Destination Maternity Reports Third Quarter and First Nine Months Fiscal 2018 Results

December 11, 2018 6:45 AM

Q3 Selling, General and Administrative expenses declined 8.7%

Full-year 2018 SG&A now guided to $198 million to $202 million vs. $219 million in FY17 on flat same store sales

Q3 Adjusted EBITDA before other charges +95% to $3.9 million, +$1.9 million from the prior year third quarter

Q3 e-Commerce sales represented 21.7% of retail sales, compared to 20.7% last year

Q3 e-Commerce gross profit excluding 3rd party e-commerce sites, +14% year over year

Re-affirms FY 2019 and FY 2022 adjusted cash flow and adjusted EBITDA

MOORESTOWN, N.J.--(BUSINESS WIRE)-- 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 2018 ended November 3, 2018 compared to the third quarter and first nine months of fiscal 2017 ended October 28, 2017.

Commentary

“Our third quarter results illustrate our continued discipline in right-sizing the organization, rationalizing expenses and improving profitability as part of our multi-year strategic plan, Destination -> Forward,” said Marla Ryan, Chief Executive Officer of Destination Maternity. “SG&A expenses in the third quarter declined 8.7% year-over-year, and Adjusted EBITDA before other charges improved 95% over the prior year period due to ongoing cost management efforts.

“During the third quarter, we also continued to manage the business for long term profitability, focusing on strengthening profitability rather than driving revenue in the short term. This was especially true in our e-commerce division where we are tightly managing expenses to grow profits in our digital flagship. While total e-commerce revenues were flat compared to the prior year, excluding 3rd party e-commerce sites, sales were up 8%. Total e-commerce product gross margins also improved by 230 basis points versus last year. Mobile sales were also strong, up 29% year-over-year, representing 54% of total online sales in the third quarter.

“Our brick and mortar sales remain sluggish as we continue to shutter unprofitable stores and aggressively manage our long-term inventory position through increased markdowns and promotional activity. In the short-term, we expect inventory levels will be higher than optimal. While this negatively impacts margins, right sizing inventory and our store portfolio will create a leaner organization, better positioning us for future growth. We expect to generate $7 million in cash flow from working capital in FY 2019 from our on-going inventory reduction efforts.

“We remain encouraged by our progress to date and our future. As such, we continue to believe our stock is undervalued and both management and the Board will be purchasing additional shares when our trading window opens. Looking ahead, we are focused on executing our strategy, sticking to the fundamentals of our business, and leveraging the strength of our brands to deliver on our commitments for moms and moms2be, associates and stakeholders.”

Financial Outlook

Destination Maternity is adjusting its FY 2018 revenue guidance lower by 100bps to reflect expected softness in brick and mortar sales as the Company continues efforts to optimize inventory and manage expenses. The Company is also reducing SG&A guidance by an incremental $4 million, or 100bps, which offsets the bottom-line impact. Additionally, FY 2019 comparable sales expectations remain unchanged at 0.0% - 1.4%. Full year 2018 company comparable sales are on a 52-week basis. Adjusted EBITDA before other charges is defined in the financial tables at the end of this press release.

FY 2017

FY 2018 FY 2019 FY 2022
Low High Low High Low High
Sales $ 406.2 $ 387 $ 391 $ 375 $ 385 $ 450 $ 475
Comp % (1.4)% (1.0)% - 0.0% 0.0% - 1.4% 6%+ CAGR in total sales vs FY19
Ecommerce Growth 41.0% 14.5% 15.1% 20%+ CAGR in ecomm sales vs FY19
Margin %1 52.6% 51.0% 51.5% 51.5% 52.0% 48.0% 50.0%
bps to LY down 110-160 bps up 50 bps
SG&A $ 218.7 $ 198 $ 202 $ 187 $ 191 $ 195 $ 209
SG&A % 53.8% 50.9% - 51.9% 50.0% - 51.0% 42.0% - 45.0%
Adj EBITDA b/f Other Charges $ 13.0 $ 16.9 $ 17.9 $ 19.0 $ 23.6 $ 42.0 $ 51.0
% to LY (up 30% - 38%) (up 22% at mid-point) (20%+ CAGR vs FY19)
Adj EPS - Diluted 2 $ (0.74) $ (0.38) $ (0.33) $ (0.03) $ 0.15 $ 1.20 $ 1.60
Adj Operating Cash Flow2 13.8 1.5 3.0 18.0 22.6 39.0 48.0
Capex 6.7 3.7 4.2 6.0 7.0 10.0 12.0
Adj Free Cash Flow2 $ 7.1 $ (2.2) $ (1.2) $ 12.0 $ 15.6 $ 29.0 $ 36.0
Inventory Turns

2.7x

2.7x 2.8x - 3.0x 3.2x - 3.6x
Owned Store Count

487

455 410 - 425 350 - 370
Leased Store Count

637

552 530 - 540 495 - 515
Total Store Count (Year-end)

1,124

1,007 940 - 965 845 - 885
1 Long-term (FY 2022) margin reduces due to shift in business mix i.e. growth in e-commerce, wholesale, and international
2 FY2018 figures exclude impact of charges related to organizational changes, proxy contest, debt refinancing, and other one-time charges

Third Quarter Fiscal 2018 Financial Results

First Nine Months of Fiscal 2018 Financial Results (39 weeks ended November 3, 2018)

Adjusted EBITDA before other charges, and adjusted net income, are defined in the financial tables at the end of this press release.

