Destination Maternity Corporation (NASDAQ:DEST)
F1Q 2014 (Qtr End 12/31/2013) Earnings Call
January 30, 2014, 9:00 AM ET
Judd Tirnauer - Executive Vice President and Chief Financial Officer
Edward Krell - Chief Executive Officer
Christopher Daniel - President
Christina Brathwaite - Sidoti
Brian Roenik - DLR Capital Partners
Good morning, ladies and gentlemen, and welcome to the Destination Maternity Corporation first quarter fiscal 2014 earnings release call. My name is Glenn, and I will be your operator for today. (Operator Instructions) 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, Mr. Tirnauer.
Thank you, operator. Thanks everyone for joining us this morning for Destination Maternity's investor conference call for the first quarter of fiscal 2014 ended December 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 Relation section of our website at 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 meaning 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, adjusted earnings per share, 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 first quarter financial results and provide guidance with respect to the remainder of fiscal 2014, and we'll then turn the call over to Chris for additional comments. Ed will then provide closing remarks, after which we will be available to take your questions.
I would now like to turn the call over to Ed.
Thank you, Judd, and good morning to everyone. We are pleased to report an increase in earnings and comparable sales versus last year for our first quarter, despite the difficult retail environment. Our adjusted earnings for the first quarter were $0.33 per share, a 14% increase over our first quarter of fiscal 2013 adjusted earnings per share of $0.29 per share.
Our GAAP earnings for the first quarter were $0.31 per share, a 7% increase over our first quarter of fiscal 2013 GAAP EPS of $0.29. Our first quarter fiscal 2014 GAAP EPS includes $0.02 per share of other charges related to the previously announced relocations of our headquarters and distribution facilities.
Our sales for the quarter were somewhat weaker than planned, reflecting the continued challenging overall economic environment, which affected many retailers in the recent holiday shopping season. Although, our sales for the quarter were slightly below the low-end of our expected sales range, it represents our sixth consecutive quarter of achieving a comparable sales increase, 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. Last year, we repaid the remaining $15.3 million principal amount of our debt. This completed a dramatic decrease in our debt from $118 million to zero over a seven-year period through use of our operating cash flow.
Given our strong balance sheet and the strong profitability and cash flow generation of our company, 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 has declared a regular quarterly cash dividend of $0.20 per share, representing a 7% increase from our previous quarterly dividend rate. This represents a new annual dividend rate of $0.80 per share compared to our previous annual rate of $0.75 per share.
I would now like to turn the call back over to Judd to review our financial results and our financial guidance.
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 '14.
Net sales for the first quarter of fiscal '14 of $134.8 million, was a decrease of 0.3% from last year's first quarter. The slight decrease in sales versus last year resulted primarily from decreased sales related to the company's continued efforts to close underperforming stores, substantially offset by the increase in comparable sales. Our total sales of $134.8 million were slightly below the low-end of our sales guidance range of $135 million to $139 million provided in our November 21, press release.
Comparable sales for the first quarter of fiscal '14 increased 0.7% versus a comparable sales increase of 1.9% for the first quarter of fiscal '13. Our comparable sales performance for the first quarter was slightly below the low-end of our guidance range of comparable sales increase between 1.0% and 4.0% for the quarter.
Adjusting for the calendar timing shift, as described in today's earnings release, our calendar adjusted comparable sales increased 1.1% for the first quarter of fiscal '14 versus an increase of 3.6% for the first quarter of fiscal '13. Gross margin for the first quarter was 52.8% of sales, an increase of 20 basis points from last year's first quarter gross margin of 52.6%.
SG&A expense for the first quarter increased 0.6% from last year's first quarter. Our first quarter SG&A expense percentage of 47.4% of sales this year was approximately 10 basis points lower than our last year's first quarter figure of 47.5% of sales.
We incurred store closing, asset impairment and asset disposal charges of approximately $0.1 million for the first quarter versus $0.5 million for the first quarter of fiscal '13. Operating income for the first quarter was $6.8 million, 5% higher than last year's first quarter operating income of $6.5 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 disposable of assets; and four, stock-based compensation expense.
Adjusted EBITDA before other charges was $11.5 million, a 7% increase from last year's first quarter adjusted EBITDA before other charges of $10.7 million. Our adjusted EBITDA before other charges margin of 8.5% of sales for the first quarter was 60 basis points higher than last year's first quarter margin of 7.9%.
Adjusted EBITDA for the first quarter of fiscal '14 was $11.4 million, a 6% increase from last year's first quarter adjusted EBITDA of $10.7 million. Interest expense, net of interest income for the first quarter of fiscal '14 was $0.1 million compared to last year's first quarter net interest expense of $0.2 million.
