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

Show all filings for DESTINATION MATERNITY CORP

Form 10-Q for DESTINATION MATERNITY CORP


8-Aug-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 1,893 retail locations, including 606 stores in all 50 states, Puerto Rico and Canada, and 1,287 leased departments located within department stores and baby specialty stores throughout the United States and Puerto Rico. In addition to the 1,893 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 have expanded internationally and have entered into exclusive store franchise and product supply relationships in the Middle East, India and South Korea. As of June 30, 2013, we have 141 international franchised locations, including 123 shop-in-shop locations and 18 stand-alone stores operated under one of our retail nameplates. 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) loss
(gain) 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 third quarter of fiscal 2013, adjusted comparable sales were measured for the period Monday April 1, 2013 through Sunday June 30, 2013 compared to the period Monday April 2, 2012 through Sunday July 1, 2012 and for the first nine months of fiscal 2013, adjusted comparable sales were measured for the period Monday October 1, 2012 through Sunday June 30, 2013 compared to the period Monday October 3, 2011 through Sunday July 1, 2012.


Table of Contents

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

Third Quarter Fiscal 2013 Financial Results

• GAAP net income for the third quarter of fiscal 2013 was $8.6 million, or $0.64 per share (diluted), a 24% increase compared to GAAP net income of $6.9 million, or $0.52 per share (diluted), for the third quarter of fiscal 2012. This represents an increase of 23% in diluted earnings per share.

• Non-GAAP adjusted net income for the third quarter of fiscal 2013 was $8.9 million, or $0.66 per share (diluted), a 22% increase compared to the comparably adjusted non-GAAP net income for the third quarter of fiscal 2012 of $7.3 million, or $0.55 per share (diluted). This represents a 20% increase in comparably adjusted diluted earnings per share.

• Adjusted EBITDA was $17.8 million for the third quarter of fiscal 2013, an increase of 11% compared to $16.0 million of Adjusted EBITDA for the third quarter of fiscal 2012.

• Net sales for the third quarter of fiscal 2013 increased 2.2% to $141.9 million from $138.8 million for the third quarter of fiscal 2012.

• Comparable sales for the third quarter of fiscal 2013 increased 4.9% compared to a comparable sales decrease of 2.4% for the third quarter of fiscal 2012. Adjusting for calendar timing shifts, our adjusted comparable sales increased 5.3% for the third quarter of fiscal 2013 and decreased 1.5% for the third quarter of fiscal 2012.

First Nine Months of Fiscal 2013 Financial Results

• GAAP net income for the first nine months of fiscal 2013 was $18.3 million, or $1.37 per share (diluted), a 29% increase compared to GAAP net income of $14.2 million, or $1.07 per share (diluted) for the first nine months of fiscal 2012. This represents an increase of 28% in diluted earnings per share.

• Non-GAAP adjusted net income for the first nine months of fiscal 2013 was $19.6 million, or $1.46 per share (diluted), a 28% increase compared to the comparably adjusted non-GAAP net income for the first nine months of fiscal 2012 of $15.3 million, or $1.15 per share (diluted). This represents a 27% increase in comparably adjusted diluted earnings per share.

• Adjusted EBITDA was $42.3 million for the first nine months of fiscal 2013, a 14% increase compared to $37.2 million of Adjusted EBITDA for the first nine months of fiscal 2012.

• Net sales for the first nine months of fiscal 2013 decreased 0.2% to $412.0 million from $413.0 million for the first nine months of fiscal 2012.

• Comparable sales for the first nine months of fiscal 2013 increased 3.0% compared to a comparable sales decrease of 1.1% for the first nine months of fiscal 2012. Adjusting for calendar timing shifts, our adjusted comparable sales increased 3.9% for the first nine months of fiscal 2013 and decreased 1.5% for the first nine months of fiscal 2012.