Other Financial Information

Retail Locations

Three Months Ended

Nine Months Ended

November

3, 2018

October

28, 2017

November

3, 2018

October

28, 2017

Store Openings (1) 0 2 2 7
Store Closings (1) (2) 6 8 15 21

Period End Retail Location Count (1)

Stores 474 501 474 501
Leased Department Locations 634 646 634 646
Total Retail Locations 1,108 1,147 1,108 1,147
1) Excludes international franchised locations.
2) During the nine months ended October 28, 2017 Macy’s completed closure of 59 stores where we had a leased department within the store.

Conference Call Information

As announced previously, the Company will host a conference call regarding third quarter Fiscal 2018 financial results that includes comments on the results from members of our senior management at 9:30 a.m. Eastern Time. Management will conduct a question and answer session with investors following its prepared remarks.

Interested parties can listen to 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. The call will also be available on the investors section of the Company's website at http://investor.destinationmaternity.com. Passcode for the conference call is 2184623.

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 Monday, September 10, 2018 through 12:00 p.m. Eastern Time on Monday, September 17, 2018 by calling (855) 859-2056 in the United States and Canada or (404) 537-3406 outside of the United States and Canada. Passcode for the replay is 2184623.

About Destination Maternity

Destination Maternity Corporation is the world's largest designer and retailer of maternity apparel. As of November 3, 2018, Destination Maternity operates 1,108 retail locations in the United States, Canada and Puerto Rico, including 474 stores, predominantly under the trade names Motherhood Maternity®, A Pea in the Pod® and Destination Maternity®, and 634 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 November 3, 2018, Destination Maternity has 187 international franchised locations, including 10 standalone stores operated under one of the Company's nameplates and 177 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 loss, 2) adjusted net 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 the Company's level of achievement of Adjusted EBITDA before other charges. 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, 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 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

November 3,

2018

October 28,

2017

November 3,

2018

October 28,

2017

Net sales $ 92,837 $ 96,354 $ 292,459 $ 301,060
Cost of goods sold 44,181 45,453 138,535 140,167
Gross profit 48,656 50,901 153,924 160,893
Gross margin 52.4 % 52.8 % 52.6 % 53.4
Selling, general and administrative expenses 48,629 53,234 150,581 161,689
Store closing, asset impairment and asset disposal expenses 1,028 1,011 2,669 3,649
Other charges, net 1,825 3,100 4,898 3,746
Operating loss (2,826 ) (6,444 ) (4,224 ) (8,191
Interest expense, net 1,232 1,006 3,533 2,989
Loss before income taxes (4,058 ) (7,450 ) (7,757 ) (11,180
Income tax provision 56 73 168 259
Net loss $ (4,114 ) $ (7,523 ) $ (7,925 ) $ (11,439
Net loss per share— Basic $ (0.30 ) $ (0.55 ) $ (0.57 ) $ (0.83
Average shares outstanding— Basic 13,895 13,800 13,867 13,777
Net loss per share— Diluted $ (0.30 ) $ (0.55 ) $ (0.57 ) $ (0.83
Average shares outstanding— Diluted 13,895 13,800 13,867 13,777
Reconciliation of Net Loss to Adjusted Net Loss
Net loss, as reported $ (4,114 ) $ (7,523 ) $ (7,925 ) $ (11,439
Add: other charges 1,825 3,100 4,898 3,746
Less: effect of change in accounting principle (764
Less: income tax effect of adjustments to net loss (444 ) (1,163 ) (1,190 ) (1,121
Add deferred tax valuation allowance related to cumulative losses 1,001 2,855 1,925 4,352
Adjusted net loss $ (1,732 ) $ (2,731 ) $ (2,292 ) $ (5,226
Adjusted net loss per share - diluted $ (0.12 ) $ (0.20 ) $ (0.16 ) $ (0.38
DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands)
(unaudited)
November 3, 2018 February 3, 2018
ASSETS
Current assets:
Cash and cash equivalents $ 1,247 $ 1,635
Trade receivables, net 7,261 6,692
Inventories 79,054 71,256
Prepaid expenses and other current assets 10,270 11,522
Total current assets 97,832 91,105
Property and equipment, net 55,158 66,146
Other assets 7,115 5,331
Total assets $ 160,105 $ 162,582
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Line of credit borrowings $ 21,700 $ 8,000
Current portion of long-term debt 4,729 4,780
Accounts payable 25,767 30,949
Accrued expenses and other current liabilities 30,988 31,661
Total current liabilities 83,184 75,390
Long-term debt 22,704 23,809
Deferred rent and other non-current liabilities 20,856 22,715
Total liabilities 126,744 121,914
Stockholders’ equity 33,361 40,668
Total liabilities and stockholders’ equity $ 160,105 $ 162,582
Selected Consolidated Balance Sheet Data
(in thousands)
(unaudited)

