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Executives

Judd P. Tirnauer – Executive Vice President and Chief Financial Officer

Edward M. Krell – Chief Executive Officer

Christopher F. Daniel – President

Analysts

Lee J. Giordano – Imperial Capital LLC

James Fronda – Sidoti & Company LLC

Arnold Brief – Goldsmith & Harris

Destination Maternity Corporation (DEST) F2Q13 Earnings Call April 25, 2013 9:00 AM ET

Operator

Good morning and welcome to the Destination Maternity Corporation’s Second Quarter Earnings Release Conference call. My name is Tahitia and I will be your operator for today. At this time, all participants are in listen-only mode. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today Mr. Judd Tirnauer, Executive Vice President and Chief Financial Officer. Please proceed.

Judd P. Tirnauer

Thank you, operator. Thanks everyone for joining us this morning for Destination Maternity’s investor conference call for the second quarter of fiscal 2013, ended March 31, 2013. I am Judd Tirnauer, Executive 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 reconciliations of certain non-GAAP financial measures we will 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&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 sales, internet sales, free cash flow or other results of operations, liquidity and financial condition, expense savings, potential stock repurchases, the continuation of the regular quarterly cash dividend, the trading liquidity of our common stock, 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 Chris Daniel, President of Destination Maternity. Ed will open with some overview comments, I will follow with a review of our second quarter financial results and provide financial guidance with respect to the remainder of fiscal 2013 and we’ll then turn the call over to Chris for additional comments. Ed will then provide closing remarks after which we’ll be available to take your questions.

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

Edward M. Krell

Thank you, Judd and good morning to everyone. We are pleased with our continued positive momentum in delivering increases in earnings and comparable sales during the second quarter despite very unfavorable weather conditions for the month of March.

Our second quarter fiscal 2013 diluted earnings per share of $0.44 was 16% higher than last year’s second quarter earnings of $0.38 per share and we are at the top end of our prior earnings guidance range of $0.38 to $0.44 per share that we provided in our January 31, 2013 press release. This represents our third consecutive quarter of achieving both a comparable sales increase and a significant increase in earnings over the prior year, showing the continued progress we have made with our sales initiatives while maintaining strong operational and expense discipline.

We continue to use our strong free cash flow to generate shareholder value. In April 2013, we repaid the remaining $1.8 million principal amount of our debt. This completes a dramatic decrease in our financial leverage through use of our operating cash flow with our total debt decreasing from $118 million to zero over the past six and a half years.

Given our strong balance sheet, with the complete repayment of our outstanding debt, and our strong projected cash flow, we believe the total return to our stockholders will be further enhanced by increasing our regular quarterly cash dividend. As a result, our Board of Directors have declared a regular quarterly cash dividend of $0.1875 per share payable June 28, 2013, a 7.1% increase from our previous quarterly dividend rate of $0.175 per share. This represents a new annual dividend rate of $0.75 per share compared to our previous annual rate of $0.70 per share.

Our key focus continues to be improving our sales performance through initiatives to enhance our merchandise assortments, merchandise presentation, store environment, and customer experience. While we recognize the challenging macroeconomic environment, we remain focused on the things that we can control not on external factors that we cannot control.

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

Judd P. Tirnauer

Thanks, Ed. I will now take you through a review of our second quarter as well as provide guidance with respect to the remainder of fiscal ‘13. Net sales for the second quarter of fiscal ’13 of $134.9 million was a decrease of 2.1% from last year’s second quarter. The decrease in sales versus last year resulted primarily from decreased sales related to the closure of all of the company’s remaining leased departments within Babies"R"Us stores during the month of October 2012, and decreased sales related to the company's continued efforts to close underperforming stores, partially offset by an increase in comparable sales.

Our total sales of $134.9 million were within our sales guidance range of $134 million to $138 million provided in our January 31 press release. Comparable sales for the second quarter of fiscal ’13 increased 1.6% versus a comparable sales increase of 3.2% for the second quarter of fiscal ‘12. Our comparable sales performance for the second quarter was within our guidance range of a comparable sales increase of between 0.5% and 3.5% for the quarter.

