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DEST > SEC Filings for DEST > Form 10-Q on 8-May-2013All Recent SEC Filings

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Form 10-Q for DESTINATION MATERNITY CORP


8-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Our fiscal year ends on September 30. All references in this discussion to our fiscal years refer to the fiscal year, or periods within the fiscal year, ended on September 30 in the year mentioned. For example, our "fiscal 2013" will end on September 30, 2013.

Overview

We are the leading designer and retailer of maternity apparel in the United States with 1,875 retail locations, including 613 stores in all 50 states, Puerto Rico and Canada, and 1,262 leased departments located within department stores and baby specialty stores throughout the United States and Puerto Rico. In addition to the 1,875 retail locations we operate, through an exclusive licensed arrangement we are the exclusive provider of maternity apparel to Kohl's®, which operates approximately 1,155 stores throughout the United States. We also sell merchandise on the Internet, primarily through DestinationMaternity.com and our various brand-specific websites.

In assessing the performance of our business, we consider a variety of operational and financial measures. The key measures for determining how our business is performing are net income determined in accordance with GAAP ("GAAP net income") and the corresponding net income (or earnings) per share (diluted), net income before stock-based compensation expense and loss on extinguishment of debt ("Non-GAAP adjusted net income") and the corresponding earnings per share (diluted), Adjusted EBITDA (defined below), net sales, comparable sales, and adjusted comparable sales. Adjusted EBITDA represents operating income before deduction for the following non-cash charges: (i) depreciation and amortization expense, (ii) loss on impairment of tangible and intangible assets, (iii) (gain) loss on disposal of assets, and (iv) stock-based compensation expense.

Comparable sales figures include sales at retail locations (which does not include licensed or franchised relationships) that have been in operation by us for at least twelve full months at the beginning of the period for which such data is presented, as well as Internet sales. Comparable sales figures do not include retail locations opened during a period even if such location was opened in connection with the closure of other retail locations in the same geographic area (including, for example, the opening of a new Destination Maternity combo store or superstore). Also, our comparable sales figures generally do not include: (i) retail locations which change store nameplate, location type or format, (ii) retail locations which are expanded, contracted or relocated if the square footage of the retail location has changed by 20% or more, or, if in the judgment of management, such expansion, contraction or relocation materially alters the comparability of the retail location (either with respect to the manner of its operation or otherwise), (iii) in the case of relocations only, retail locations which are not in the same immediate geographical vicinity (such as, without limitation, the same mall, the same part of a mall, or the same street) after the relocation, or (iv) retail locations which, in the judgment of management, have undergone other significant changes which materially alter the comparability of the retail location (either with respect to the manner of its operation or otherwise) (such as, for example only, in the case of closure of retail locations in connection with the cessation of a leased department relationship where the manner of operation of such retail location has been materially altered prior to closure, or in the case of construction in, on or near a retail location, which significantly interferes with the customer traffic, visibility or operation of a retail location).

We report 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 period, there is a "days adjustment calendar shift" which may help or hurt reported calendar quarter and fiscal year to date 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", we also present comparable sales on an adjusted basis. For example, for the second quarter of fiscal 2013, adjusted comparable sales were measured for the period Tuesday January 1, 2013 through Sunday March 31, 2013 compared to the period Tuesday January 3, 2012 through Sunday April 1, 2012 and for the first six months of fiscal 2013, adjusted comparable sales were measured for the period Monday October 1, 2012 through Sunday March 31, 2013 compared to the period Monday October 3, 2011 through Sunday April 1, 2012.

Following is a summary of our results for the second quarter and first six months of fiscal 2013 with regard to each of the key measures noted above:

Second Quarter Fiscal 2013 Financial Results

• GAAP net income for the second quarter of fiscal 2013 was $5.9 million, or $0.44 per share (diluted), an 18% increase compared to GAAP net income of $5.0 million, or $0.38 per share (diluted), for the second quarter of fiscal 2012. This represents an increase of 16% in diluted earnings per share.