Table of Contents

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 nine months ended June 30:



                                                                                               % Change Period to Period
                                                     % of Net Sales (1)                         Favorable (Unfavorable)
                                                                                              Three                 Nine
                                              Three                      Nine                 Months               Months
                                           Months Ended              Months Ended             Ended                Ended
                                             June 30,                  June 30,              June 30,             June 30,
                                                                                             2013 vs.             2013 vs.
                                        2013         2012         2013         2012            2012                 2012
Net sales                                100.0 %      100.0 %      100.0 %      100.0 %             2.2 %               (0.2 )%
Cost of goods sold (2)                    45.5         45.4         46.3         46.9              (2.4 )                1.7

Gross profit                              54.5         54.6         53.7         53.1               2.0                  1.1
Selling, general and administrative
expenses (3)                              44.4         45.6         46.2         46.7               0.4                  1.4
Store closing, asset impairment and
asset disposal expenses                    0.2          0.5          0.2          0.4              67.1                 42.5

Operating income                           9.9          8.5          7.3          5.9              18.7                 23.3
Interest expense, net                      0.1          0.2          0.1          0.3              66.5                 59.1
Loss on extinguishment of debt              -           0.0          0.0          0.0             100.0                 59.1

Income before income taxes                 9.8          8.3          7.2          5.7              21.2                 27.1
Income tax provision                       3.8          3.3          2.8          2.2             (17.2 )              (24.0 )

Net income                                 6.1 %        5.0 %        4.4 %        3.4 %            23.8 %               29.1 %

(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 June 30,
                                            2013                                                2012
                                        Leased          Total Retail                        Leased          Total Retail
Retail Locations (1)    Stores        Departments         Locations         Stores        Departments         Locations
Beginning of period         613              1,262              1,875           643              1,384              2,027
Opened                        1                 30                 31            -                  -                  -
Closed                       (8 )               (5 )              (13 )          (7 )               (4 )              (11 )

End of period               606              1,287              1,893           636              1,380              2,016

                                                           Nine Months Ended June 30,
                                            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                       11                 48                 59             4                  8                 12
Closed                      (30 )             (144 )             (174 )         (26 )             (322 )             (348 )

End of period               606              1,287              1,893           636              1,380              2,016

(1) Excludes international franchised locations.


Table of Contents
                                                                     Three Months Ended June 30,
                                                         2013                                             2012
                                                                       Total                                           Total
                                                  Shop-in-         International                    Shop-in-       International
                                                    Shop            Franchised                        Shop          Franchised
International Franchised Locations   Stores       Locations          Locations         Stores      Locations         Locations
Beginning of period                       16             124                  140           14             80                  94
Opened                                     2               5                    7            2              5                   7
Closed                                    -               (6 )                 (6 )         -              -                   -

End of period                             18             123                  141           16             85                 101

                                                                       Nine Months Ended June 30,
                                                         2013                                               2012
                                                                        Total                                             Total
                                                   Shop-in-         International                     Shop-in-        International
                                                     Shop            Franchised                         Shop           Franchised
International Franchised Locations   Stores        Locations          Locations         Stores       Locations          Locations
Beginning of period                       16              103                  119           15              51                   66
Opened                                     3               27                   30            2              36                   38
Closed                                    (1 )             (7 )                 (8 )         (1 )            (2 )                 (3 )

End of period                             18              123                  141           16              85                  101

Three Months Ended June 30, 2013 and 2012

Net Sales. Our net sales for the third quarter of fiscal 2013 increased by 2.2%, or approximately $3.1 million, to $141.9 million from $138.8 million for the third quarter of fiscal 2012. Comparable sales for the third quarter of fiscal 2013 increased 4.9% compared to a comparable sales decrease of 2.4% for the third quarter of fiscal 2012. Our third quarter fiscal 2013 reported comparable sales increase of 4.9% was unfavorably impacted by 0.4 percentage points, and our third quarter fiscal 2012 reported comparable sales decrease of 2.4% was unfavorably impacted by 0.9 percentage points, due to calendar timing shifts as described above. Adjusting for these calendar shifts our adjusted comparable sales increased 5.3% for the third quarter of fiscal 2013 and decreased 1.5% for the third quarter of fiscal 2012. The increase in total reported sales for the third quarter of fiscal 2013 compared to the third quarter of fiscal 2012 resulted primarily from the increase in comparable sales, partially offset by decreased sales from our continued efforts to close underperforming stores and the closure of all of our remaining leased departments within Babies"R"Us® stores during the month of October 2012.