Adjusting for the calendar timing shift, as described in today’s earnings release, our adjusted comparable sales increased 2.4% for the second quarter of fiscal ‘13 versus an increase of 0.7% for the second quarter of fiscal ‘12. Our Internet sales, which are included in our comparable sales, increased 5% for the second quarter of fiscal ‘13 on a reported basis and increased 7% after adjusting for the calendar timing shift on top of a 39% increase in the second quarter of fiscal ‘12.

Net sales of $270.1 million for the six-month period were 1.5% lower than last year’s first six months sales. Comparable sales increased 1.9% for the first six months of fiscal ‘13 versus the comparable sales decrease of 0.6% for this first six months of fiscal ‘12.

Adjusting for the calendar timing shift, adjusted comparable sales increased 3.1% for the first six-month of fiscal ‘13 versus a decrease of 1.6% for the six months of fiscal ‘12. Our Internet sales, which are included in our comparable sales, included increased 11% for the first six months of fiscal ‘13 on top of the 35% increase for the first six months of fiscal ‘12.

Gross margin for the second quarter was 54.1% of sales, an increase of 60 basis points from last year’s second quarter gross margin of 53.4%. Gross margin for the first six months of fiscal ‘13 was 53.4%, an increase of 110 basis points from last year’s first six months gross margin of 52.3%. Our gross margin increase versus last year was due primarily to lower product costs.

SG&A expense for the second quarter decreased 2.5% from last year’s second quarter. our second quarter SG&A expense percentage of 46.7% of sales this year was approximately 20 basis point lower than our last year’s second quarter figure of 46.9% of sales. SG&A expense for the first six months of fiscal ‘13 was 1.9% lower than last year’s first six months expense.

Our first six months SG&A expense percentage of 47.1% of sales this year was approximately 20 basis points lower than last year’s first six months figure. We encourage store closing, asset impairment and asset disposal charges of approximately $0.3 million for the second quarter versus $0.6 million for the second quarter of fiscal ‘12.

Operating income for the second quarter was $9.7 million, $1.1 million higher than last year’s second quarter operating income of $8.6 million. Operating income for the first six months of fiscal ‘13 was $16.1 million, $3.5 million higher than last year’s first months operating income of $12.7 million.

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. one, depreciation and amortization; two, loss on impairment of tangible and intangible assets; three, gain or loss on disposal of assets; and four, stock-based compensation expense.

Adjusted EBITDA for the second quarter of fiscal ‘13 was $13.7 million, an increase from last year’s second quarter adjusted EBITDA of $12.9 million. Our adjusted EBITDA margin of 10.2% of sales for the second quarter was 80 basis points higher than last year’s adjusted EBITDA margin of 9.4%.

Adjusted EBITDA for the first six months of fiscal ‘13 was $24.5 million, an increase from last year’s first six months of $21.2 million. Our adjusted EBITDA margin of 9.1% of sales for the first six months of fiscal ‘13 was 130 basis points higher than last year’s adjusted EBITDA margin of 7.7%.

Interest expense, net of interest income for the second quarter of fiscal ‘13 was $0.1 million, a reduction of 63% from last year’s second quarter net interest expense of $0.3 million. For the six months period, interest expense was $0.3 million, a reduction of 56% versus last year’s first six months expense of $0.7 million.

Our interest expense reduction versus last year resulted primarily from our term loan prepayments made during the last 12 months, including the remaining principal amount repayment on November 1. Our diluted earnings per share for the second quarter was $0.44, a 16% increase versus last year’s second quarter diluted earnings per share of $0.38. this earnings performance was at the top-end of our diluted earnings per share guidance range of $0.38 to $0.44 provided in our January release, showing the progress we are making in our sales driving initiatives while maintaining strong operational and expense discipline. Our diluted earnings per share for the six month period were $0.73, a 33% increase versus last year’s first six months earnings per share of $0.55.

Turning to the balance sheet, we are pleased with our strong financial position as we have significantly reduced our financial leverage, and we are very focused on continuing to generate free cash flow and continuing to drive increased shareholder value. We have increased our net cash, defined as cash and cash equivalents and restricted cash collateral minus total debt by $12 million during the past year, bringing us to a net cash position of $14 million at March 31, 2013.

