Destination Maternity Reports Q2 Earnings And Provides Updated Earnings Guidance For Fiscal 2014

PHILADELPHIA, April 24, 2014 /PRNewswire/ -- Destination Maternity Corporation (Nasdaq: DEST), the world's leading maternity apparel retailer, today announced operating results for the second quarter of fiscal 2014, which ended March 31, 2014, and updated its earnings guidance for fiscal 2014.

Second Quarter Fiscal 2014 Financial Results

• Net income for the second quarter of fiscal 2014 was $3.2 million, a decrease compared to net income of $5.9 million for the second quarter of fiscal 2013.  Diluted earnings per share for the second quarter of fiscal 2014 was $0.24, a decrease compared to $0.44 for the second quarter of fiscal 2013.  This second quarter fiscal 2014 diluted earnings per share performance was in line with the Company's updated guidance of $0.23-$0.24 per share provided on April 10, 2014, but lower than its prior guidance range of $0.35-$0.40 provided in its January 30, 2014 press release.
  
  
• Net income for the second quarter of fiscal 2014 includes other charges of approximately $0.3 million, net of tax, or $0.02 per diluted share, related to the Company's planned relocations of its headquarters and distribution facilities.  Adjusted diluted earnings per share, which is presented in the financial tables at the end of this press release and excludes these charges, was $0.26 for the second quarter of fiscal 2014, a decrease compared to $0.44 for the second quarter of fiscal 2013.  This second quarter fiscal 2014 adjusted diluted earnings per share performance was in line with the Company's updated guidance of $0.25-$0.26 per share provided on April 10, 2014, but lower than its prior guidance range of $0.37-$0.42 provided in its January 30, 2014 press release.
  
  
• Adjusted EBITDA was $10.5 million for the second quarter of fiscal 2014, a decrease compared to $13.7 million of Adjusted EBITDA for the second quarter of fiscal 2013.  Adjusted EBITDA before other charges was $10.6 million for the second quarter of fiscal 2014, a decrease compared to $13.7 million of Adjusted EBITDA before other charges for the second quarter of fiscal 2013.
  
  
• Net sales for the second quarter of fiscal 2014 decreased 6.5% to $126.1 million from $134.9 million for the second quarter of fiscal 2013.  The decrease in sales for the second quarter of fiscal 2014 compared to fiscal 2013 resulted primarily from a decrease in comparable sales and decreased sales related to the Company's continued efforts to close underperforming stores.  The net sales of $126.1 million for the second quarter were below the low end of the Company's guidance range of $131 to $134 million provided in January 2014.
  
  
• Comparable sales for the second quarter of fiscal 2014 decreased 5.1% compared to a comparable sales increase of 1.6% for the second quarter of fiscal 2013.  The comparable sales decrease of 5.1% for the second quarter of fiscal 2014 was below the low end of the Company's guidance range for a comparable sales change of between a decrease of 1% and an increase of 2%.  Adjusting for the calendar timing shift, the Company's calendar-adjusted comparable sales decreased 5.6% for the second quarter of fiscal 2014 and increased 2.4% for the second quarter of fiscal 2013.  The Company's Internet sales increased 0.6% for the second quarter of fiscal 2014 on a reported basis, and increased 4.7% in the second quarter of fiscal 2013.

First Six Months of Fiscal 2014 Financial Results

• Net income for the first six months of fiscal 2014 was $7.5 million, a decrease compared to net income of $9.7 million for the first six months of fiscal 2013.  Diluted earnings per share for the first six months of fiscal 2014 was $0.55, a decrease compared to $0.73 for the first six months of fiscal 2013.
  
  
• Net income for the first six months of fiscal 2014 includes other charges of approximately $0.5 million, net of tax, or $0.04 per diluted share, related to the Company's planned relocations of its headquarters and distribution facilities.  Adjusted diluted earnings per share was $0.59 for the first six months of fiscal 2014, a decrease compared to $0.73 for the first six months of fiscal 2013.
  
