Destination Maternity Reports 71% Increase in Q1 Earnings Per Share Versus Last Year

PHILADELPHIA, Jan. 31, 2013 /PRNewswire/ -- Destination Maternity Corporation (Nasdaq: DEST), the world's leading maternity apparel retailer, today announced operating results for the first quarter of fiscal 2013, which ended December 31, 2012.  The Company's diluted earnings per share for its first quarter fiscal 2013 increased significantly versus the prior year, and were near the middle of its November 15, 2012 earnings guidance range.  On January 30, 2013 the Company announced that its Board of Directors declared a regular quarterly cash dividend of $0.175 per share payable March 28, 2013.

First Quarter Fiscal 2013 Financial Results

• Net income for the first quarter of fiscal 2013 was $3.8 million, an increase of 70% compared to net income of $2.3 million for the first quarter of fiscal 2012.  Diluted earnings per share for the first quarter of fiscal 2013 was $0.29, an increase of 71% compared to $0.17 for the first quarter of fiscal 2012.  This first quarter fiscal 2013 diluted earnings per share performance was near the middle of the Company's prior guidance range of $0.25-$0.32 provided in its November 15, 2012 press release.
• Adjusted EBITDA was $10.7 million for the first quarter of fiscal 2013, a 29% increase compared to the $8.3 million of Adjusted EBITDA for the first quarter of fiscal 2012.  Adjusted EBITDA is defined in the financial tables at the end of this press release.
• Net sales for the first quarter of fiscal 2013 decreased 0.8% to $135.3 million from $136.4 million for the first quarter of fiscal 2012.  The decrease in sales for the first quarter of fiscal 2013 compared to fiscal 2012 resulted primarily from decreased sales related to the Company's continued efforts to close underperforming stores, partially offset by an increase in comparable sales.  The net sales of $135.3 million for the first quarter were within the Company's guidance range of $132.5 to $136.5 million provided in November 2012.
• Comparable sales (which include Internet sales) for the first quarter of fiscal 2013 increased 1.9% versus a comparable sales decrease of 4.1% for the first quarter of fiscal 2012.  The comparable sales increase of 1.9% during the first quarter of fiscal 2013 was within the Company's guidance range for a comparable sales change of between flat and an increase of 3%.  The Company's first quarter reported comparable sales increase of 1.9% was adversely impacted by approximately 1 percentage point due to having one less Saturday in the first quarter of fiscal 2013 than in the first quarter of fiscal 2012.  Thus, adjusting for this "days shift," the Company's adjusted comparable sales increased approximately 2.9% for the first quarter.  In addition, the Company estimates that its first quarter comparable sales, both as reported and as adjusted above, were hurt by approximately 0.5 percentage points due to the impact on stores affected by Superstorm Sandy in late October and early November 2012.  The Company's Internet sales, which are included in the Company's reported comparable sales, increased 18% for the first quarter of fiscal 2013, on top of a 32% increase in the first quarter of fiscal 2012.

Financing and Related Activities

• On November 1, 2012, the Company announced that it entered into a new $61 million revolving credit facility with Wells Fargo Bank, N.A., which will mature on November 1, 2017.  The new credit facility replaced the Company's $55 million revolving credit facility with Bank of America, N.A., which was due to mature on January 13, 2013.
• On November 1, 2012, the Company repaid the remaining $13.4 million principal amount of its senior secured Term Loan, which was due to mature on March 13, 2013.
• On January 30, 2013, the Company announced that its Board of Directors declared a regular quarterly cash dividend of $0.175 per share, payable March 28, 2013 to stockholders of record at the close of business on March 7, 2013.

Retail Locations

The tables below summarize store opening and closing activity for the first quarter of fiscal 2013 and 2012, as well as the Company's store, total retail location and total international franchised location count at the end of each fiscal period.  In connection with the Company's new broad-based partnership with Bed Bath & Beyond Inc. and its subsidiary, Buy Buy Baby, Inc., the Company discontinued operation of its 124 remaining leased departments in Babies"R"Us® stores in late October 2012 and began to open leased departments in select buybuy BABY® stores.  The decrease in leased department locations at the end of December 2012 versus December 2011 predominantly reflects this change of partners in October 2012.  As of December 19, 2012, Bed Bath & Beyond Inc. had 80 buybuy BABY stores, including 12 stores as of December 31, 2012 in which the Company operates leased departments. Over time, the Company expects to significantly increase the number of buybuy BABY stores in which it has a maternity apparel leased department.

Commentary

Ed Krell, Chief Executive Officer of Destination Maternity Corporation, noted, "We are pleased to report a significant increase in earnings versus last year for our first quarter.  Our diluted earnings per share of $0.29 for the first quarter were 71% higher than last year's first quarter diluted earnings of $0.17 per share, and were near the middle of our prior earnings guidance range of $0.25 to $0.32 per share that we provided in our November 15, 2012 press release.  This represents our second consecutive quarter of achieving both a comparable sales increase and a significant increase in earnings over the prior year, showing the progress we are making in our sales-driving initiatives while maintaining strong operational and expense discipline.  In addition, we continued to use our strong free cash flow to generate shareholder value, both through the repayment of nearly all of our remaining debt during the first quarter, and continuing to return funds to our stockholders via a meaningful regular quarterly cash dividend.     