On April 3, 2013, we’ve repaid remaining $1.8 million principal amount of our debt. Giving effect to this debt repayment, we now have no debt outstanding. In addition, as I’ve previously mentioned, this morning we announced that our Board of Directors declared a regular quarterly cash dividend of $0.1875 per share payable June 28, 2013 to stockholders of record at the close of business on June 7, 2013, an increase of 7% compared to our previous dividend rate.

At March 31, 2013, we had no outstanding borrowings under our credit facility and approximately $56 million of availability under the credit facility based on the facilities borrowing base formula, and expect to have no outstanding borrowings at the end of fiscal ’13. Our average level of borrowings under our credit facility was $0.4 million for the first six months of fiscal ‘13 with no borrowings at all during the second quarter of fiscal ‘13.

I will now provide financial guidance with respect to fiscal ‘13. We are targeting net sales for fiscal ‘13 in the $535 million to $542 million range, representing a projected sales change of between a decrease of 1.2%, and an increase of 0.1% versus fiscal ‘12. The sales guidance range is based on a projected comparable sales increase of 1.5% to 3.0%. Our targeted sales for fiscal ‘13 reflect our plan to open 15 to 18 new stores, including 9 to 10 new multi-brand Destination Maternity stores and our plan to close approximately 33 to 41 stores with 12 to 14 of these planned store closings related to openings of new multi-brand Destination Maternity stores.

In addition, we distribute our Oh Baby by Motherhood collection through a licensed arrangement at Kohl’s stores throughout the United States and on Kohls.com. Kohl’s currently operates 1,155 stores in 49 states, compared to 1,134 stores in 49 states a year ago. We are targeting our gross margin to increase by approximately 50 basis points to 80 basis points to between 54.2% and 54.5% of sales in fiscal ‘13 from 53.7% in fiscal ‘12.

Total SG&A expenses are planned to be modestly lower to nearly flat, compared to fiscal ‘12 in dollar terms and nearly flat compared to fiscal ‘12 as a percentage of net sales. The projected SG&A expenses for the full year reflect increased marketing expenses, additions of talent to drive sales and increase variable incentive compensation, as well as inflationary expense increases, partially offset by continued tight expense controls and additional cost reductions.

We are targeting operating income from fiscal ‘13 in a $35.7 million to $38.6 million range, a projected increase of between 8% and 17%, compared to our fiscal ‘12 operating income of $33.1 million. We project depreciation expense to be approximately $12.6 million for the year, slightly higher than the $12.4 million figure for fiscal ‘12.

We project charges for impairment write-downs and loss on disposable fixed asset to be approximately $1.6 million for fiscal ‘13 versus the $2.0 million figure for fiscal ‘12 and project charges of approximately $2.8 million for stock compensation expense versus the $2.4 million figure for fiscal ‘12.

Based on these assumptions, we are targeting fiscal ‘13 adjusted EBITDA in the $52.6 million to $55.5 million range, a projected increase of between 5% and 11%, compared to our fiscal ‘12 adjusted EBITDA of $49.9 million. We expect interest expense, net of interest income to be approximately $0.5 million for fiscal ‘13, a decrease from our fiscal ‘12 interest expense of $1.2 million. We are assuming an effective tax rate of approximately 38.5% in fiscal ‘13 versus 39.2% in fiscal ‘12. We project average diluted shares outstanding for earnings per share calculation purposes of approximately 13.4 million shares.

Based on these assumptions, we are targeting diluted earnings per share of between $1.61 and $1.74 per share, a projected increase of between 10% and 19% versus our earnings per share of $1.46 from fiscal ’12. We are planning our fiscal ‘13 capital expenditures to be between $16 million and $20 million compared to $9.3 million in fiscal ‘12.

After deducting for projected tenant allowance payments to us from store landlords, we expect our net cash outlay for capital projects to be between $13.0 million and $16.5 million versus $6.1 million in the fiscal ‘12. Our planned capital expenditures include significant investments for store enhancements, as well as continued investments in systems, distribution center efficiency projects and new stores.

We expect our inventory at fiscal ‘13 year-end to be approximately 3% to 6% lower than fiscal ‘12 year-end. Based on these targets and plans we expect to generate free cash flow defined as net cash provided by operating activities minus capital expenditures of between $25 million and $33 million in fiscal ‘13, a slight increase versus our prior guidance of between $24 million and $33 million and a projected decrease from fiscal ‘12 free cash flow of $33.4 million due to higher planned capital expenditures.