November 3, 2018

February 3, 2018 October 28, 2017
Cash and cash equivalents $ 1,247 $ 1,635 $ 2,217
Inventory 79,054 71,256 73,936
Property and equipment, net 55,158 66,146 72,232
Line of credit borrowings 21,700 8,000 8,200
Total debt 49,133 36,589 41,563
Stockholders’ equity 33,361 40,668 50,541
DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands, except percentages and per share data)
(unaudited)
Nine Months Ended
November 3, 2018 October 28, 2017
Operating Activities
Net loss $ (7,925 ) $ (11,439 )

Adjustments to reconcile net loss to net cash provided
by operating activities:

Depreciation and amortization 11,789 13,259
Stock-based compensation expense 750 858
Loss on impairment of long-lived assets 2,236 3,267
Loss on disposal of assets 238 283
Grow NJ award benefit (1,977 ) 1,096
Amortization of deferred financing costs 506 375
Changes in assets and liabilities:
Decrease (increase) in:
Trade receivables (569 ) (1,218 )
Inventories (7,798 ) (4,896 )
Prepaid expenses and other current assets 1,251 3,110
Other non-current assets 35 (59 )
Increase (decrease) in:
Accounts payable, accrued expenses and other current liabilities (3,861 ) 2,474
Deferred rent and other non-current liabilities (2,087 ) 23
Net cash provided by (used in) operating activities (7,412 ) 7,133
Investing Activities
Capital expenditures (3,456 ) (5,484 )
Additions to intangible assets (18 )
Net cash used in investing activities (3,456 ) (5,502 )
Financing Activities
Decrease in cash overdraft (1,486 ) (461 )
Decrease in line of credit borrowings 13,700 3,600
Proceeds from long-term debt 2,500 3,401
Repayment of long-term debt (3,935 ) (8,493 )
Deferred financing costs paid (160 ) (277 )

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

(136 ) (45 )
Proceeds from exercise of stock options 1
Net cash provided by (used in) financing activities 10,484 (2,275 )
Effect of exchange rate changes on cash and cash equivalents (4 ) 2
Net Decrease in Cash and Cash Equivalents (388 ) (642 )
Cash and Cash Equivalents, Beginning of Period 1,635 2,859
Cash and Cash Equivalents, End of Period $ 1,247 $ 2,217
DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES
Supplemental Financial Information
Reconciliation of Net Loss to Adjusted EBITDA(1)
and Adjusted EBITDA Before Other Charges and Change in Accounting Principle,
and Operating Loss Margin to Adjusted EBITDA Margin
and Adjusted EBITDA Margin Before Other Charges and Change in Accounting Principle
(in thousands, except percentages)
(unaudited)
Three Months Ended Nine Months Ended

November 3,
2018

October 28,
2017

November 3,
2018

October 28,
2017

Net loss $ (4,114 ) $ (7,523 ) $ (7,925 ) $ (11,439 )
Add: income tax provision 56 73 168 259
Add: interest expense, net 1,232 1,006 3,533 2,989
Operating loss (2,826 ) (6,444 ) (4,224 ) (8,191 )
Add: depreciation and amortization expense 3,828 4,371 11,788 13,259
Add: loss on impairment of long-lived assets 717 821 2,236 3,267
Add: loss on disposal of assets 170 167 238 283
Add: stock-based compensation expense 166 28 750 858
Adjusted EBITDA (1) 2,055 (1,057 ) 10,788 9,476
Add: other charges 1,825 3,100 4,898 3,746
Less: effect of change in accounting principle (764 )

Adjusted EBITDA before other charges and effect of
change in accounting principle

$ 3,880 $ 2,043 $ 15,686 $ 12,458
Net Sales $ 92,837 $ 96,354 $ 292,459 $ 301,060
Operating loss margin (operating loss as a percentage of net sales) (3.0 )% (6.7 )% (1.4 )% (2.7 )%

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

2.2 % (1.1 )% 3.7 % 3.1 %

Adjusted EBITDA margin before other charges and
effect of change in accounting principle (adjusted
EBITDA before other charges and change in
accounting principle as a percentage of net sales)

4.2 % 2.1 % 5.4 % 4.1 %
(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.

Sloane & Company

Erica Bartsch, 212-446-1875

Ebartsch@sloanepr.com



Alex Kovtun, 212-446-1896

Akovtun@sloanepr.com

Source: Destination Maternity Corporation

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