As of June 30, 2013, we operated a total of 606 stores and 1,893 total retail locations, compared to 636 stores and 2,016 total retail locations as of June 30, 2012. During the third quarter of fiscal 2013 we opened one multi-brand Destination Maternity nameplate store, and we closed eight stores, with two of the store closings related to Destination Maternity nameplate store openings. In connection with our new broad-based partnership with Bed Bath & Beyond Inc. and its subsidiary, Buy Buy Baby, Inc., 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 June 2013 compared to June 2012 predominantly reflects this change of partners in October 2012. According to Bed Bath & Beyond Inc.'s latest public disclosure, as of June 26, 2013 there are 84 buybuy BABY stores. As of June 30, 2013, we operate leased departments in 44 buybuy BABY stores, an increase from the 14 leased departments the Company operated in buybuy BABY stores as of March 31, 2013. Over time, we expect to continue to 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 third quarter of fiscal 2013 increased by 2.0%, or $1.5 million, to $77.3 million from $75.8 million for the third quarter of fiscal 2012, and our gross profit as a percentage of net sales (gross margin) for the third quarter of fiscal 2013 was 54.5% compared to 54.6% for the third quarter of fiscal 2012. The increase in gross profit for the third quarter of fiscal 2013 compared to the third quarter of fiscal 2012 was due to our higher sales.

Selling, General and Administrative Expenses. Our selling, general and administrative expenses for the third quarter of fiscal 2013 decreased by 0.4%, or $0.3 million, to $63.0 million from $63.3 million for the third quarter of fiscal 2012. As a percentage of net sales, selling, general and administrative expenses decreased to 44.4% for the third quarter of fiscal 2013 compared to 45.6% for the third quarter of fiscal 2012. This slight decrease in expense for the quarter resulted primarily from lower expenses (primarily payroll and occupancy costs) related to our continued closure of underperforming stores and the closure of all of our remaining leased departments within Babies"R"Us stores during October 2012, and continued tight expense controls, substantially offset by higher expenses for variable incentive compensation, advertising and marketing, and corporate payroll to drive increased sales. The decrease in expense percentage for the three month period reflects the favorable expense leverage from our increased sales and comparable sales due to the partially fixed nature of our expenses.


Table of Contents

Store Closing, Asset Impairment and Asset Disposal Expenses. Our store closing, asset impairment and asset disposal expenses for the third quarter of fiscal 2013 decreased by approximately $0.5 million, to $0.2 million from $0.7 million for the third quarter of fiscal 2012, reflecting lower impairment charges for write-downs of long-lived assets.

Operating Income. We had operating income of $14.1 million for the third quarter of fiscal 2013, an increase of 18.7% compared to $11.9 million for the third quarter of fiscal 2012. Operating income as a percentage of net sales for the third quarter of fiscal 2013 increased to 9.9% from 8.5% for the third quarter of fiscal 2012. The increase in operating income and operating income percentage was primarily due to our higher gross profit, and to a lesser extent, our lower asset impairment charges and selling, general and administrative expenses.

Interest Expense, Net. Our net interest expense for the third quarter of fiscal 2013 decreased to $0.1 million from $0.3 million for the third quarter of fiscal 2012. This decrease was due to our lower debt level, as a result of the $15.7 million of debt repayments we made in the previous twelve months.

