Destination Maternity Reports Improved First Quarter Fiscal 2016 Results

MOORESTOWN, N.J., May 26, 2016 /PRNewswire/ -- Destination Maternity Corporation (NASDAQ: DEST), the world's leading maternity apparel retailer, today announced financial results for the first quarter of fiscal 2016 ended April 30, 2016 compared to the first quarter of fiscal 2015 ended May 2, 2015.

First Quarter Fiscal 2016 Selected Financial Results (13 weeks ended April 30, 2016):

• Comparable sales decreased 5.4%, compared to a 1.1% decrease for the first quarter of fiscal 2015 (13 weeks ended May 2, 2015);
• Gross margin improved 370 basis points to 54.1%, up from 50.4% in the prior year quarter; 
• SG&A declined approximately $5.2 million to $58.8 million, a decrease of 8.2% from the first quarter of fiscal 2015;
• GAAP net income improved 59.4% to $4.0 million, or $0.30 per diluted share, compared to net income of $2.5 million, or $0.19 per diluted share, for the first quarter of fiscal 2015; and
• Adjusted net income was $4.5 million, or $0.33 per diluted share, compared to adjusted net income of $3.7 million, or $0.27 per diluted share, for the first quarter of fiscal 2015 (See Reconciliation of Net Income to Adjusted Net Income in the financial tables at the end of this press release).

Anthony M. Romano, Chief Executive Officer, President & Interim Chief Financial Officer stated, "For the first quarter, in a challenging environment that pressured sales, we are pleased to report a 10.2% increase in adjusted EBITDA before other charges. Our positive earnings growth  compared to the prior year demonstrates the early success of our merchandising, inventory and expense management initiatives, which led to a significant increase in gross margin, a reduction in SG&A and a decrease in ending inventory as compared to the first quarter of fiscal 2015.  Specifically, we drove higher margin sell-through and saw increased average selling prices, which were the primary drivers of our 370 basis point improvement in gross margin. The approximately $5.2 million reduction in SG&A during the quarter more than offset the impact to sales from lower mall traffic and anticipated store closures, and exits of certain leased businesses associated with our real estate optimization strategy.  In April we implemented a new product allocation tool, which is expected to enable us to better flow product across our channels to drive sales and continue our improved margins and inventory levels in future quarters. We remain focused on our key initiatives, including our efforts to elevate our Motherhood and A Pea in the Pod brands and streamline our distribution network while maintaining our expense and inventory discipline in our ongoing efforts to drive long-term profitable growth."

Real Estate and Partnerships
During the quarter and as previously announced, the Company's leased department relationship with Gordmans ended and the Company plans to discontinue its Two Hearts^® Maternity by Destination Maternity^® line, ending its relationship with Sears^® in June 2016.  Additionally, the Company will phase out production of its Oh Baby by Motherhood^® line during fiscal 2016 after being informed that Kohl's^® has elected to scale back and ultimately discontinue its exclusive license with the Company for this line in early fiscal 2017.  These actions will allow the Company to direct resources to the highest return opportunities and further optimize its footprint while reducing costs. 

Capital Allocation
The Company remains focused on implementing key infrastructure and systems projects to have the tools needed to drive sustained profitable growth.  To this end, in fiscal 2016 the Company will complete the implementation of a new best-in-class product allocation tool and will re-platform its e-commerce sites with a best-in-class enterprise cloud commerce solution. 

