Destination Maternity Corp. F1Q09 (Qtr End 12/31/08) Earnings Call Transcript

| About: Mothers Work (MWRK)

Destination Maternity Corp. (MWRK) F1Q09 (Qtr End 12/31/08) Earnings Call January 27, 2009 9:00 AM ET

Executives

Ed Krell - Chief Executive Officer

Judd Tirnauer - Senior Vice President & Chief Financial Officer

Rebecca Matthias - President and Chief Creative Officer

Operator

Good morning and welcome to the Destination Maternity Corporation, first quarter fiscal 2009 earnings release call. At this time all participants are in a listen-only mode. (Operator Instructions)

I would now like to introduce Mr. Judd Tirnauer, Senior Vice President, Chief Financial Officer. Sir, you may begin.

Judd Tirnauer

Thank you, operator. Thanks everyone for joining us this morning for Destination Maternity’s investor conference call for the first quarter of fiscal 2009, ended December 31, 2008. I am Judd Tirnauer, Senior Vice President and Chief Financial Officer of Destination Maternity.

The earnings release was disseminated this morning and everyone should have received a copy. If you haven’t, please call us at 215-873-2247 and we will get one right out to you or you can go to the Investor Relations section of our website at www.destinationmaternitycorp.com to get a copy of the release. The earnings release contains definitions of various financial terms as well as reconciliation of certain non-GAAP financial measures we’ll be discussing in today’s call.

Before we get started this morning, I need to remind everyone that certain statements in today’s management presentation and Q-and-A session will contain forward-looking statements within the meanings of the federal securities laws. This includes statements concerning management’s current expectations, estimates and projections dealing with expected net sales, comparable store sales, free cash flow or other results of operations, liquidity and financial condition, expense savings, potential debt prepayments, potential stock repurchases, gross margin, operating income and operating income margin, adjusted EBITDA and adjusted EBITDA margin, capital expenditures, competition, various business initiatives and operating results generally.

Actual results might differ materially from those projected in the forward-looking statements. For additional information concerning factors that could cause actual results to differ materially from those projected in the forward-looking statements, please refer to the company’s filings with the SEC. Also, I would like to remind you that today’s call cannot be reproduced in any form without the express written consent of Destination Maternity.

Joining me this morning is Ed Krell, Chief Executive Officer; and Rebecca Matthias, President and Chief Creative Officer of Destination Maternity. Ed will open with comments on the first quarter and I will follow with a review of our first quarter financial results and provide financial guidance with respect to the remainder of fiscal 2009 and we’ll then turn the call over to Rebecca for additional comments. Ed will then provide closing remarks on our overall corporate strategy. We will then be available to take your questions.

I would now like to turn the call over to Ed.

Ed Krell

Thank you, Judd and good morning to everyone. Although our sales for the first quarter (Audio Gap) planned, we are very pleased that our earnings for the first quarter, excluding the goodwill impairment charge, slightly exceeded the top end of the earnings guidance range we provided in our November 18, 2008 press release.

As for our sales performance, although we experienced a slight 0.5% decline in comparable store sales for the quarter, we believe our sales performance is very respectable in light of the extremely difficult overall retail environment of recent months and the significant comparable store sales declines experienced by many retailers.

Also, we believe we are taking the right actions to manage our business in this tough environment and with our tight management of expenditures and inventory, we were able to continue to reduce expenses and were able to control markdown levels, while still reducing inventory levels, resulting in better than planned gross margin performance and lower than planned expenses for the first quarter. This strong operational and financial control enabled us to beat our earnings guidance even with sales missing our guidance.

We are also pleased with our strong financial position and are very focused on continuing to generate free cash flow and continuing to de-leverage our balance sheet. We have reduced our total debt by $24 million in the past 12 months, including $10 million of debt repaid during the first quarter of fiscal 2009.

