I took a look at Destination Maternity (DEST) recently. I thought I would post my findings here in order to help myself further think through the business, as well as to potentially tap into the collective wisdom of my readers. If you know something about the company, post it in the comments section or send me an e-mail at my first and last name at gmail.
I have no position in the stock.
Destination Maternity – a niche clothing retailer
DEST’s business is not too hard to understand: they sell maternity clothes through 1,900 locations, 1/3 stores and 2/3 leased departments. Most but not all locations are in the U.S., where they have a 40%+ market share. And they do some Internet business, too, although I did not find how much of revenue is from this source.
The stock price of Destination Maternity has cratered over the past year-and-a-half: going from roughly $30 in late 2013 to about $11 now. Revenues have remained roughly the same, dropping slightly from about $540M annually to $510M – no big deal, and it may mostly be due to (wise?) store closings.
DEST is in the middle of a corporate move from Philadelphia to Moorestown, NJ, which is expected to contribute an extra $0.10 to annual earnings. In better years, from fiscal 2011 to 2013, DEST earned on average $1.66 per year.
The problem lately is that same-store sales went negative. Also, the company took an $11M inventory write-down in the most recently reported period (ended Jan 31). They are having trouble with the “millennial” mother, who will not buy last year’s clothes this year – thus, the need for the write-down. The company is implementing a new, smarter inventory management system. Maybe it will work. Anthony Romano, the current CEO, only took the helm ten months ago, so it’s not like he is cleaning up his own mess here. This may bode better for his ability to turn things around.
The “quarter” ended January 31 was actually four months long, as DEST happens to be transitioning to a traditional retailer calendar that ends the last Saturday of January from now on. Regardless, you can see that results took a hit during the period. We should get the April 30 quarter results this week.
A 7.6% dividend yield
DEST is currently paying dividends of $2.8M per quarter, which makes for a nice yield on a $146M stock. The market definitely seems to be anticipating a cut or worse here. (Or is the market worried that DEST won’t cut the dividend? In conversations with another investor, we speculated that the stock might actually rally on a dividend suspension.) In fact, the only question on the recent quarterly conference call was regarding the dividend. The caller seemed to want DEST to suspend its dividend for the time being. At January 31, the company had only $1.4M of cash. In response to the question, management portrayed themselves as pretty confident that they would not have to cut the dividend, though didn’t expressly rule it out. In fact, just a week ago on May 28, DEST declared their usual $0.20 dividend. It may be that the recent use of cash to move from Philadelphia to Moorestown is making the cash/cash flow situation look much worse than it really is. But what if sales continue to dip?
Along these lines, the company has an untapped line of credit for $55M. I expect this is why they are not worried about their ability to pay the dividend.
I believe DEST is cheap
In the end, my initial impression is that Destination Maternity is cheap. Clearly a lot of pessimism is priced in. They are selling for approximately 28% of sales. Debt is low at $15M on a company that does $500M in sales a year. In healthy times, the company can earn $1.50 easily while the current stock price is only $10.56.
The risk is that they don’t turn it around and that there is something fundamentally new about “millennial” maternity shopping patterns. It seems a little far-fetched that this business model (stores that sell maternity clothes) just became extinct. More likely, a little re-calibration is needed on DEST’s part – this is management’s belief. I can’t say how long it will take to see “green shoots” – probably at least a couple quarters.
If I have a circle of competence, I couldn’t tell you what it is. But I’m pretty sure it wouldn’t be retailers. I have not spent much time looking at this segment, so take what I say here with a grain of salt. But my impression is that shares of Destination Maternity are more attractive than not here.
That said, I’d love to hear others’ insights on the company. Please feel free to chime in below.
Disclosure: I currently have no position in DEST.