We present non-GAAP adjusted earnings per share to enhance the understanding of operating results. Non-GAAP adjusted EPS represents GAAP diluted EPS before certain charges or credit when applicable such as: one, other charges; two, loss on extinguishment of debt; and three, certain infrequent income tax adjustments.
Our non-GAAP adjusted EPS for the first quarter was $0.33, a 14% increase compared to last year's first quarter adjusted EPS of $0.29. Our diluted earnings per share for the first quarter was $0.31, a 7% increase versus last year's first quarter diluted earnings per share of $0.29.
Turning to the balance sheet. We are very 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.
As of December 31, 2013, we had net cash, defined as cash and cash equivalents minus total debt of $30 million. At December 31, 2013, we had no debt and no outstanding borrowings under our credit facility and approximately $52 million of availability under the credit facility based on the facilities borrowing base formula. We had no borrowings during the first quarter of 2014.
I will now provide financial guidance with respect to fiscal '14. We are targeting net sales for fiscal '14 in the $539 million to $550 million range, representing between a projected sales decrease of 0.2% and an increase of 1.8% versus fiscal '13. This sales guidance range is based on projected comparable sales increase of 1.0% to 3.0%.
Our targeted sales for fiscal '14 reflects our plan to open 19 to 21 new stores, including 7 to 8 new multi-brand Destination Maternity nameplate stores and our plan to close approximately 43 to 48 stores with 13 to14 of these planned stores closing related to openings of new multi-brand Destination Maternity nameplate 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. We are targeting our gross margin to increase by approximately 60 basis points to 100 basis points to be between 54.5% and 54.9% of sales in fiscal '14 from 53.9% in fiscal '13.
Total SG&A expenses are planned to be approximately 1% to 3% higher in fiscal '13 in dollar terms and slightly higher as a percentage of net sales. The projected SG&A expense increase for the full year reflects additions of talent to drive sales and other inflationary wage and wage-related expense increase and increased marketing and advertising expenses, partially offset by continued tight expense controls.
We are targeting operating income before other charges in the $38.0 million to $42.0 million range, a projected increase of between 1% and 12% compared to our fiscal '13 operating income of $37.5 million. We are projecting an operating income for fiscal '14 in the $35.6 million and $39.6 million range versus our fiscal '13 operating income of $37.5 million.
We project depreciation expense to be approximately $14.6 million for the year versus the $12.4 million figure for fiscal '13. We project charges for impairment write-downs and loss on disposal of fixed assets to be approximately $0.9 million for fiscal '14 versus a $1.3 million figure for fiscal '13 and project charges of approximately $4.1 million for stock compensation expense versus the $2.8 million figure for fiscal '13.
For fiscal '14, we projected other charges predominantly non-cash associated with our facilities relocation will be approximately $2.4 million pre-tax or approximately $1.5 million after-tax. This represents projected charge of $0.11 per share for fiscal '14. As a point of reference, for fiscal '15, we expect charges of approximately $0.8 million pre-tax or approximately $0.5 million after-tax. This represents a projected charge of $0.04 per share for fiscal '15.
We project that once we are operating in both our new headquarters and new distribution center facilities, which we expect to begin during the middle of fiscal '15, our ongoing annualized after-tax earnings benefit from the relocations, will be approximately $0.11 per share and project our ongoing annualized after-tax cash benefit from the relocations will be approximately $4 million.
Based on these assumptions, we are targeting fiscal '14 adjusted EBITDA before other charges in the $57.5 million to $61.5 million range, a projected increase of between 7% and 14% compared to our fiscal '13 adjusted EBITDA before other charges of $54.0 million. We are targeting fiscal '14 adjusted EBITDA in the $56.3 million to $60.3 million range versus $54.0 million in fiscal '13.
We expect interest expense, net of interest income to be approximately $0.4 million for fiscal '14, a decrease from our fiscal '13 interest expense of $0.5 million. We are assuming an effective tax rate of approximately 38.0% in fiscal '14 versus 35.2% in fiscal '13. A significantly lower than historical effective tax rate of 35.2% in fiscal '13, reflected the benefit of reduction of state income tax expense due to changes in certain state income tax regulations enacted during the year. We project average diluted shares outstanding for earnings per share calculation purposes of approximately 13.6 million shares.
We are targeting non-GAAP adjusted EPS of between $1.72 and $1.90 per share, a projected increase of between 2% and 12% versus our non-GAAP adjusted EPS of $1.69 for fiscal '13. We are targeting GAAP diluted earnings per share of between $1.61 and $1.79 per share versus our full year fiscal '13 earnings per share of $1.78.