  
• Adjusted EBITDA was $21.8 million for the first six months of fiscal 2014, a decrease compared to $24.5 million of Adjusted EBITDA for the first six months of fiscal 2013.  Adjusted EBITDA before other charges was $22.1 million for the first six months of fiscal 2014, a decrease compared to $24.5 million of Adjusted EBITDA before other charges for the first six months of fiscal 2013.
  
  
• Net sales for the first six months of fiscal 2014 decreased 3.4% to $260.9 million from $270.1 million for the first six months of fiscal 2013.  The decrease in sales for the first six months of fiscal 2014 compared to fiscal 2013 resulted primarily from a decrease in comparable sales and decreased sales related to the Company's continued efforts to close underperforming stores.
  
  
• Comparable sales for the first six months of fiscal 2014 decreased 2.1% compared to a comparable sales increase of 1.9% for the first six months of fiscal 2013.  Adjusting for the calendar timing shift, the Company's calendar-adjusted comparable sales decreased 2.2% for the first six months of fiscal 2014 and increased 3.1% for the first six months of fiscal 2013.  The Company's Internet sales increased 2.6% for the first six months of fiscal 2014 on a reported basis, and increased 11% for the first six months of fiscal 2013.

Retail Locations

The tables below summarize store opening and closing activity for the second quarter and first six months of fiscal 2014 and 2013, as well as the Company's store, total retail location and total international franchised location count at the end of each fiscal period.  The growth in the number of leased department locations at March 31, 2014 compared to March 31, 2013 resulted predominantly from the increase in the number of leased departments operated in buybuy BABY® stores.  As of March 31, 2014, the Company operates leased departments in 85 buybuy BABY stores, an increase from the 14 leased departments operated in buybuy BABY stores as of March 31, 2013.

In November 2013, the Company announced its planned expansion into Mexico through an international franchise agreement with El Puerto de Liverpool, S.A.B. de C.V. ("Liverpool"), the largest department store company in Mexico.  Through this franchise relationship, Destination Maternity will introduce its Motherhood Maternity®, A Pea in the Pod®, and Destination Maternity® brands into Mexico, with the first franchised locations opening by the end of April 2014.  Destination Maternity brands will initially be sold through shop-in-shops in Liverpool department stores throughout Mexico, with plans to open freestanding Destination Maternity stores in Mexico later in 2014 and beyond.

Comparable Sales Data

Comparable sales data (which includes Internet sales) for the second quarter and first six months of fiscal 2014 and 2013 is presented in the table below. 

Refer to the section entitled "Days Adjustment Calendar Shift" later in this press release for a description of calendar-adjusted comparable sales. 

Dividend

The Company's Board of Directors declared a regular quarterly cash dividend of $0.20 per share, payable June 27, 2014 to stockholders of record at the close of business on June 6, 2014.

Commentary

Ed Krell, Chief Executive Officer of Destination Maternity Corporation, noted, "We are disappointed in our sales and earnings results for the second quarter.  Our sales for the quarter were considerably weaker than planned.  We believe the primary driver of this sales weakness was the adverse weather conditions across much of the United States during the quarter, which included significantly colder than normal temperatures and much more inclement weather than normal, with numerous periods of snow and icy conditions which suppressed store traffic for us and many retailers in many regions of the United States.  These extreme weather conditions adversely impacted sales, particularly sales of Spring merchandise, which represent a significantly larger percentage of our total sales for the second fiscal quarter than do sales of Fall merchandise.  We believe that our weaker than planned sales results also reflect the continued challenging overall economic environment which has affected many retailers in recent months.  Our sales for the quarter were well below the low end of our expected sales range and, as a result of this sales shortfall, our earnings for the second quarter, although in line with our updated guidance of April 10, 2014, were below the low end of our prior earnings guidance range that we provided in our January 30, 2014 press release, and significantly lower than our second quarter fiscal 2013 earnings.

"Our total sales of $126.1 million for the second quarter were below the low end of our sales guidance range of $131 to $134 million provided in our January 30, 2014 press release, primarily due to our reported comparable sales decrease of 5.1%, which was below the low end of our guidance range for a comparable sales change of between a decrease of 1% and an increase of 2% for the quarter.