Based on the company’s new current quarterly dividend rate of $0.1875 per share, the dividend will use approximately $9.8 million of cash flow for fiscal 2013 and uses approximately $10.1 million on a pro forma annualized basis. For the third quarter of fiscal ‘13, we are targeting net sales in the $138 million to $142 million range, based on an assumed comparable sales increase of 2% to 5% on a reported basis. We are targeting diluted earnings per share for the quarter of between $0.56 and $0.64 per share, a projected increase of between 8% and 23% versus the EPS of $0.52 per share for the third quarter of fiscal ‘12.

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

Christopher F. Daniel

Thank you, Judd, and good morning everyone. We continue to focus our efforts in merchandizing and marketing on three key initiatives: one, improving product and presentation in all merchandize brands and store formats; two, leveraging our brand value and market position as the leader in maternity apparel, and three, strengthening our merchandising, marketing and design teams and developing an attractive top talent at all levels.

In our Motherhood brand, we’re pleased to see continued positive sales momentum in key areas of the business, as a result of more consistent focus on developing and maintaining a relevant point of view for the fashionable, value-oriented mom-to-be..

We’re seeing particular improvement in the bottoms business, which is an important first purchase by expectant moms and in our nursing business, which extends our postnatal relationship with our customers. Likewise, as we’ve expanded and updated our active and yoga inspired business with comfortable trend-right knit separates that make easy outfits, the customer has responded positively.

Throughout the Motherhood business, we continue to be pleased with our customers’ response to trend-right content in the assortments. We believe that as we continue to focus on updating key items in all classifications, improving quality, offering versatility and creating exceptional value will continue to drive sales improvement and deepen our relationship with the Motherhood customer.

In Motherhood stores, we are keenly focused on improving the in-store experience by making shopping easier for our customers. We’ve made significant changes in signing, the visual imagery and item adjacencies. We are reducing SKU count and adding depth in most wanted items and categories. We’re also adding one more mannequins and display options in order to show more outfitting and make it easier for our customers to understand what they need and how to put it all together.

In our A Pea in the Pod assortments, we continue to focus on maximizing our position as the market leader in contemporary and better maternity fashion, in both our internally designed A Pea in the Pod brand and through our exclusive designer brand relationships.

We are especially focused on elevating the content and fashion point of view of our internally-designed products, and making sure that A Pea in the Pod continues to be clearly differentiated from our other brands. We believe that our effort to create a more boutique-like environment for our A Pea in the Pod customers has created stronger visual impact for new items and color stories and resonates well with this upscale customer.

At both Motherhood and the A Pea in the Pod, we remain focused on developing and executing memorable in-store experiences for each of our brands, as well as in our larger-format, multibrand Destination Maternity nameplate stores.

We will continue to maximize specialized product categories such as intimate apparel, nursing apparel, and beauty and body care products. Our ongoing goal is always to exceed our clients’ expectations during a very special time in their life and reinforce our position as the maternity experts in all of the markets we serve, including online. In addition to our catalog and component promotions, we’re actively pursuing new ways to enhance our relationship with each customer during the course of her pregnancy and her transition to Motherhood.

In September 2012, we launched our exclusive Jessica Simpson maternity collection in approximately 300 of our locations and online. We’ve now expanded the distribution of this exclusive collection to more than 800 locations, and over the next few months, we will introduce new categories to the Jessica Simpson maternity brand such as sleepwear and intimate apparel.

We’re very excited by excited by our customers’ enthusiastic reception of this new brand and believe that Jessica’s current pregnancy, her second, further enhances the relevance and appeal of her brand with our customer base. We will continue to develop one-at-a-time partnerships, product initiatives, events, celebrity relationships and promotions in all of our brands to clearly differentiate us from competitors and reinforce our position as the place where expectant moms can expect it all.

Thank you. and I’d now like to turn the call back to Ed for some closing remarks.

Edward M. Krell

Thanks, Chris. Looking forward, we are confident that we can continue to improve our sales performance and position our company for future growth by continuing to enhance our merchandise assortments, merchandise presentation, store environment and customer experience, and continuing to focus on our strategic plan.