• Non-GAAP adjusted net income for the second quarter of fiscal 2013 was $6.4 million, or $0.48 per share (diluted), a 19% increase compared to the comparably adjusted non-GAAP net income for the second quarter of fiscal 2012 of $5.4 million, or $0.40 per share (diluted). This represents a 20% increase in comparably adjusted diluted earnings per share.

• Adjusted EBITDA was $13.7 million for the second quarter of fiscal 2013, an increase of 6.6% compared to $12.9 million of Adjusted EBITDA for the second quarter of fiscal 2012.


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• Net sales for the second quarter of fiscal 2013 decreased 2.1% to $134.9 million from $137.8 million for the second quarter of fiscal 2012.

• Comparable sales for the second quarter of fiscal 2013 increased 1.6% compared to a comparable sales increase of 3.2% for the second quarter of fiscal 2012. Our second quarter fiscal 2013 reported comparable sales increase of 1.6% was unfavorably impacted by 0.8 percentage points primarily from having one less day in the quarter compared to the second quarter of fiscal 2012, due to 2012 being a leap year. Our second quarter fiscal 2012 reported comparable sales increase of 3.2% was favorably impacted by approximately 2.5 percentage points due to 1) having an extra day in the quarter compared to the second quarter of fiscal 2011, and 2) the benefit of a days shift in the calendar month of March compared to fiscal 2011, with an extra Friday and Saturday compared to March 2011, and one less Tuesday and Wednesday compared to March 2011. Adjusting for these calendar shifts our adjusted comparable sales increased 2.4% for the second quarter of fiscal 2013 and increased 0.7% for the second quarter of fiscal 2012.

First Six Months of Fiscal 2013 Financial Results

• GAAP net income for the first six months of fiscal 2013 was $9.7 million, or $0.73 per share (diluted), a 34% increase compared to GAAP net income of $7.2 million, or $0.55 per share (diluted) for the first six months of fiscal 2012. This represents an increase of 33% in diluted earnings per share.

• Non-GAAP adjusted net income for the first six months of fiscal 2013 was $10.7 million, or $0.80 per share (diluted), a 33% increase compared to the comparably adjusted non-GAAP net income for the first six months of fiscal 2012 of $8.0 million, or $0.60 per share (diluted). This represents a 33% increase in comparably adjusted diluted earnings per share.

• Adjusted EBITDA was $24.5 million for the first six months of fiscal 2013, a 15% increase compared to $21.2 million of Adjusted EBITDA for the first six months of fiscal 2012.

• Net sales for the first six months of fiscal 2013 decreased 1.5% to $270.1 million from $274.1 million for the first six months of fiscal 2012.

• Comparable sales for the first six months of fiscal 2013 increased 1.9% versus a comparable sales decrease of 0.6% for the first six months of fiscal 2012. Our first six months of fiscal 2013 reported comparable sales increase of 1.9% was unfavorably impacted by 1.2 percentage points primarily as a result of 1) having one less Saturday compared to the first six months of fiscal 2012, and 2) having one less day compared to the first six months of fiscal 2012 due to the leap year in 2012. Our first six months of fiscal 2012 reported comparable sales decrease of 0.6% was favorably impacted by approximately 1.0 percentage point due to 1) having an extra day in the six month period compared to the first six months of fiscal 2011, and 2) the benefit of the calendar shift in March 2012 compared to March 2011. Adjusting for these calendar shifts our adjusted comparable sales increased 3.1% for the first six months of fiscal 2013 and decreased 1.6% for the first six months of fiscal 2012.


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Results of Operations

The following tables set forth certain operating data as a percentage of net
sales and as a percentage change for the three and six months ended March 31:



                                                                                              % Change Period to Period
                                                     % of Net Sales (1)                        Favorable (Unfavorable)
                                                                                              Three                 Six
                                              Three                      Six                 Months               Months
                                           Months Ended              Months Ended             Ended                Ended
                                            March 31,                 March 31,             March 31,            March 31,
                                                                                            2013 vs.             2013 vs.
                                        2013         2012         2013         2012           2012                 2012
Net sales                                100.0 %      100.0 %      100.0 %      100.0 %           (2.1 )%              (1.5 )%
Cost of goods sold (2)                    45.9         46.5         46.6         47.7              3.4                  3.7