First Quarter Fiscal 2016 Financial Results 

• Net sales were $124.4 million compared with $141.6 million for the comparable prior year quarter. The decrease resulted primarily from a decline in comparable sales and, to a lesser extent, the reduction in leased store sales from exiting Gordmans and approximately half of the Sears locations, as well as decreased sales related to the Company's continued efforts to close underperforming stores. In addition, the Company's shipments to Kohl's declined as this licensed relationship will end by early fiscal 2017.
• Comparable sales decreased 5.4%, compared to a 1.1% decrease for the first quarter of fiscal 2015. The Company believes the primary drivers of the comparable sales decline were lower transactions and unit sales resulting from lower traffic, partially offset by an increase in average selling prices.
• Gross margin for the first quarter of fiscal 2016 was 54.1%, up 370 basis points over the comparable prior year quarter gross margin of 50.4%. The improvement was a result of a reduction in price promotion and markdown activity as a result of better managed inventory, and lower levels of excess current season and aged merchandise.
• Selling, general and administrative expenses ("SG&A") for the first quarter of fiscal 2016 decreased 8.2% to $58.8 million, compared to $64.0 million for the first quarter of fiscal 2015. The decline in SG&A dollars reflects management actions resulting in lower marketing and advertising expense, reduced store and home office payroll, and savings from the Company's continued closure of underperforming stores. As a percentage of net sales, SG&A increased to 47.2% for the first quarter of fiscal 2016 compared to 45.2% for the first quarter of fiscal 2015.
• Other charges during the first quarter of fiscal 2016 were $0.7 million, primarily related to management and organizational changes, compared to $1.8 million in the first quarter of fiscal 2015, which included $0.8 million for management and organizational changes and $1.0 million for the Company's facilities relocations. The Company incurred store closing, asset impairment and asset disposal expense of $0.6 million compared to expense of $1.0 million for the first quarter of fiscal 2015.
• Adjusted EBITDA before other charges was $13.2 million compared to $12.0 million for the first quarter of fiscal 2015. Adjusted EBITDA before other charges is defined in the financial tables at the end of this press release.
• GAAP net income was $4.0 million, or $0.30 per diluted share, an increase of 59.4% compared to net income of $2.5 million, or $0.19 per diluted share, for the first quarter of fiscal 2015.
• Adjusted net income was $4.5 million, or $0.33 per diluted share, an increase of 21.6% compared to adjusted net income of $3.7 million, or $0.27 per diluted share, for the first quarter of fiscal 2015. For a reconciliation of GAAP to non-GAAP financial information, refer to the financial tables at the end of this press release.

Other First Quarter Fiscal 2016 Financial Information

• Capital expenditures totaled $3.6 million primarily driven by expenditures for new stores, improvements to existing stores and investments to support key infrastructure and systems projects. First quarter fiscal 2015 capital expenditures of $12.9 million included $6.6 million for the relocations of the Company's corporate headquarters and distribution operations that were completed in fiscal 2015.
• At April 30, 2016, inventory was $77.2 million, a decrease of $3.8 million compared to $81.0 million at May 2, 2015. Overall unit inventory at the end of the first quarter was down 6% on a year-over-year basis.

Guidance for Fiscal 2016

The Company updated its financial guidance for fiscal 2016 as follows:

• Comparable sales expected to be flat for the full fiscal year with greater improvement in the second half of fiscal 2016;
• Gross margin to increase approximately 200 to 300 basis points year-over-year, as inventory productivity initiatives continue to generate more profitable sales;
• SG&A dollars will continue to decline, with some deleveraging as a percent of sales on a full year basis;
• Capital expenditures to be $15 to $17 million, driven by investments in systems, infrastructure, and modest store growth;
• The Company plans to open 7 to 10 new stores and close 25 to 35 stores.

Retail Locations
The table below summarizes store opening and closing activity for the three months ended April 30, 2016 and May 2, 2015, as well as the Company's total store, leased department and retail location count at the end of each fiscal period.

Conference Call Information
As announced previously, the Company will hold a conference call today at 9:00 a.m. Eastern Time, regarding the Company's first quarter fiscal 2016 financial results. Interested parties can participate in this conference call by dialing (877) 648-5519 in the United States and Canada or (281) 973-6287 outside of the United States and Canada. Please call ten minutes prior to 9:00 a.m. Eastern Time. The conference call (listen only) will also be available on the investor section of the Company's website at http://investor.destinationmaternity.com. The passcode for the conference call is 17371796. In the event that you are unable to participate in the call, a replay will be available at 12:00 p.m. Eastern Time on Thursday, May 26, 2016 through 11:59 p.m. Eastern Time Thursday, June 2, 2016 by calling (855) 859-2056 in the United States and Canada or (404) 537-3406 outside of the United States and Canada. The passcode for the replay is 17371796.