As you have heard from Chris, we have been taking significant actions to turn around our sales performance, and we are cautiously optimistic that we will continue to see the results of our efforts in an improved sales trend during current year and beyond.

While we recognize that over the past four to five years, we have faced the dual challenges of a deep recession, followed by a weak recovery as well as a 9% decrease in annual births in the United States since 2007. we remain focused on driving continued improvement in our sales performance through initiatives to enhance our merchandise assortments, merchandise presentation, store environment and customer experience.

We are pleased with our improved sales trend over the past three quarters, and we are confident in our ability to continue to manage our business through this uncertain consumer environment, to continue to improve our sales performance and to continue to make progress towards our key corporate goals.

I believe we continue to have the opportunity to significantly increase shareholder value by continuing to implement our strategy and by improving our merchandising execution. Our current total equity market capitalization is $314 million, and our enterprise value, including the impact of our net cash balance is approximately $300 million.

This implies an enterprise value to adjusted EBITDA valuation multiple of 5.6 times on a trailing four-quarters basis, and between 5.1 and 5.5 times based on our fiscal 2013 guidance range. Also our projected free cash flow of $25 million to $33 million for fiscal 2013 represent a highly attractive the free cash flow yield of 8.0% to 10.5% on our equity market capitalization, and our new increased annual dividend rate of $0.75 per share represent a highly attractive dividend yield of 3.2%.

We see significant opportunity, continue to increase shareholder value based on our ability to meaningfully grow EBITDA in the future and generate strong free cash flow, the potential for valuation multiple expansions and the ability to enhance the total return to our stockholders via a regular quarterly cash dividend and potential stock repurchases. And as the management team, we are very focused on achieving this increase in shareholder value.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) All right. You do have a question from the line of Lee Giordano from Imperial Capital. Please proceed.

Lee J. Giordano – Imperial Capital LLC

Thanks, good morning everyone. I realize it’s early, but can you talk a little bit about what you are seeing at the Buy Buy Baby stores that you’ve opened up and how quickly will you ramp up expansion in the chain there? Thanks.

Judd P. Tirnauer

Sure. Thanks, Lee. As we’ve said before, we have pretty strict confidentiality provision with our retail partners. So we’re really limited in how much detail we can discuss. But I can tell you that we’re very excited about the buybuy BABY relationship. We feel very good about where the business is and we really expect to see that grow very nicely in terms of rolling outdoors. We’re not going to give precise numbers in terms of rollout, but as we have mentioned, we do plan to significantly roll out and significantly increase the number of doors here over the next few quarters.

So we think that has been, we worked very well with them on a partnership and by kind of testing different locations in their store and different things. we think that that’s really helping us and is going to give us a better business as we rollout, but can’t tell you we’re very pleased with the relationship there and we’re pleased with how it’s going.

Lee J. Giordano – Imperial Capital LLC

Great. And it seems based on the guidance that comps are improving a bit in this quarter. Can you talk about what happened last quarter as far as the weather impact? Was that a factor in the results and what you’re seeing early spring trends as we get warmer weather here today?

Judd P. Tirnauer

Yes. To address the second quarter, so that’s our January, February, March quarter. There, we’re adjusting for the calendar shift where comp up 2.4% and there, as we do point out and as you mentioned that weather was, we think a pretty significant impact towards the end of the quarter in the March month, not only with this March unusually cold this year, but it was especially cold compared to a very unusually warm last March.

So as a result, there was a very significant change in terms of the customer feeling that they needed wear-now spring apparel, because you really didn’t need it than this March whereas last March, there was much more favorable weather. So as we have gotten into April, the weather still hasn’t been very favorable. It just hasn’t been as unfavorable, relative to last year as it was in March. We have seen very significant improvements in the sales trend.

Lee J. Giordano – Imperial Capital LLC

Great, thank you.

Operator

(Operator Instructions) And your next question comes from the line of James Fronda from Sidoti & Company. Please proceed.

James Fronda – Sidoti & Company LLC

Hey guys, how are you?

Judd P. Tirnauer

Good.

James Fronda – Sidoti & Company LLC

I know you don’t break out the yoga-inspired or the Jessica Simpson line by segment. But do those provide, I guess higher margins than the normal product assortment?