Gross profit                              54.1         53.5         53.4         52.3             (1.1 )                0.5
Selling, general and administrative
expenses (3)                              46.7         46.9         47.1         47.3              2.5                  1.9
Store closing, asset impairment and
asset disposal expenses                    0.2          0.4          0.3          0.4             51.4                 26.4

Operating income                           7.2          6.2          6.0          4.6             13.0                 27.5
Interest expense, net                      0.1          0.2          0.1          0.3             63.1                 56.0
Loss on extinguishment of debt              -            -           0.0          0.0               -                  10.0

Income before income taxes                 7.1          6.0          5.9          4.3             16.2                 32.8
Income tax provision                       2.7          2.4          2.3          1.7            (13.4 )              (30.6 )

Net income                                 4.4 %        3.6 %        3.6 %        2.6 %           18.0 %               34.2 %

(1) Components may not add to total due to rounding.

(2) "Cost of goods sold" includes merchandise costs (including customs duty expenses), expenses related to inventory shrinkage, product related corporate expenses (including expenses related to our payroll, benefit costs and operating expenses of our buying departments), inventory reserves (including lower of cost or market reserves), inbound freight charges, purchasing and receiving costs, inspection costs, warehousing costs, internal transfer costs, and the other costs of our distribution network.

(3) "Selling, general and administrative expenses" includes advertising and marketing expenses, corporate administrative expenses, store expenses (including store payroll and store occupancy expenses), and store opening expenses.

The following tables set forth certain information concerning the number of our retail locations, and international franchised locations for the periods indicated:

                                                          Three Months Ended March 31,
                                            2013                                                2012
                                        Leased          Total Retail                        Leased          Total Retail
Retail Locations (1)    Stores        Departments         Locations         Stores        Departments         Locations
Beginning of period         621              1,266              1,887           656              1,405              2,061
Opened                        8                  5                 13             4                  6                 10
Closed                      (16 )               (9 )              (25 )         (17 )              (27 )              (44 )

End of period               613              1,262              1,875           643              1,384              2,027

                                                           Six Months Ended March 31,
                                            2013                                                2012
                                        Leased          Total Retail                        Leased          Total Retail
Retail Locations (1)    Stores        Departments         Locations         Stores        Departments         Locations
Beginning of period         625              1,383              2,008           658              1,694              2,352
Opened                       10                 18                 28             4                  8                 12
Closed                      (22 )             (139 )             (161 )         (19 )             (318 )             (337 )

End of period               613              1,262              1,875           643              1,384              2,027

(1) Excludes international franchised locations.


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                                                                       Three Months Ended March 31,
                                                         2013                                               2012
                                                                        Total                                               Total
                                                                    International                                       International
                                                 Shop-in-Shop        Franchised                     Shop-in-Shop         Franchised
International Franchised Locations   Stores        Locations          Locations        Stores         Locations           Locations
Beginning of period                       16               121                 137          15                 63                   78
Opened                                    -                  3                   3          -                  18                   18
Closed                                    -                 -                   -           (1 )               (1 )                 (2 )

End of period                             16               124                 140          14                 80                   94

                                                                          Six Months Ended March 31,
                                                          2013                                                 2012
                                                                          Total                                                Total
                                                                      International                                        International
                                                  Shop-in-Shop         Franchised                      Shop-in-Shop         Franchised
International Franchised Locations   Stores         Locations           Locations         Stores         Locations           Locations
Beginning of period                       16                103                  119           15                 51                   66
Opened                                     1                 22                   23           -                  31                   31
Closed                                    (1 )               (1 )                 (2 )         (1 )               (2 )                 (3 )

End of period                             16                124                  140           14                 80                   94