About Destination Maternity
Destination Maternity Corporation is the world's largest designer and retailer of maternity apparel. As of April 30, 2016 Destination Maternity operates 1,487 retail locations in the United States, Canada, Puerto Rico and, most recently, England, including 530 stores, predominantly under the trade names Motherhood Maternity^®, A Pea in the Pod^® and Destination Maternity^®, and 957 leased department locations. The Company also sells merchandise on the web primarily through its brand-specific websites, motherhood.com and apeainthepod.com, as well as through its destinationmaternity.com website. Destination Maternity has international store franchise and product supply relationships in the Middle East, South Korea, Mexico, Israel and India. As of April 30, 2016 Destination Maternity has 203 international franchised locations, including 23 standalone stores operated under one of the Company's nameplates and 180 shop-in-shop locations. Destination Maternity also distributes its Oh Baby by Motherhood^® collection through a licensed arrangement at Kohl's^® stores throughout the United States and on Kohls.com.

Reconciliation of Non-GAAP Financial Measures
This press release and the accompanying financial tables contain non-GAAP financial measures within the meaning of the SEC's Regulation G, including 1) adjusted net income, 2) adjusted net income per share - diluted, 3) adjusted EBITDA, 4) adjusted EBITDA before other charges, 5) adjusted EBITDA margin, 6) Adjusted EBITDA margin before other charges, and 7) net debt. In the accompanying financial tables, the Company has provided reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures. The Company's management believes that each of these non-GAAP financial measures provides useful information about the Company's results of operations and/or financial position to both investors and management. Each non-GAAP financial measure is provided because management believes it is an important measure of financial performance used in the retail industry to measure operating results, to determine the value of companies within the industry and to define standards for borrowing from institutional lenders. The Company uses each of these non-GAAP financial measures as a measure of the performance of the Company. The Company provides these measures to investors to assist them in performing their analysis of its historical operating results. Each of these non-GAAP financial measures, except net debt, reflects a measure of the Company's operating results before consideration of certain charges and consequently, none of these measures should be construed as an alternative to net income or operating income as an indicator of the Company's operating performance, or as an alternative to cash flows from operating activities as a measure of the Company's liquidity, as determined in accordance with generally accepted accounting principles. The Company may calculate each of these non-GAAP financial measures differently than other companies.

Forward-Looking Statements
The Company cautions that any forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) contained in this press release or made from time to time by management of the Company, including those regarding earnings, net sales, comparable sales, other results of operations, liquidity and financial condition, management changes and various business initiatives, involve risks and uncertainties, and are subject to change based on various important factors. The following factors, among others, in some cases have affected and in the future could affect the Company's financial performance and actual results and could cause actual results to differ materially from those expressed or implied in any such forward-looking statements: the strength or weakness of the retail industry in general and of apparel purchases in particular, our ability to successfully manage our various business initiatives, our ability to successfully pursue, complete and manage any strategic transaction and related matters, adverse effects on the market price of our common stock and on our operating results because of a failure to complete any strategic transaction, failure to realize any benefits of any strategic transaction, the success of our international business and its expansion, our ability to successfully manage and retain our leased department and international franchise relationships and marketing partnerships, future sales trends in our various sales channels, unusual weather patterns, changes in consumer spending patterns, raw material price increases, overall economic conditions and other factors affecting consumer confidence, demographics and other macroeconomic factors that may impact the level of spending for apparel (such as fluctuations in pregnancy rates and birth rates), expense savings initiatives, our ability to anticipate and respond to fashion trends and consumer preferences, unanticipated fluctuations in our operating results, the impact of competition and fluctuations in the price, availability and quality of raw materials and contracted products, availability of suitable store locations, continued availability of capital and financing, our ability to hire, develop and retain senior management and sales associates, our ability to develop and source merchandise, our ability to receive production from foreign sources on a timely basis, our compliance with applicable financial and other covenants under our financing arrangements, potential debt prepayments, the trading liquidity of our common stock, changes in market interest rates, our compliance with certain tax incentive and abatement programs, war or acts of terrorism and other factors set forth in the Company's periodic filings with the U.S. Securities and Exchange Commission (the "SEC"), or in materials incorporated therein by reference. Although it is believed that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations will prove to have been correct and persons reading this announcement are therefore cautioned not to place undue reliance on these forward-looking statements which speak only as at the date of this announcement. The Company assumes no obligation to update or revise the information contained in this announcement (whether as a result of new information, future events or otherwise), except as required by applicable law.

SOURCE Destination Maternity Corporation

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