Judd P. Tirnauer

Not necessarily. For us, it’s really; it’s not about trying to focus on products that are higher margin. It’s focusing on the product and the brands that the customer wants. So that’s really what it’s about, it is outfitting her, the way she wants to be outfitted and giving her looks and giving her brands that really resonate with her. So I wouldn’t want the focus to be on that, we’re doing it, because of the gross margin difference versus other products, that’s not really the case.

James Fronda – Sidoti & Company LLC

Right, okay. And I guess, is there any, I guess, point in time, I guess a few years out where the closure of underperforming stores will end or will that just be an ongoing basis going forward?

Christopher F. Daniel

I see it as just a process of just kind of continuous improvement that will always, one of the luxuries that we have is that with a large store base, and some very strong shop-in-shop partnerships that, the answer is, when we have decision based on stores whether it’s the kickout or whether it’s the lease expiration. we’ve got the ability to look at that critically, and we’ve got the ability to call it negotiate hard with landlords and make sure that we get the kind of rent deal that makes sense. And if it doesn’t, then we can close the store.

James Fronda – Sidoti & Company LLC

Right.

Christopher F. Daniel

But we do have a lot of leases that expire here in the next couple of years and often that’s because will have pushed out a kickout one year or extended a term only one year, both to see if the store can pick up in terms of volume, and also at times to position ourselves for a larger format Destination Maternity store in that market. So the number of those store closings due to prunings may well decrease over time. But I see it as just part of the discipline of running a strong retail business.

And also as we’ve said before, a lot of it depends on what kind of rents we can negotiate with our landlords for a renewal of some of those, call them lower volume sales stores. If we have a kickout right or a lease expiration, the lower rent that the landlords are willing to provide us to keep us, then the fewer stores will close. Conversely, the higher rent that folks look for on those marginal stores, then we’ll tend to close more of those stores. So we evaluate each store on its own merits, and we think it’s just part of the continued progress of running a healthy retail business.

James Fronda – Sidoti & Company LLC

All right, okay. All right, it makes sense. Thanks guys.

Judd P. Tirnauer

Sure.

Operator

Your next question comes from the line of Arnold Brief from Goldsmith & Harris. Please proceed.

Arnold Brief – Goldsmith & Harris

Just a couple of quickies, number one, do you see any change going on in the birthrate at all? Do you see any numbers that are encouraging?

Judd P. Tirnauer

Yes. in terms of that, the latest data on birth has it about 3.94 million births. So that’s about down 9% from 2007, seems to have kind of leveled the loss. It’s really just down a smidgen. I think it may be down like 1% or so from the previous year. In terms of projection, we do see some information out there. I’m just not sure that anybody has got a really good bead on projecting it. We have seen certain projections that over the next couple of years project that the births will go up 1.5% to 3% a year for each of the next couple of years. But to be fair, I think that what they’re really doing is focusing on the fact that the birthrate has come down significantly, the birthrate has come down more than the 9% decline in the absolute number of birth because there are more women of child bearing age.

So the view is there is this kind of pent-up demand for having babies and the view is it’s the recession and the weak recovery and the continued high employment and high underemployment that have prevented those births from coming back. So the view is with this pent-up demand that births will come back, but I can’t tell you that we necessarily put a lot of credence into the forecast that births will go up 1.5% to 3% for each of the next two years. But we do have the view that over the next several years the birth trend should become wind at our back as opposed to wind at our face that it has been in recent years. But I can also tell you that we’re not going to bet on a near-term increase in births in terms of buying extra inventory for it because we just – we don’t think that that makes sense. We’ll manage the business site and if we see – we see continued increases in sales and/or we see increase in birth that really happened then we’ll chase, which is a good position to be in.

Arnold Brief – Goldsmith & Harris

I’m just wondering whether it’s more of the changes because the swing is more imminent because of what’s going on in the real estate market with families unbundling and kids moving out of the parents’ house and getting their own house…

Edward M. Krell

That’s right. I mean that is one of the hopeful sign that folks have pointed to and maybe there is a little bit of that behind these projections of some increase births is that with housing formation starting to increase, the simple concept is that may be you have more of the 20 something moving out of the basement of their parents’ house and thus in a better position to think about starting a family and having a baby. Yeah, so we are working for that, but we’ll just all have to wait and see.