"Our total sales of $135.3 million for the first quarter were within our sales guidance range of $132.5 to $136.5 million provided in our November 15 press release, primarily due to our reported comparable sales increase of 1.9%, which was within our guidance range for a comparable sales change of between flat and an increase of 3% for the quarter.  It is important to note that we estimate that our first quarter reported comparable sales increase of 1.9% was adversely impacted by approximately 1 percentage point due to having one less Saturday in the first quarter of this fiscal year than last fiscal year, resulting in a days-adjusted comparable sales increase of approximately 2.9%.  In addition, we estimate that our first quarter comparable sales were hurt by approximately 0.5 percentage points due to the impact on stores affected by Superstorm Sandy in late October and early November 2012.

"Our key focus continues to be improving our sales performance through initiatives to enhance our merchandise assortments, merchandise presentation, store environment and customer experience.  While we recognize the challenging macroeconomic environment, we remain focused on the things that we can control, not on external factors that we cannot control.  During fiscal 2012, we made many changes to drive improvements in our merchandise assortments and the way these assortments are presented in store, and we are pleased with the improved sales trend we have seen in the Fall and early Spring product selling seasons as we progress during fiscal 2013.  We are cautiously optimistic that we will continue to see the results of our efforts in an improved sales trend during the current year and beyond."

Financing and Related Activities

"As previously announced, on November 1, 2012, we entered into a new five-year $61 million revolving credit facility to replace our $55 million revolving credit facility, which was due to mature on January 13, 2013.  In addition, simultaneous with entering into the new credit facility, we repaid the remaining $13.4 million principal amount of our senior secured Term Loan, which was due to mature on March 13, 2013. 

"The repayment of our Term Loan completes a dramatic decrease in our financial leverage over the past several years.  Over the past six years, our total debt has decreased from $118 million to $2 million, and our annual interest expense has decreased from $15 million to less than $1 million.  In addition, our new credit facility provides us with continued significant financial and operating flexibility as we continue to execute on our strategic plan."

Guidance for Fiscal 2013

"Looking forward, we are confident that we can continue to improve our sales performance and position our Company for continued future growth, by continuing to enhance our merchandise assortments, merchandise presentation, store environment and customer experience, and continuing to focus on our strategic plan as summarized in our five key goals and strategic objectives discussed later under "Company Strategy."  

"Our financial guidance for the full year fiscal 2013 is as follows:

• Net sales in the $538 to $549 million range, representing a projected sales change of between a decrease of 0.6% and an increase of 1.4% versus fiscal 2012 net sales of $541.5 million.  This sales guidance range is based on a projected comparable sales increase of between 1.5% and 3.5%.  
• Gross margin for fiscal 2013 is expected to increase between 50 and 90 basis points versus fiscal 2012, with greater improved year-over-year gross margin projected for the first half of the fiscal year.
• Total selling, general and administrative expenses (SG&A) are planned to be flat to modestly higher than fiscal 2012 in dollar terms and slightly higher than fiscal 2012 as a percentage of net sales.  The projected SG&A expense for the full year reflects increased marketing expenses, additions of talent to drive sales, and increased variable incentive compensation expense, as well as inflationary expense increases, partially offset by continued tight expense controls and additional cost reductions.
• Operating income in the $34.8 to $38.3 million range, a projected increase of between 5% and 16% compared to fiscal 2012 operating income of $33.1 million.
• Diluted earnings per share of between $1.58 and $1.74 per share for fiscal 2013, a projected increase of between 8% and 19% compared to diluted earnings per share of $1.46 per share for fiscal 2012.
• Adjusted EBITDA in the $52.0 to $55.5 million range, a projected increase of between 4% and 11% compared to the fiscal 2012 Adjusted EBITDA of $49.9 million.
• Open 14 to 20 new stores during the year, including 7 to 10 new multi-brand Destination Maternity stores, and close approximately 31 to 41 stores, with 11 to 15 of these planned store closings related to openings of new Destination Maternity stores.
• Capital expenditures planned at between $16 and $20 million compared to fiscal 2012 capital expenditures of $9.3 million.  After deducting projected tenant construction allowance payments to us from store landlords, the Company expects net cash outlay for capital projects to be between $13.0 million and $16.5 million, compared to $6.1 million in fiscal 2012.  Our planned capital expenditures include significant investments for store enhancements, as well as continued investments in systems, distribution center efficiency projects, and new stores.
• Inventory at fiscal 2013 year end planned to be approximately 4% to 8% lower than fiscal 2012 year end.
• Given these assumptions, the Company plans to generate free cash flow (defined as net cash provided by operating activities minus capital expenditures) of between $24 and $33 million for the full year fiscal 2013, an increase versus prior guidance of between $20 and $31 million, and a projected decrease from fiscal 2012 free cash flow of $33.4 million due to higher planned capital expenditures.  Based on the Company's current quarterly dividend rate of $0.175 per share, the dividend will use approximately $9.5 million of cash flow for fiscal 2013.