Income Tax Provision. For the third quarter of fiscal 2013 our effective tax rate was 38.5% compared to 39.8% for the third quarter of fiscal 2012. Our effective tax rates for the third 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 third quarter of fiscal 2013 was $8.6 million, or $0.64 per share (diluted), compared to net income of $6.9 million, or $0.52 per share (diluted), for the third quarter of fiscal 2012. Net income for the third quarter of fiscal 2013 includes (net of tax) stock-based compensation expense of $0.3 million. Net income for the third quarter of fiscal 2012 includes (net of tax) stock-based compensation expense of $0.4 million and loss on extinguishment of debt of $8,000. Before stock-based compensation expense and loss on extinguishment of debt, our third quarter fiscal 2013 net income was $8.9 million, or $0.66 per share (diluted), compared to $7.3 million, or $0.55 per share (diluted), for the third quarter of fiscal 2012.

Our average diluted shares outstanding of 13,465,000 for the third quarter of fiscal 2013 were 1.0% higher than the 13,332,000 average diluted shares outstanding for the third 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 June 30, 2013 and 2012 (in thousands, except per share amounts):

                                                                Three Months Ended June 30,
                                                        2013                                    2012
                                           Net        Diluted       Diluted        Net       Diluted       Diluted
                                          Income       Shares         EPS        Income       Shares         EPS
As reported                              $  8,591       13,465     $    0.64     $ 6,941       13,332     $    0.52
Stock-based compensation expense, net
of tax                                        314           -                        368           -
Loss on extinguishment of debt, net of
tax                                            -            -                          8           -

As adjusted before stock-based
compensation expense and loss on
extinguishment of debt                   $  8,905       13,465     $    0.66     $ 7,317       13,332     $    0.55


Table of Contents

Following is a reconciliation of net income to Adjusted EBITDA for the three months ended June 30, 2013 and 2012 (in thousands):

                                                        Three Months Ended
                                                             June 30,
                                                         2013          2012
       Net income                                     $    8,591     $  6,941
       Add: income tax provision                           5,378        4,588
       Add: interest expense, net                            104          310
       Add: loss on extinguishment of debt                    -            12

       Operating income                                   14,073       11,851
       Add: depreciation and amortization expense          3,092        3,020
       Add: loss on impairment of long-lived assets           52          596
       Add: loss (gain) on disposal of assets                 76          (39 )
       Add: stock-based compensation expense                 504          589

       Adjusted EBITDA                                $   17,797     $ 16,017

Nine Months Ended June 30, 2013 and 2012

Net Sales. Our net sales for the first nine months of fiscal 2013 decreased by 0.2%, or $1.0 million, to $412.0 million from $413.0 million for the first nine months of fiscal 2012. Comparable sales for the first nine months of fiscal 2013 increased 3.0% compared to a comparable sales decrease of 1.1% for the first nine months of fiscal 2012. Our first nine months of fiscal 2013 reported comparable sales increase of 3.0% was unfavorably impacted by 0.9 percentage points primarily as a result of: (1) having one less Saturday compared to the first nine months of fiscal 2012, and (2) having one less day compared to the first nine months of fiscal 2012 due to the leap year in 2012. Our first nine months of fiscal 2012 reported comparable sales decrease of 1.1% was favorably impacted by 0.4 percentage points due to the calendar timing shift. Adjusting for these calendar shifts our adjusted comparable sales increased 3.9% for the first nine months of fiscal 2013 and decreased 1.5% for the first nine months of fiscal 2012. The slight decrease in total reported sales for the first nine months of fiscal 2013 compared to the first nine months of fiscal 2012 resulted primarily from our continued efforts to close underperforming stores, and the closure of all of our remaining leased departments within Babies"R"Us stores during the month of October 2012, substantially offset by the increase in comparable sales.

During the first nine months of fiscal 2013, we opened 11 stores, including seven Destination Maternity nameplate stores, and we closed 30 stores, with nine of the store closings related to Destination Maternity nameplate store openings.

Gross Profit. Our gross profit for the first nine months of fiscal 2013 increased by 1.1%, or $2.3 million, to $221.4 million from $219.1 million for . . .

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