Three Months Ended March 31, 2013 and 2012

Net Sales. Our net sales for the second quarter of fiscal 2013 decreased by 2.1%, or $2.9 million, to $134.9 million from $137.8 million for the second quarter of fiscal 2012. Comparable sales for the second quarter of fiscal 2013 increased 1.6% compared to a comparable sales increase of 3.2% for the second quarter of fiscal 2012. Our second quarter fiscal 2013 reported comparable sales increase of 1.6% was unfavorably impacted by 0.8 percentage points primarily from having one less day in the quarter compared to the second quarter of fiscal 2012, due to 2012 being a leap year. Our second quarter fiscal 2012 reported comparable sales increase of 3.2% was favorably impacted by approximately 2.5 percentage points due to 1) having an extra day in the quarter compared to the second quarter of fiscal 2011, and 2) the benefit of a days shift in the calendar month of March compared to fiscal 2011, with an extra Friday and Saturday compared to March 2011, and one less Tuesday and Wednesday compared to March 2011. Adjusting for these calendar shifts our adjusted comparable sales increased 2.4% for the second quarter of fiscal 2013 and increased 0.7% for the second quarter of fiscal 2012. The decrease in total reported sales for the second quarter of fiscal 2013 compared to the second quarter of fiscal 2012 resulted primarily from the closure of all of our remaining leased departments within Babies"R"Us® stores during the month of October 2012, and our continued efforts to close underperforming stores, partially offset by the increase in comparable sales.

As of March 31, 2013, we operated a total of 613 stores and 1,875 total retail locations, compared to 643 stores and 2,027 total retail locations as of March 31, 2012. During the second quarter of fiscal 2013, we opened eight stores, including three Destination Maternity multi-brand stores, and we closed 16 stores, with five of the store closings related to Destination Maternity store openings. In connection with our new broad-based partnership with Bed Bath & Beyond Inc. and its subsidiary, Buy Buy Baby, Inc., which we previously announced in May 2012, we discontinued operation of our 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 March 2013 compared to March 2012 predominantly reflects this change of partners in October 2012. According to Bed Bath & Beyond Inc.'s latest public disclosure, as of April 10, 2013 there are 83 buybuy BABY stores. As of March 31, 2013, the Company operates leased departments in 14 of these stores. Over time, we expect to significantly increase the number of buybuy BABY stores in which we have a maternity apparel leased department. In addition, our Oh Baby by Motherhood® collection is available at Kohl's stores throughout the United States.

Gross Profit. Our gross profit for the second quarter of fiscal 2013 decreased by 1.1%, or $0.8 million, to $73.0 million from $73.8 million for the second quarter of fiscal 2012, and our gross profit as a percentage of net sales (gross margin) for the second quarter of fiscal 2013 was 54.1% compared to 53.5% for the second quarter of fiscal 2012. The decrease in gross profit for the second quarter of fiscal 2013 compared to the second quarter of fiscal 2012 was due to our lower sales. The increase in gross margin for the second quarter of fiscal 2013 compared to the second quarter of fiscal 2012 was primarily due to lower product costs.


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Selling, General and Administrative Expenses. Our selling, general and administrative expenses for the second quarter of fiscal 2013 decreased by 2.5%, or $1.6 million, to $63.0 million from $64.6 million for the second quarter of fiscal 2012. As a percentage of net sales, selling, general and administrative expenses decreased to 46.7% for the second quarter of fiscal 2013 compared to 46.9% for the second quarter of fiscal 2012. This decrease in expense for the quarter resulted primarily from lower expenses related to our continued efforts to close underperforming stores (primarily payroll and occupancy costs), partially offset by higher advertising and marketing expenses and higher variable incentive compensation expense.

Store Closing, Asset Impairment and Asset Disposal Expenses. Our store closing, asset impairment and asset disposal expenses for the second quarter of fiscal 2013 decreased by $0.3 million, to $0.3 million from $0.6 million for the second quarter of fiscal 2012, which primarily reflected lower impairment charges for write-downs of long-lived assets.

Operating Income. We had operating income of $9.7 million for the second quarter of fiscal 2013, an increase of 13.0% compared to $8.6 million for the second quarter of fiscal 2012. Operating income as a percentage of net sales for the second quarter of fiscal 2013 increased to 7.2% from 6.2% for the second quarter of fiscal 2012. The increase in operating income and operating income percentage was primarily due to our lower selling, general and administrative expenses, partially offset by lower gross profit.