We are planning our fiscal '14 capital expenditures to be between $36 million and $40 million compared to $15.1 million in fiscal '13, excluding approximately $17 million of planned fiscal '14 capital expenditures associated with the relocations, we are targeting capital expenditures between $19 million and $23 million. After deducting projected tenant allowance payments to us from store landlords, we expect our net cash outlay for capital projects excluding capital expenditures associated with the relocations of between $15 million and $19 million versus $12.7 million in fiscal 2013.
Our planned capital expenditures include significant investments for the relocations of our headquarters and distribution operations, store enhancements, store remodels, relocations and new stores as well as continued investments in information systems and technology. We expect our inventory at fiscal '14 yearend to be approximately flat versus fiscal 2013 yearend.
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 negative $1 million and positive $8 million in fiscal '14, excluding the approximately $17 million of capital expenditures related to the relocations of our corporate headquarters and distribution operations, we project full year fiscal '14 cash flow of between $16 million and $25 million, a projected decrease from fiscal '13 free cash flow of $27.1 million due to higher planned capital expenditures.
Based on the company's new current quarterly dividend rate of $0.27 per share, dividend will use approximately $10.8 million of cash flow for fiscal '14 and uses approximately $11.0 million on a pro forma annualized basis.
For the second quarter of fiscal '14, we are targeting net sales in the $131 million to $134 million range based on an assumed comparable sales change of between a decrease of 1% and an increase of 2% on a reported basis, which includes the negative impact that's weaker than planned sales in January, which we attribute largely to the severe and inclement weather and related declines in retail traffic in many regions of the United States.
We are targeting non-GAAP adjusted EPS for the quarter of between $0.37 and $0.42 per share versus last year's second quarter adjusted EPS of $0.44. We are targeting GAAP diluted earnings per share for the quarter of between $0.35 and $0.40 per share compared to the diluted earnings per share of $0.44 per share for the second quarter of fiscal '13.
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.
Thank you, Judd. Good morning everyone. We continue to focus our efforts in merchandizing and marketing on three key initiatives: one, improving products and presentation in all brands and store formats; two, leveraging brand value or market position as the leader in maternity apparel; and three, strengthening our merchandising, marketing, and design teams and developing and attracting top talent at all level.
In our Motherhood brand, we are focused on accelerating 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 this fashionable value-oriented mom-to-be. We are particularly focused on driving the Motherhood business relevant to our customers' needs at each stage of her pregnancy and in her first few months as a new mother.
Throughout the Motherhood business, we continue to be pleased with our customers' response to trend right content in our assortments. Likewise, we are very excited by the continued growth of the Jessica Simpson brand, which is available on all Motherhood and Destination Maternity stores as well as many of our leased department shop-and-shop locations. We believe that as we continue to focus on updating the content of our brand portfolio, improving brand equity, offering versatility, and creating exceptional value, we'll continue to drive sales improvement and deepen our relationship with the Motherhood customer.
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 actively working to continue to improve and elevate the content and fashion point of view of our internally designed product.
This spring we have introduced exciting new collections from Nanette Lapore, Rebecca Taylor and Majestic. And we'll continue to expand our assortments of BCBG and Isabella Oliver to offer more styles, including styles exclusive to A Pea in the Pod available on more locations. We believe that our effort to create a more boutique-like environment for our A Pea in the Pod customer creates stronger visual impact for new items, brands and key looks 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 brand, as well as in our larger format, multi-brand Destination Maternity nameplate stores. We're keenly focused on continuing to improve the in-store experience by making shopping easier for our customers. We continue to make significant changes in signing, visual imagery, fixturing and item adjacencies as we leverage learning's from the two designed prototype stores, which we opened at the end of this past summer.
We are reducing SKU count and adding depths in most wanted items and categories. We have added 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. We are also actively engaged in translating our in-store experience to a memorable online experience as part of our omni-channel focus.
Our ongoing goal is always to exceed our clients' expectations during a very special time in her life and reinforce our position as the maternity expert in every market we serve including online. In addition to our catalog and compelling promotions, we are actively pursuing new ways to enhance our relationship with each customer in a personalized and relevant way during the course of her pregnancy and her transition to motherhood.
We continue to develop one-of-a-kind brand partnerships and celebrity relationships. Like our capsule collection with Jennifer Love Hewitt which arrives in stores this April. We believe that these unique product opportunities clearly differentiate us from competitors and reinforce our position as the place where expectant moms can expect it all.
Thank you. And I will now turn the call back to Ed for some closing remarks.
Thanks Chris. While we recognized that over the past 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 have achieved success during this time by remaining focused on the things that we can control, not on external factors that we cannot control.