"We are pleased that we have seen a significant improvement in our sales trend thus far in April compared to our second quarter sales performance."

Relocations of Corporate Headquarters and Distribution Operations

"As we announced in September 2013, we are very excited about our plans to relocate our corporate headquarters and distribution operations from Philadelphia, Pennsylvania to southern New Jersey.  We will soon be starting the interior renovations to the office building in Moorestown, New Jersey that will house our new corporate headquarters, which will provide a more modern, spacious, bright and open office environment for our headquarters team members.  On March 28, 2014 we had the groundbreaking ceremony for our new, build-to-suit, state-of-the-art distribution facility in Florence, New Jersey.  We plan to relocate our corporate headquarters in late 2014 and our distribution operations in early/mid 2015. 

"We expect to close on the sale of our current headquarters/distribution facility by the end of fiscal 2014, and expect to realize a gain from the sale of this facility.  We will also incur some, predominantly non-cash, charges to earnings in fiscal 2014 and 2015 related to the closure of our existing facilities and the preparation for occupancy of our new facilities.  We project that our "other charges (income)," including both the projected gain on the sale of our current headquarters/distribution facility, and the charges associated with the facilities relocations, will be:  (1)  approximately $0.8 million of pretax income, or approximately $0.5 million income after tax ($0.04 per diluted share) for fiscal 2014, and (2) approximately $0.5 million of pretax expense, or approximately $0.3 million expense after tax ($0.02 per diluted share) for fiscal 2015.  We project that, once we are operating in both our new headquarters and new distribution center facilities, which we expect to begin during the middle of fiscal  2015, our ongoing annualized after-tax earnings benefit from the relocations will be approximately $0.10 per diluted share, and our ongoing annualized after-tax cash benefit from the relocations will be approximately $4 million.

"Capital expenditures associated with the relocations are planned at between $25 to $27 million for fiscal 2014, with nearly $4 million of this amount expected to be offset by construction allowance contributions from our landlord.  Additionally, we expect approximately $10 million of capital expenditures for the relocations in fiscal 2015."

Financing and Related Activities

"We continue to use our strong free cash flow to generate shareholder value.  In fiscal 2013 we repaid the remaining $15.3 million principal amount of our debt.  This completed a dramatic decrease in our debt from $118 million to $0 over a seven-year period through use of our operating cash flow.  Given our strong balance sheet, and the strong profitability and cash flow generation of our Company, we increased our regular quarterly cash dividend, beginning with our March 2014 dividend payment, to further enhance the total return to our stockholders.  Our regular quarterly cash dividend of $0.20 per share paid March 28, 2014 was a 6.7% increase from our previous quarterly dividend rate of $0.1875 per share and represents an annual dividend rate of $0.80 per share compared to our previous annual rate of $0.75 per share."

Guidance for Fiscal 2014

"Looking forward, we are confident that we can continue to improve our sales performance and position our Company for future growth, by continuing to enhance our merchandise assortments, merchandise presentation, store environment and customer experience, and by 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 2014 is as follows:

• Net sales in the $528 to $535 million range, representing a projected sales decrease of between 1.0% and 2.3% compared to fiscal 2013 net sales of $540.3 million.  This sales guidance range is based on a projected comparable sales change of between a decrease of 1.0% and an increase of 0.5%.  
  
  
• Gross margin for fiscal 2014 is expected to increase between 60 and 100 basis points compared to the fiscal 2013 gross margin of 53.9%.
  
  
• Total selling, general and administrative expenses (SG&A) are planned to increase between 0% and 2%  compared to fiscal 2013 SG&A of $252.0 million.  The projected increase in SG&A for the full year reflects additions of talent to drive sales and other inflationary wage and wage related expense increases, and increased marketing and advertising expenses, partially offset by continued tight expense controls.
  
  
• Other charges (income) related to the Company's previously announced relocations are projected to be a net pretax income amount of approximately $0.8 million, reflecting a projected gain on sale of the Company's current headquarters/distribution facility of $3.2 million, partially offset by  projected non-cash accelerated depreciation and amortization expense of $1.1 million, with the remainder consisting primarily of non-cash pre-opening rent expense for the new facilities.  This net "other income" is projected to be approximately $0.04 per diluted share (after tax).
  