Interest Expense, Net. Our net interest expense for the second quarter of fiscal 2013 decreased to $0.1 million from $0.3 million for the second quarter of fiscal 2012. This decrease was due to our lower debt level, primarily as a result of the $23.4 million of Term Loan prepayments we made in the previous twelve months.

Income Tax Provision. For the second quarter of fiscal 2013 our effective tax rate was 38.5% compared to 39.4% for the second quarter of fiscal 2012. Our effective tax rates for the second quarter of fiscal 2013 and 2012 were higher than the statutory federal tax rate of 35% primarily due to the effect of state income taxes, net of federal benefit, and to a lesser extent, additional income tax expense (including interest and penalties) recognized as required by the accounting standard for uncertain income tax positions. We expect our effective tax rate for the full year fiscal 2013 to be approximately 38.5%.

Net Income. Net income for the second quarter of fiscal 2013 was $5.9 million, or $0.44 per share (diluted), compared to net income of $5.0 million, or $0.38 per share (diluted), for the second quarter of fiscal 2012. Net income for the second quarter of fiscal 2013 and 2012 includes (net of tax) stock-based compensation expense of $0.5 million and $0.4 million, respectively. Before stock-based compensation expense, our second quarter fiscal 2013 net income was $6.4 million, or $0.48 per share (diluted), compared to $5.4 million, or $0.40 per share (diluted), for the second quarter of fiscal 2012.

Our average diluted shares outstanding of 13,402,000 for the second quarter of fiscal 2013 were 1.2% higher than the 13,248,000 average diluted shares outstanding for the second quarter of fiscal 2012, primarily as a result of the exercise of stock options and vesting of restricted stock.

Following is a reconciliation of GAAP net income and net income per share ("EPS") (diluted) to Non-GAAP adjusted net income and net income per share (diluted) for the three months ended March 31, 2013 and 2012 (in thousands, except per share amounts):

                                                                  Three Months Ended March 31,
                                                           2013                                   2012
                                              Net       Diluted       Diluted        Net       Diluted       Diluted
                                            Income       Shares         EPS        Income       Shares         EPS
As reported                                 $ 5,877       13,402     $    0.44     $ 4,979       13,248     $    0.38
Stock-based compensation expense, net of
tax                                             501           -                        382           -

As adjusted before stock-based
compensation expense                        $ 6,378       13,402     $    0.48     $ 5,361       13,248     $    0.40


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Following is a reconciliation of net income to Adjusted EBITDA for the three months ended March 31, 2013 and 2012 (in thousands):

                                                    Three Months Ended March 31,
                                                     2013                  2012
  Net income                                     $       5,877         $       4,979
  Add: income tax provision                              3,678                 3,242
  Add: interest expense, net                               127                   344

  Operating income                                       9,682                 8,565
  Add: depreciation and amortization expense             3,081                 3,109
  Add: loss on impairment of long-lived assets             195                   517
  Add: (gain) loss on disposal of assets                   (14 )                  95
  Add: stock-based compensation expense                    803                   610

  Adjusted EBITDA                                $      13,747         $      12,896

Six Months Ended March 31, 2013 and 2012

Net Sales. Our net sales for the first six months of fiscal 2013 decreased by 1.5%, or $4.0 million, to $270.1 million from $274.1 million for the first six months of fiscal 2012. Comparable sales for the first six months of fiscal 2013 increased 1.9% versus a comparable sales decrease of 0.6% for the first six months of fiscal 2012. Our first six months of fiscal 2013 reported comparable sales increase of 1.9% was unfavorably impacted by 1.2 percentage points primarily as a result of 1) having one less Saturday compared to the first six months of fiscal 2012, and 2) having one less day compared to the first six months of fiscal 2012 due to the leap year in 2012. Our first six months of fiscal 2012 reported comparable sales decrease of 0.6% was favorably impacted by approximately 1.0 percentage point due to 1) having an extra day in the six month period compared to the first six months of fiscal 2011, and 2) the benefit of the calendar shift in March 2012 compared to March 2011. Adjusting for these calendar shifts our adjusted comparable sales increased 3.1% for the first six . . .

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