, or 6.2% from the comparable quarter last year.
Selling, general & administrative expenses for the third quarter were $53.2 million, a decline of $1.4 million, or 2.5%, from the comparable quarter last year. The decline in SG&A was primarily driven by lower occupancy expense and reduced employee costs, partially offset by additional freight and marketing spend to drive incremental web growth. However, as a percentage of sales, SG&A increased by 200 basis points to 55.2%.
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Adjusted EBITDA before other charges for the third quarter was $2.0 million, a decrease of $2.7 million from the comparable quarter last year.
The net loss for the third quarter was $7.5 million, or $0.55 per share, compared to a net loss for the third quarter of fiscal 2016 of $1.5 million, or $0.11 per share.
Adjusted net loss was $2.7 million, or $0.20 per share, compared to adjusted net loss of $1.2 million, or $0.09 per share, for the third quarter of fiscal 2016.
I will now turn to our year-to-date results through the third quarter.
Sales for the first nine months ended October 28, 2017 were $301.1 million, a decline of $32.4 million, or 9.7% from the comparable period last year. This decline in sales was primarily driven by a decrease in comparable sales of 3.5%, which reflects the result of a decrease in brick and mortar comparable sales of 9.9%, partially offset by an increase in e-commerce sales of 33.7%. Additionally, sales were negatively impacted by the previously referenced net decrease in store count, as well as reduced leased department relationships, and exiting our licensed brand relationship.
Gross margin for the first nine months of 2017 was 53.4%, an increase of 50 basis points from the comparable period last year. The improvement in gross margin was primarily driven by reduced product costs and the exit from the leased department and licensed relationships, which generated lower than average gross
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margins. Gross profit for the first nine months was $160.9 million, a decrease of $15.5 million, or 8.8%, from last year. The decline in gross profit was driven by reduced sales partially offset by the increased gross margin.
Selling, general & administrative expenses for the first three quarters of 2017 were $161.7 million, a decrease of $8.3 million, or 4.9% from the comparable period last year. The decline in SG&A was primarily driven by reduced employee costs and lower occupancy expense, partially offset by increased marketing spend and freight to support the web growth. However, as a percentage of sales, SG&A increased 270 basis points to 53.7%.
Adjusted EBITDA before other charges and effect of change in accounting principle for the first nine months of 2017 was $12.5 million, a decrease of $8.7 million from the comparable period last year.
Net loss for the first nine months of fiscal 2017 was $11.4 million, or $0.83 per share, compared to net income of $26 thousand, or $0.00 per share, for the comparable period last year.
Adjusted net loss for the first nine months of fiscal 2017 was $5.2 million, or $0.38 per share, compared to adjusted net income of $1.3 million, or $0.09 per share, for the nine months ended October 29, 2016.
Turning now to the balance sheet:
At quarter end, Inventory was $73.9 million, an increase from the comparable period last year of $0.4 million, and Debt, net of cash, was $39.3 million, a decrease of $4.6 million from the comparable period last year.
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Through the third quarter of 2017, we opened 7 stores and closed 21 stores for a net reduction of 14 retail stores. We ended the quarter with 501 retail stores.
Capital Expenditures for the third quarter of 2017 were $1.9 million, a reduction of $0.9 million from last year. Third quarter capital outlays were primarily the result of modest store investments, as we optimize our real estate portfolio, as well as investments in systems, primarily related to the new web platform. These investments represent a measured and revenue-focused approach to capital expenditures that we will continue as we move forward.
With that, I will turn the call back to the operator to initiate the question and answer portion of the call.
Following Questions:
Allen Weinstein, Interim Chief Executive Officer
Thank you for joining us today and we will talk with you again when we report our fourth quarter and full year results. We wish you a happy and safe holiday season. Thank you for joining the call.
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