  
• Operating income in the $34.0 to $36.9 million range, a projected decrease of between 2% and 9% compared to fiscal 2013 operating income of $37.5 million.  Operating income before other charges is projected in the $33.1 to $36.0 million range, a projected decrease of between 4% and 12% versus fiscal 2013.
  
  
• Diluted earnings per share of between $1.53 and $1.66 per share for fiscal 2014, a projected decrease of between 7% and 14% compared to diluted earnings per share of $1.78 per share for fiscal 2013.  Projected diluted earnings per share for fiscal 2014 includes a net after-tax other income amount of approximately $0.04 per diluted share related to the Company's planned relocations and sale of its current corporate headquarters and distribution center building.  Diluted earnings per share for fiscal 2013 includes a reduction of state income tax expense, net of federal expense, of $0.09 per diluted share.  The Company's prior diluted earnings per share guidance range provided on January 30, 2014 was $1.61-$1.79.
  
  
• Adjusted diluted earnings per share is projected to be between $1.49 and $1.62 per share for fiscal 2014, a projected decrease of between 4% and 12% compared to adjusted diluted earnings per share of $1.69 per share for fiscal 2013.  The Company's prior Adjusted diluted earnings per share guidance range provided on January 30, 2014 was $1.72-$1.90. A reconciliation between diluted earnings per share and Adjusted diluted earnings per share is provided in the financial tables at the end of this press release.
  
  
• Adjusted EBITDA in the $52.1 to $55.0 million range, a projected change of between a decrease of 4% and increase of 2% compared to the fiscal 2013 Adjusted EBITDA of $54.0 million.  Adjusted EBITDA before other charges is projected in the $53.4 to $56.3 million range, a projected change of between a decrease of 1% and an increase of 4% versus fiscal 2013.
  
  
• Open 21 to 23 new stores during the year, including 5 to 6 new multi-brand Destination Maternity nameplate stores, and close approximately 49 to 54 stores, with 9 to 10 of these planned store closings related to openings of new Destination Maternity nameplate stores.
  
  
• Capital expenditures planned at between $48 and $53 million compared to fiscal 2013 capital expenditures of $15.1 million.  Excluding approximately $25 to $27 million of planned fiscal 2014 capital expenditures associated with the relocations, capital expenditures are planned at between $23 and $26 million, compared to fiscal 2013 capital expenditures of $15.1 million.  Excluding capital expenditures associated with the relocations, after deducting projected tenant construction allowance payments to us from store landlords, the Company expects net cash outlay for capital projects to be between $18 and $21 million, compared to $12.7 million in fiscal 2013.  Our planned capital expenditures include significant investments for the relocations of our headquarters and distribution operations, store enhancements, store remodels, relocations and new stores, as well as continued investments in information systems and technology.
  
  
• Inventory at fiscal 2014 year end planned to be approximately 3% higher than fiscal 2013 year end.
  
  
• Given these assumptions, the Company expects capital expenditures to exceed net cash provided by operating activities by between $1 and $9 million for the full year fiscal 2014.  Excluding the approximately $25 to $27 million of capital expenditures related to the relocations of our corporate headquarters and distribution operations, projected full year fiscal 2014 free cash flow (defined as net cash provided by operating activities minus capital expenditures) is between $17 and $24 million, a projected decrease from fiscal 2013 free cash flow of $27.1 million due to higher planned capital expenditures.  Based on the Company's current quarterly dividend rate of $0.20 per share, the dividend will use approximately $10.8 million of cash flow for fiscal 2014, and is projected to use approximately $11.0 million on an annualized basis.

"Our financial guidance for the third quarter of fiscal 2014 is as follows:

• Net sales in the $138 to $142 million range.
  
  
• A projected comparable sales change of between a decrease of 1% and an increase of 2% on a reported basis.
  