We have reduced our debt by $50 million over the past two and a quarter years, bringing our total debt down to $68.4 million at December 31, 2008, compared to $92.6 million at December 31, 2007 and $118.3 million at September 30, 2006. We have minimal maturities of long-term debt prior to the March 2013 maturity of our term loan.

By continuing to reduce our debt level and having refinanced our debt at lower rates in 2007, we have significantly reduced our annual interest expense; $14.5 million in fiscal 2006, to $7.0 million in fiscal 2008, to a projected fiscal 2009 interest expense of approximately $5 million. At December 31, 2008, we had no outstanding borrowings under our credit facility and had approximately $36 million of availability under the credit facility. Our credit facility is committed entirely by Banc of America and does not mature until March 2012.

Looking forward, we feel very good about our product lines and the actions we are taking to streamline our business and position us to improve our profitability, both in the near term and the long term. With the very weak overall economic and retail environment we face, we will continue to manage our inventory and expenditures very tightly.

I would now like to turn the call over to Judd to review our financial results and our financial guidance.

Judd Tirnauer

Thanks, Ed. I will now take you through a review of our first quarter as well as provide guidance with respect to the remainder of fiscal 2009. Net sales for the first quarter of fiscal 2009 decreased 5.6% from last year’s first quarter. Comparable store sales decreased 0.5% during the first quarter of 2009 versus a comparable store sales decrease of 4.1% during the first quarter of fiscal 2008.

The decrease in total sales for the first quarter resulted primarily from a decrease in sales from leased and licensed relationships, largely due to the decrease in Sears leased department sales due to the closure of all of the remaining leased departments within Sears stores during June 2008, as well as reduced sales volume from the ongoing closure of certain underperforming stores and a slight decrease in comparable store sales.

Gross profit for the first quarter of fiscal 2009 decreased 5.7% from last year’s first quarter. Gross margin for the first quarter was 50.3% of sales, a slight decrease from last year’s first quarter gross margin of 50.4%. SG&A expense for the first quarter of fiscal 2009 decreased 5.3% from last year’s first quarter SG&A expense. Our first quarter SG&A expense percentage of 48.9% of sales this year was essentially equal to last year’s first quarter figure of 48.8%.

We incurred store closing, asset impairment, and asset disposal charges of approximately $2,000 for the first quarter of fiscal 2009 versus $0.9 million for the first quarter of fiscal 2008. We incurred restructuring and other charges of approximately $0.2 million in the first quarter of fiscal 2009 versus none in fiscal 2008.

We recorded a non-cash goodwill impairment charge of $47.0 million on both a pretax and after tax basis in the first quarter of fiscal ‘09. As a result of a substantial decrease in the market price of our common stock subsequent to September 30, 2008, reflecting the very difficult market conditions of recent months, we reassessed the carrying value of our goodwill as of December 31, 2008, in accordance with the interim period requirement of Statement of Financial Accounting Standards (142), Goodwill and Other Intangible Assets and concluded that our goodwill was impaired.

The $47 million goodwill impairment charge recorded in the first quarter reflects the impairment analysis completed to date and may be adjusted when all aspects of the analysis are completed. Non-cash goodwill charges do not have any adverse effect on the covenant calculations under our debt agreements or our overall compliance with the covenants of our debt agreements.

Operating loss for the first quarter of fiscal 2009 was $45.3 million. Excluding the goodwill impairment charge, operating income for the first quarter was $1.7 million, $0.3 million better than last year’s first quarter operating income of $1.4 million. Excluding the goodwill impairment charge, our first quarter fiscal 2009 operating income margin was 1.3% of sales compared to last year’s first quarter operating income margin of 1.0%.

We present adjusted EBITDA to enhance the understanding of our operating results. Adjusted EBITDA represents operating income before deduction for the following non-cash charges. (1) depreciation and amortization; (2) loss on impairment of tangible or intangible assets; (3) gain or loss on disposal of assets and; (4) stock compensation expense.

