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

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.

Third Quarter Fiscal 2018 Financial Results

• Net sales for the third quarter of fiscal 2018 decreased 3.7% to $92.8 million from $96.4 million for the third quarter of fiscal 2017. Sales were negatively impacted by the net closure of 27 owned locations and 12 leased lease locations in addition to a decrease in comparable sales.
• Comparable sales for the third quarter of fiscal 2018 decreased 2.6%, compared to an increase of 1.1% in the third quarter of fiscal 2017.
• Gross margin for the third quarter of fiscal 2018 was 52.4%, a decrease of 40 basis points from the comparable prior year gross margin.
• Selling, general and administrative expenses (“SG&A”) for the third quarter of fiscal 2018 decreased 8.7% to $48.6 million from $53.2 million for the third quarter of fiscal 2017. As a percentage of net sales, SG&A decreased 280 basis points to 52.4% vs 55.2% for the third quarter of fiscal 2017.
• Adjusted EBITDA before other charges and effect of change in accounting principle increased 95% to $3.9 million for the third quarter of fiscal 2018 from $2.0 million for the third quarter of fiscal 2017.
• Net loss for the third quarter of fiscal 2018 was $4.1 million, or $0.30 per share (diluted), compared to a net loss of $7.5 million, or $0.55 per share (diluted), for the third quarter of fiscal 2017.
• Adjusted net loss for the third quarter of fiscal 2018 was $1.7 million, or $0.12 per share (diluted), compared to the comparably adjusted net loss for the third quarter of fiscal 2017 of $2.7 million, or $0.20 per share (diluted).

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

• Net sales for the first nine months decreased 2.9% to $292.5 million from $301.1 million for the comparable period in fiscal 2017.
• Comparable sales for the first nine months of fiscal 2018 decreased 0.5%, compared to a decrease of 3.5% for the nine months ended October 28, 2017.
• Gross margin for the first nine months of fiscal 2018 was 52.6%, a decrease of 80 basis points from the comparable prior year gross margin.
• Selling, general and administrative expenses (“SG&A”) for the first nine months of fiscal 2018 decreased 6.9% to $150.6 million from $161.7 million for the first nine months of fiscal 2017. As a percentage of net sales, SG&A decreased 220 basis points to 51.5% from 53.7% for the first nine months of fiscal 2017.
• Adjusted EBITDA before other charges and effect of change in accounting principle increased 26% to $15.7 million for the first nine months of fiscal 2018 from $12.5 million for the first nine months of fiscal 2017.
• Net loss for the first nine months of fiscal 2018 was $7.9 million, or $0.57 per share (diluted), compared to a net loss of $11.4 million, or $0.83 per share (diluted), for the comparable period in fiscal 2017.
• Adjusted net loss for the first nine months of fiscal 2018 was $2.3 million, or $0.17 per share (diluted), compared to the comparably adjusted net loss for the first nine months of fiscal 2017 of $5.2 million, or $0.38 per share (diluted).

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

• Capital expenditures in the third quarter totaled $0.9 million primarily driven by minor investments in stores and investments to support key systems projects.
• At November 3, 2018, inventory was $79.1 million, an increase of $5.1 million compared to $73.9 million at October 28, 2017, in part due to the previously announced Amazon roll-out.

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.

View source version on businesswire.com: https://www.businesswire.com/news/home/20181211005272/en/