  
• Diluted earnings per share of between $0.53 and $0.62 per share, compared to diluted earnings per share of $0.64 for the third quarter of fiscal 2013.
  
  
• Adjusted diluted earnings per share of between $0.56 and $0.65 per share, compared to adjusted diluted earnings per share of $0.64 for the third quarter of fiscal 2013."

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:

Mr. Krell concluded, "We remain focused on driving improvement in our sales performance through initiatives to enhance our merchandise assortments, merchandise presentation, store environment and customer experience.  Our progress in these sales-driving initiatives is evidenced by our previous six consecutive quarters of comparable sales increases up until this most recent quarter, and we believe we are well positioned 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." 

Days Adjustment Calendar Shift

Destination Maternity reports sales on a calendar quarter basis, rather than on a "4-5-4 retail fiscal calendar" where each fiscal week and fiscal quarter starts on a Sunday and ends on a Saturday.  Thus, for each calendar quarter, there is a "days adjustment calendar shift" which may help or hurt reported calendar quarter sales and comparable sales due to different days of the week typically contributing more sales than other days of the week.  In order to quantify and eliminate the effect on reported comparable sales results of the "days adjustment calendar shift", the Company also presents comparable sales on a calendar-adjusted basis.  For the second quarter of fiscal 2014, calendar-adjusted comparable sales were measured for the period Wednesday January 1, 2014 through Monday March 31, 2014 compared to the period Wednesday January 2, 2013 through Monday April 1, 2013.  The Company estimates the calendar shift favorably impacted its reported comparable sales for the second quarter of fiscal 2014 by approximately 0.5 percentage points.  Thus, calendar-adjusted comparable sales for the second quarter of fiscal 2014 decreased 5.6%, compared to the reported comparable sales decrease of 5.1%.  For the first six months of fiscal 2014, calendar-adjusted comparable sales were measured for the period Tuesday October 1, 2013 through Monday March 31, 2014 compared to the period Tuesday October 2, 2012 through Monday April 1, 2013.  The Company estimates the calendar shift favorably impacted its reported comparable sales for the first six months of fiscal 2014 by approximately 0.1 percentage point.  Thus, calendar-adjusted comparable sales for the first six months of fiscal 2014 decreased 2.2%, compared to the reported comparable sales decrease of 2.1%.  The Company estimates the calendar shift unfavorably impacted its reported comparable sales for the second quarter of fiscal 2013 by approximately 0.8 percentage points, primarily as a result of having one less day in the quarter versus the second quarter of fiscal 2012, due to 2012 being a leap year.  The Company estimates the calendar shift unfavorably impacted its reported comparable sales for the first six months of fiscal 2013 by approximately 1.2 percentage points, primarily as a result of:  (1) having one less Saturday versus the first six months of fiscal 2012, and (2) having one less day versus the first six months of fiscal 2012 due to the leap year in 2012.

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 second quarter fiscal 2014 earnings and future financial guidance.  You can participate in this conference call by calling (877) 299-4454 in the United States and Canada or (617) 597-5447 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 "90838489."  In the event that you are unable to participate in the call, a replay will be available through Thursday, May 8, 2014 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 "25192278."

Destination Maternity Corporation is the world's largest designer and retailer of maternity apparel.   In the United States and Canada, as of March 31, 2014, Destination Maternity operates 1,906 retail locations, including 578 stores, predominantly under the tradenames Motherhood Maternity®, A Pea in the Pod®, and Destination Maternity®, and 1,328 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 Kohl's® stores throughout the United States and on Kohls.com.  In addition, Destination Maternity has international store franchise and product supply relationships in the Middle East, South Korea and Mexico.  As of March 31, 2014, Destination Maternity has 32 international franchised locations, including 19 Destination Maternity branded stores and 13 shop-in-shop locations.  The Company expects its first franchised locations in Mexico to open by the end of April 2014, pursuant to its franchise agreement with El Puerto de Liverpool, S.A.B. de C.V., the largest department store company in Mexico.

***

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, our ability to successfully manage and accomplish our planned relocations of our headquarters and distribution operations with minimal disruption to our overall operations, 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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