Adjusted EBITDA for the first quarter of fiscal 2009 was $6.1 million compared to last year’s first quarter adjusted EBITDA of $6.5 million. Our adjusted EBITDA margin was 4.5% of sales for the first quarter of fiscal 2009, compared to last year’s adjusted EBITDA margin of 4.6%.

Interest expense, net of interest income for the first quarter of fiscal 2009 was $1.4 million, a reduction of $0.5 million or 25% from last year’s first quarter net interest expenses of $1.9 million, resulting primarily from our term loan prepayments made during the last 12 months and to lesser extent lower interest rates.

Our loss per share for the first quarter was $7.86 versus last year’s first quarter loss per share of $0.06. Excluding the goodwill impairment charge, our earnings per share for the first quarter was $0.01. This earnings performance was slightly above our earnings per share guidance of between a loss of $0.10 and breakeven provided in our November 18, 2008, press release. Excluding the after tax debt repayment charges, restructuring and other charges of $0.03, our earnings per share for the first quarter was $0.04.

Turning to the balance sheet, we are very pleased with the continued reduction of our debt and ongoing interest expense during the first quarter of fiscal 2009. We pre paid $10 million of our term loan in the first quarter.

During the first quarter of fiscal 2009, we had average outstanding borrowings from our credit line of approximately $0.1 million and we ended the quarter with no outstanding borrowings under our credit line and approximately $36 million of availability under the credit facility. We were in compliance with all covenants under our debt agreements at December 31, 2008.

As for inventory, with the discontinuation of our Sears relationship during June 2008 and our overall aggressive actions to manage our inventory level, our total inventory at the end of December is 19.7% lower than last year, despite our generating less sales than originally planned. On a per retail location square foot basis, our total inventory at December 31, 2008, excluding Sears and Kohl’s, was 10.7% lower than at December 31, 2007, reflecting our continued tight inventory control, despite weaker than planned sales.

I will now provide financial guidance with respect to 2009. Looking forward, we feel very good about our product line and we are cautiously optimistic about our future sales trend. Although in recent months we have seen relatively stronger sales than most retailers, with the increasingly weak current and projected overall economic environment we are planning our sales more conservatively than we did in November 2008, when we gave our previous financial guidance for fiscal 2009.

We are implementing additional expense reductions, such that our earnings-per-share guidance for the full year fiscal 2009, excluding goodwill impairment charges, remains the same as the guidance we provided in November 2008. We continue to plan to generate significant free cash flow during fiscal 2009, and such cash flow could be used in part or in whole for prepayment of debt.

We are targeting net sales for fiscal 2009 in the $539.5 million to $549 million range, representing sales that were down approximately 2.8% to 4.4%, based on an assumed comparable store sales decrease of between down 1% and down 3% for the full fiscal year. The sales decline is primarily due to the negative sales impact of the non-renewal Sears relationship and decreased comparable store sales, partially offset by the expected increased sales contribution from our leased departmental expansion, internet sales, our marketing partnerships and the continued rollout of our multi-brand stores.

Our targeted sales for fiscal 2009 reflect our plan to open approximately 14 to 18 new stores, including four to seven new multi-brand stores and our plan to close approximately 45 to 55 stores, with approximately eight to 12 of these planned store closings, related to openings of new multi-brand stores, including our Destination Maternity Superstores.

We plan to modestly increase our leased department locations with our existing leased department partners. In addition, we distribute our Oh Baby, by Motherhood collection through a licensed arrangement at Kohl’s stores throughout the United States and on www.kohls.com. Kohl’s currently operates 1,004 stores in 48 states compared to 929 stores in 47 states a year ago.

We are targeting our gross margin to increase by approximately 25 basis points to 50.4% of sales in fiscal 2009, from 50.1% in fiscal 2008. We expect our operating expenses to decrease somewhat as a percentage of net sales for fiscal 2009 versus fiscal 2008, primarily as a result of our previously announced restructuring, the non-recurrence of the management transition expense incurred in fiscal 2008, reduced impairment charges for write-downs of store fixed assets, expense leverage from our multi-brand stores and a continued sharp focus on expense control.