Arnold Brief – Goldsmith & Harris

Okay. Second question is, how long or how many years do you feel it will be before you start to breakout the results of the international business?

Edward M. Krell

Well, we do breakout sales outside of the United States. So we do have that – most of that sales at this point is the Canada business. So we do breakout the sales there. And that’s a business that we’ve said is that the growth in international is not what has been a big part of our earnings growth over the past couple of years, but we think that long-term that was tremendous opportunities internationally. We have seen growth in that international business and we are actively looking at new markets to expand into including China, which we think is a very attractive market for us, where there already is a decent amount of maternity apparel business being done and we are actively evaluating alternatives in China. So we think that long-term this is going to be a very strong business for us, but the answer is, it’s going to be a slow build.

Arnold Brief – Goldsmith & Harris

All right. So in Macy’s business, could you give us some idea of how it’s progressing and number two, same part of the same question, you feel that business would do better if Macy’s would make more of a commitment to the baby business in general, cribs and clothing and bedding and have that as a joint some kind of merchandising effort? So there is two aspects of the question.

Edward M. Krell

Yeah, first of all, we’ve said, I said it earlier on the call, we do have pretty strict confidentiality provisions with our retail partner. So we can’t really get into a lot of detail here. But we have pointed out that we believe there are the same types of sales growth opportunities with our retail partners as well with our own stores by improving the merchandise assortments in the presentation and we think the answer is that we’ve executed well on that both in our own stores and with our retail partners. Macy’s, we think, is a great relationship for us. They’ve done a really nice job overall in their business. And we think they are very strong partner to be with and we see that as a strategic relationship not just a way of getting some extra sales.

In terms of – will there be the opportunity to grow the maternity apparel business even further if they were to focus more on the baby business and all that. I think that that makes a lot of sense. And as Macy’s has talked about the whole focus on the millennial mom out there and the millennial gal is a big focus for them. So I feel very good that just like Macy’s is a strong strategic partner for us, I think that our business, maternity apparel business, has strategic value to them. So, obviously, Macy’s will have to talk about what their precise merchandise initiatives are going to be, but they are focused very much on that millennial generation. So I would think that the baby business and things like that could become increased focus for them, but I’m just (inaudible) that.

Arnold Brief – Goldsmith & Harris

And you feel if it did would help you?

Edward M. Krell

Yeah, I think that just because it’s going to bring in those folks just like with buybuy BABY and we think that it has a lot of strategic value both to us and to them that yeah, I mean, you are kind of the logic that you are thinking of if there is more of a baby business is that going to bring in the pregnant mom, I think that that’s very true.

Arnold Brief – Goldsmith & Harris

Okay. Last question and I understand the confidentiality and I mean, I want you to discuss how you are rolling out doors with buybuy BABY and how the expansion is progressing for competitive reasons. But if I walked in to a store now I could see how many SKUs you have, I just don’t have a store near me believe it or not. And I’m just wondering could you tell us how many SKUs you are putting in to a buybuy BABY. I mean that’s out there, it’s not a like a prediction or anything.

Edward M. Krell

Yeah, I mean, we’ve got the size of these stores is varies and that’s one of the things, tested different sizes, but we are in around the 400 square foot, some of them are somewhat bigger, some of them are somewhat smaller, I don’t have the a precise SKU count there. But it’s a pretty tight assortment and one of the things that we are doing is experimenting with different levels of SKU depth and different product categories in there, but we have been very pleased with it. I think that the buybuy BABY folks are very pleased with it. And we always planned this as kind of a test and roll and that let’s test in a smaller number of stores so that we’ve then got the ability to refine it as we roll it out, but we are planning on rolling out in to a significant number of additional doors in the next few quarters here and that we think long-term that this makes sense to be in most of their doors.

Arnold Brief – Goldsmith & Harris

Thank you very much.

Edward M. Krell

Yep.

Operator

And ladies and gentlemen, we have no more questions in the queue at this time.

Edward M. Krell

Sherry, we'll just wait another minute and see if there is any additional questions. Okay, seeing no additional questions, I want to thank everybody for their time and attention and have a great day. Bye-bye.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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