We continue to make meaningful progress and make many changes to drive improvements on our merchandize assortments, merchandize presentation, store environment and customer experience. Our progress here can be seen by our sixth consecutive quarters of comparable sales increases. We believe these continuing sales driving initiatives have positioned us well to continue to improve our sales performance during the current year and beyond.
I believe, we continue to have the opportunity to significantly increase shareholder value by continuing to implement our strategy and by continuing to improve our merchandising and marketing execution.
Our current total equity market capitalization is $378 million and our enterprise value, including the impact of our cash balance is approximately $348 million. This implies an enterprise value to adjusted EBITDA before relocation charges valuation multiple of 6.4x on a trailing four quarters basis and between 5.9x and 6.3x based on our fiscal 2014 guidance range.
Also, our new annual dividend rate of $0.80 per share represents a highly attractive dividend yield of 2.9%. We see significant opportunity to 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 expansion and the ability to continue our ongoing return of capital to our stockholders by a regular quarterly cash dividend and potential stock repurchases.
Finally, with the planned relocations of our corporate headquarters and distribution operations, we will not only generate significant ongoing future cash flow and earnings benefits beginning next fiscal year, but we will be moving into the type of expanded and improved facilities we need to help us achieve our full potential as the global leader in the maternity apparel business. And as a management team, we are very focused on achieving this potential for our company and for our shareholders.
Thank you for joining us this morning. Operator, we are now ready to take questions.
(Operator Instructions) And your first question comes from the line of Christina Brathwaite with Sidoti.
Christina Brathwaite - Sidoti
First, just on kind of the inclement weather we've been seeing across the country, have you guys seen any difference in purchases being either on internet or customers going to your e-commerce site instead or you're just seeing loss sales there in total?
Well, the e-commerce business has performed significantly better than the store business. There is a couple of things going on. So one of the reasons, we take a look at different regions and we can see that the impacted regions, which are really the Midwest, recently been some of the Southeast.
But if you look throughout the whole month, really the Midwest and the northeast Mid-Atlantic were the two areas, and that's where we're seeing dramatically worse results than the rest of the country. Then also with the unusually cold weather, not just the stormy weather, it also means that people were going to be thinking less about spring product purchases, and we've certainly seen that also as an impact.
Christina Brathwaite - Sidoti
And then, Judd, just on the SG&A cost, much lower than I was expecting this quarter. Can you just provide a little color on what happened there?
Some of the expenses that we planned, in particular our health insurance cost, which can be choppy throughout the year, led to some expense favorability versus planned. That's a hard one to predict and really one of the primary drivers. And then there is the continued expense control that we have.
I'm not exactly sure, where your model lies for expenses. And I don't know as if your model for expenses was totally in line with our implied guidance, if you look at our sales and margin, because we were somewhat favorable, but we weren't dramatically favorable for first quarter. I think we did a nice job of controlling it, but there was not a huge favorability there.
Yes. It may have been a factor in terms of your model of the fact that our overall year has been planned out 1% to 3%, but the quarterly spread is slightly different, which you can see in our quarterly guidance.
Christina Brathwaite - Sidoti
And then I guess just last one, international sales, how did they performed over the quarter? And can you give some sort of color on how fast you expect to ramp up in Mexico going forward?
With Mexico, we plan to launch with Liverpool in the spring and summer. And they've got about a 100 department store, a leading department store company in Mexico, and should be launching in a little less than half of those doors, and then also opening up probably two freestanding Destination Maternity stores later in this year. So that really will hit in the late spring, summer, is when that will be.
And your next question comes from the line of Brian Roenik with DLR Capital Partners.
Brian Roenik - DLR Capital Partners
I just wanted to focus on the comments you made about the January sales being below plan, can you provide a little bit more color on that?
I mean, when we planned January sales, we certainly didn't planned that that were going to be certain regions that were going to be so dramatically affected by such unusual weather, in terms of the storms and the unusually cold weather. And as said, the reason we attributed to that is that when we look at it by region, we see that those regions that are affected are doing dramatically worse than the rest of the country.
Brian Roenik - DLR Capital Partners
How did that all shakeout in the end?
That's what factors into our guidance for the quarter of being down 1% to up 2%. When you look at it, it's not because we don't have confidence in our spring product lines, because we do have confidence in our spring product lines, and the reason why that low-end is significantly lower than the trend we've been seeing is because of the tough January results driven by those region that were really weather affected.
Brian Roenik - DLR Capital Partners
Can you talk about December versus January?
January was a lot worse than December, but remember we don't report monthly comps.
At this time, we have no further questions from the phone line.
We'll just wait a little bit to see if there is anybody else that would like to ask a question. It appears that there is no more questions. So thank you so much for the time. And have a great day folks. Bye-bye.
Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. And have a great day.
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