Based on these assumptions, we are targeting operating income for fiscal 2009, excluding goodwill impairment, in the $7.5 million to $11.4 million range, representing a projected range of between an increase of approximately 49% and 125% from our fiscal 2008 operating income of $5.1 million.

We project depreciation expense to be approximately $15.0 million for the year, slightly lower than the $16.0 million figure for fiscal 2008. We project charges for impairment write-downs and loss on disposal of fixed assets to be approximately $0.8 million for fiscal ‘09, significantly lower than the $2.2 million figure for fiscal 2008 and project charges of approximately $2.0 million for stock compensation expense versus the $2.3 million stock compensation expense for fiscal 2008.

In addition, we estimate the charge for impairment of goodwill will be approximately $47 million. Based on these assumptions, we are targeting fiscal 2009 adjusted EBITDA in the $25.4 million to $29.2 million range, versus our fiscal 2008 adjusted EBITDA of $25.5 million.

We expect interest expense, net of interest income to be approximately $5 million for fiscal 2009, a 28% projected reduction from the fiscal 2008 interest expense of $7.0 million, due to the reduction of debt over the last 12 months. We are assuming an effective tax rate of 41.9% on our pretax income, excluding goodwill impairment charges and project average diluted shares outstanding for earnings-per-share calculation purposes of approximately 6.04 million shares for fiscal 2009.

Based on these assumptions, we are targeting reported diluted earnings per share of between a loss of $7.24 and $7.64 per share. Excluding goodwill impairment, we are targeting adjusted diluted earnings per share of between $0.20 and $0.60 per share, a significant increase from our loss per share of $0.23 for fiscal 2008. This earnings guidance is consistent with our previous guidance range for fiscal 2009 provided in our November 18, 2008 press release.

Of course, our ability to achieve these targeted results will depend, among other factors, on the overall retail, economic, political, and competitive environment as well as the results from our new initiatives. We are planning our fiscal 2009 capital expenditures to be between $11 million and $12.5 million, compared to $15.7 million in fiscal 2008.

After deducting for projected tenant allowance payments to us from store landlords, we expect our net cash outlay for capital projects to be between $7 million and $8 million, versus $13.1 million in fiscal 2008. We expect our inventory at fiscal 2009 year end to decrease modestly from fiscal 2008 year end, as we continue to tightly plan our inventory relative to sales and refine our merchandise assortments.

Although we may have modest credit line borrowings from our credit facility at times during fiscal 2009, reflecting seasonal and other timing variations in cash flow, we did not have any outstanding credit line borrowings at the end of fiscal 2008 and expect to have none at the end of fiscal 2009. Based on these targets and plans, we expect to generate cash available for potential debt prepayments of approximately $20 million in fiscal 2009.

Turning to the current month, based on our sales results thus far in January, we expect our comparable store sales for the full month of January to increase between 4.5% and 6%. We estimate that January comparable store sales will be favorably impacted by approximately four percentage points due to the days adjustment calendar shift, as January has one more Friday and Saturday and one less Tuesday and Wednesday than January 2008.

For the second quarter of fiscal 2009, we are targeting net sales in the $128.0 million to $131.0 million range, based on an assumed comparable store sales decrease of down 3.0% to down 5.0% for the quarter. Comparable store sales for the quarter are unfavorably impacted by approximately two percentage points, due to having one less day in February 2009 compared to February 2008, as well as the later timing of Easter in 2009 compared to 2008. We are targeting reported diluted earnings per share for the quarter of between a loss of $0.22 and $0.35 per share.

This concludes my comments about Destination Maternity’s finance and future financial guidance. I would now like to turn the call over to Rebecca.

Rebecca Matthias

Thank you, Judd and good morning to everyone.