"Our financial guidance for the second quarter of fiscal 2013 is as follows:

• Net sales in the $134 to $138 million range.
• A projected comparable sales increase of 0.5% to 3.5% on a reported basis.  We estimate that our reported comparable sales for the second quarter of fiscal 2013 will be hurt by approximately 1 percentage point due to having one less day in February 2013 compared to February 2012.
• Diluted earnings per share of between $0.38 and $0.44 per share, a projection of between flat and an increase of 16% compared to diluted earnings per share of $0.38 for the second quarter of fiscal 2012."

Company Strategy

Mr. Krell added, "As we plan and execute our business for both this year and beyond, we continue to be guided by our five key goals and strategic objectives:

1. Be a profitable global leader in the maternity apparel business, treating all our partners and stakeholders with respect and fairness.

2. Increase the profitability of our U.S. business, focusing on the following:

a. Increase comparable sales, through continued improvement of merchandise assortments, merchandise presentation and customer experience, providing a more shoppable store environment for our customers, and through enhanced marketing and advertising. 

b. Reduce our expenditures and continue to be more efficient in operating our business—streamline, simplify and focus.

c. Continue to expand our multi-brand Destination Maternity store chain where ROI hurdles are met, with the goal of operating fewer but larger stores over time; and

d. Continue to close underperforming stores.

3. In addition to achieving increased comparable sales, we aim to grow our sales where we can do so profitably, including the following areas of focus:

a. International expansion.

b. Potential growth of our leased department and licensed relationships.

c. Increased utilization of the Internet to drive sales, targeting both increased direct Internet sales and enhanced web marketing initiatives to drive store sales.

d. Selective new store openings and relocations in the U.S. and Canada; and

e. Continued focus on enhancing our overall customer relationship, including our marketing partnership programs.

4. Focus on generating free cash flow to drive increased shareholder value.

5. Maintain and intensify our primary focus on delivering great maternity apparel product and service in each of our brands and store formats, to serve the maternity apparel customer like no one else can."

Mr. Krell concluded, "While we recognize that over the past four years we have faced the dual challenges of a deep recession followed by a weak recovery, as well as a 9% decrease in annual births in the United States since 2007, we remain focused on driving improvement in our sales performance through initiatives to enhance our merchandise assortments, merchandise presentation, store environment and customer experience.  We are pleased with our improved sales trend over the past two quarters, and we are confident in our ability to continue to manage our business through this uncertain consumer environment, to continue to improve our sales performance, and to continue to make progress towards our key corporate goals." 

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 first quarter fiscal 2013 earnings and future financial guidance.  You can participate in this conference call by calling (800) 299-6183 in the United States and Canada or (617) 801-9713 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 our website at http://investor.destinationmaternity.com.  The passcode for the conference call is "43054793."  In the event that you are unable to participate in the call, a replay will be available through Thursday, February 14, 2013 by calling (888) 286-8010 in the United States and Canada or (617) 801-6888 outside of the United States and Canada.  The passcode for the replay is "73287090."

Destination Maternity Corporation is the world's largest designer and retailer of maternity apparel.   In the United States and Canada, as of December 31, 2012, Destination Maternity operates 1,887 retail locations, including 621 stores, predominantly under the tradenames Motherhood Maternity®, A Pea in the Pod®, and Destination Maternity®, and 1,266 leased department locations, and sells on the web through its DestinationMaternity.com and brand-specific websites.  Destination Maternity also distributes its Oh Baby by Motherhood® collection through a licensed arrangement at over 1,100 Kohl's® stores throughout the United States and on Kohls.com.  In addition, Destination Maternity is expanding internationally and has exclusive store franchise and product supply relationships in India, the Middle East and South Korea.  As of December 31, 2012, Destination Maternity has 137 international franchised locations, including 121 shop-in-shop locations and 16 Destination Maternity branded stores.

***

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 continuation of the economic recovery 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 licensed relationships and marketing partnerships, future sales trends in our existing retail locations and through the Internet, 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 maternity apparel, 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 and develop senior management and sales associates, our ability to develop and source merchandise, our ability to receive production from foreign sources on a timely basis, potential stock repurchases, our ability to generate sufficient free cash flow to continue our regular quarterly cash dividend, the trading liquidity of our common stock, changes in market interest rates, war or acts of terrorism and other factors set forth in the Company's periodic filings with the Securities and Exchange Commission, or in materials incorporated therein by reference.

SOURCE Destination Maternity Corporation

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