The December quarter was the most difficult retail climate in memory. However, our particular customer base has a greater need to purchase than other apparel consumers and that’s one reason that our sales results have continued somewhat stronger than other retailers. Because we went into the holiday season, planning less inventory than last year, we were able to maintain very good control over markdowns and our gross margin performance was good. We are continuing to benefit in January as we have less clearance merchandise and less need for promotion than last year.

Regarding our re-branding efforts, I could not be more excited about our progress. During January, we have been changing the Mimi store signs to A Pea in the Pod or Destination Maternity and the Spring product receipts, which were formerly Mimi, contain the A Pea in the Pod labels. The sales associates are very enthusiastic about the change, which they perceive as an enhancement to the prestige of the store and the product, even though the pricing has not changed and the initial sales results are good.

We have rolled out some designer denim at special pricing to the newly renamed A Pea in the Pod and Destination Maternity stores that now carry A Pea in the Pod, with very promising initial sales results and since denim is often the first product need that drives our customer to us, we feel that the benefits of this very exciting promotion will be storewide.

Spring product is in all of our stores and initial selling is good, despite cold weather in much of the country during January. Our spring assortment far exceeds that of our competitors at this time and since our customers have due dates all the way out to September, many of them have an early interest in forward-looking spring product.

As the only national maternity apparel retailer, our assortment is unparalleled by any of our competitors, who are mostly multi-line retailers with small maternity departments and we’ve gone even further in our Destination Maternity stores, where we carry multiple brands plus accessories, gifts, body care and even the Edamame maternity spa in select stores. As some other competitors pare back their maternity offerings, we become an even stronger, must-see destination for the maternity customer at all of our stores.

We are very optimistic about the coming year and beyond, as we continue to strengthen our competitive position. Thank you and I would now like to turn the call back to Ed for some closing remarks.

Ed Krell

Thanks, Rebecca. As we plan our business for both this year and beyond, we continue to be guided by our five key goals and strategic objectives. Goal number one, be a profitable, global leader in maternity apparel business, treating all our partners and stakeholders with respect and fairness.

Goal number two, increase the profitability of our US business by focusing on our key operating initiatives to; (1) increase comparable store sales with continued improvement of merchandise assortments and leveraging our brand restructuring; (2) control our expenditures and continue to be more efficient in operating our business; (3) continue to expand our multi-brand Destination Maternity store chain, where ROI hurdles are met and; (4) continue to close underperforming stores.

Goal number three. In addition to achieving increased comparable store sales, we aim to grow our sales where we can do so profitably, including the following areas of focus: (1) international expansion; (2) potential growth of our leased department and license relationships; (3) selective new store openings and relocations in the US and Canada; (4) continued growth in sales through the internet and (5) continued focus on enhancing our overall customer relationship, including our marketing partnerships and Futuretrust College Savings program.

Goal number four; focus on generating free cash flow to drive increased shareholder value and continue to de-leverage our balance sheet and finally, goal number five; maintain and intensify our primary focus on delivering great maternity apparel products and service in each of our brand and store formats to serve the maternity apparel customer like no one else can.

We feel very good about our company’s position and the actions we are taking to manage our business through these challenging economic times. We have the leading position in our industry; we have taken aggressive actions to reduce our cost structure; we have specific initiatives to increase the profitability of our business; we have specific identified growth opportunities that are not capital intensive; we have a strong financial position and have reduced our leverage and we generate significant free cash flow which we can use to continue to de-lever our balance sheet and drive increased shareholder value.

With these actions and our leading market position, we strongly believe we can drive near-term improvements, while also making progress towards our longer-term goals so that we emerge as an even stronger company when the economy recovers.

Thank you for joining us this morning. Operator, we are now ready to take questions.

Questions-and-Answers Session

Operator

(Operator Instructions)

Ed Krell

Okay, we’ll just wait another minute to see if there are any questions. Okay, looks like there are no questions. Thanks so much for your time folks and have a great day. Bye-bye.

Operator

This concludes today’s presentation. Thank you for your participation. You may now disconnect.

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