Destination Maternity Reports Second Quarter Fiscal 2019 Results

- Operating loss of $2.2 million versus $2.8 million in prior year period

- Adjusted EBITDA before other charges of $2.0 million versus $4.0 million in prior year period

- Gross Profit Margins of 51.4% versus 51.7% in prior year period

- Selling, General and Administrative expenses decline 9.9% from prior year period

- Engaged Greenhill & Co. to Evaluate Strategic Alternatives to Maximize Shareholder Value

MOORESTOWN, N.J.--(BUSINESS WIRE)--Destination Maternity Corporation (NASDAQ: DEST), the world's leading maternity apparel retailer, today announced financial results for the second quarter of fiscal 2019 ended August 3, 2019 compared to the second quarter of fiscal 2018 ended August 4, 2018.

Commentary

“Our results this quarter illustrate the ongoing headwinds facing our business. While cost savings initiatives drove reductions in SG&A expense and a pullback in promotional cadence helped to hold margins in line with the prior year, sales declines of 11.9% year-over-year more than offset the benefits to our bottom line,” said Dave Helkey, Chief Financial Officer of Destination Maternity.

“While we continue to believe we have a compelling business and remain focused on delivering long-term profitable growth, challenges persist and more needs to be done. As part of our ongoing review of the Company’s strategic initiatives, our Board of Directors has announced that it has engaged Greenhill & Co to commence a comprehensive review of strategic alternatives. We believe that it is in the best interests of our shareholders to conduct a thorough evaluation of all options reasonably available to the Company to position the business for success.”

Review of Strategic Alternatives

At the direction of its Board of Directors, Destination Maternity is reviewing various potential strategic and financial alternatives. The strategic alternatives expected to be considered include, but are not limited to, a sale or merger of the Company, continuing to pursue value-enhancing initiatives as a standalone company, along with capital structure optimization that may involve potential financings and/or the sale or other disposition of certain businesses or assets.

The company has retained Greenhill & Co as financial advisor to assist with its strategic alternatives review.

There can be no assurance that this process will result in the approval or completion of any particular strategic alternative or transaction in the future. The Company does not intend to disclose developments or provide updates on the progress or status of the review of strategic alternatives unless and until required or when the Company determines appropriate.

Second Quarter Fiscal 2019 Financial Results

• Net loss for the second quarter of fiscal 2019 was $3.5 million, or ($0.25) per share (diluted), compared to net loss of $4.0 million, or ($0.29) per share (diluted), for the second quarter of fiscal 2018.
• Operating loss of $2.2 million for the second quarter of fiscal 2019 compared to operating loss of $2.8 million in the second quarter of fiscal 2018.
• Adjusted net loss for the second quarter of fiscal 2019 was $2.8 million, or ($0.20) per share (diluted), compared to the comparably adjusted net loss for the second quarter of fiscal 2018 of $1.6 million, or ($0.11) per share (diluted).
• Adjusted EBITDA before other charges and effect of change in accounting principle decreased to $2.0 million for the second quarter of fiscal 2019 from $4.0 million for the second quarter of fiscal 2018.
• Net sales for the second quarter of fiscal 2019 decreased 11.9% to $84.9 million from $96.4 million for the second quarter of fiscal 2018. Sales were negatively impacted by the net closure of 6 owned locations and 55 leased lease locations as well as a decrease in comparable sales.
• Comparable sales for the second quarter of fiscal 2019 decreased 10.5% from the second quarter of fiscal 2018. The decrease was attributable to an 11.9% decrease in comparable store sales and a 6.4% decrease in ecommerce sales.
• Gross margin rate for the second quarter of fiscal 2019 was 51.4%, a decrease of 30 basis points from the comparable gross margin in the second quarter of fiscal 2018.
• Selling, general and administrative expenses (“SG&A”) for the second quarter of fiscal 2019 decreased 9.9% to $45.2 million from $50.1 million for the second quarter of fiscal 2018. As a percentage of net sales, SG&A increased 120 basis points to 53.2% vs 52.0% for the second quarter of fiscal 2018.

First Six Months of Fiscal 2019 Financial Results (26 Weeks Ended August 4, 2019)

• Net sales for the first six months decreased 10.3% to $179.1 million from $199.6 million for the comparable period in fiscal 2018.
• Comparable sales for the first six months of fiscal 2019 decreased 8.7%, compared to an increase of 0.5% for the six months of fiscal 2018.
• Gross margin for the first six months of fiscal 2019 was 53.2%, an increase of 50 basis points from the comparable prior year gross margin.
• Selling, general and administrative expenses (“SG&A”) for the first six months of fiscal 2019 decreased 8.1% to $93.6 million. As a percentage of net sales, SG&A increased 120 basis points to 52.3%.
• Adjusted EBITDA before other charges and change in accounting principle was $8.7 million for the first six months of fiscal 2019, a decrease of 26.6% compared to $11.8 million for the first six months of fiscal 2018.
• Adjusted net loss for the first six months of fiscal 2019 was $2.2 million, or ($0.16) per share (diluted), compared to the comparably adjusted net loss for the first six months of fiscal 2018 of $0.6 million, or ($0.04) per share (diluted).

Adjusted EBITDA before other charges, and adjusted net loss, are defined in the financial tables at the end of this press release.

Other Financial Information

• Capital expenditures for second quarter fiscal 2019 totaled $1.3 million primarily driven by investments to support key systems projects with minor investments in stores.
• At August 3, 2019, inventory was $67.7 million, a decrease of $3.2 million compared to $70.9 million at February 2, 2019.

Retail Locations

	Three Months Ended
	August 3, 2019	August 4, 2018
Store Openings (1)	0	2
Store Closings (1)	6	6
Period End Retail Location Count (1)
Stores	446	480
Leased Department Locations	491	634
Total Retail Locations	937	1,114

1. Excludes international franchised locations.

Financial Outlook

The Company is withdrawing its Adjusted EBITDA guidance for the remainder of 2019 as a result of the announced review of strategic alternatives.

Conference Call Information

The Company will host a conference call regarding second quarter fiscal 2019 financial results that includes comments on the results from members of our senior management on Tuesday, September 17, 2019 at 10:00 a.m. Eastern Time.

Investors and analysts can listen to this conference call by dialing [phone] in the United States and Canada or [phone] outside of the United States and Canada. The call will also be available on the investors section of the Company's website at http://investor.destinationmaternity.com. Passcode for the conference call is 6190426.

In the event that you are unable to listen to the call, a replay will be available at 1:00 p.m. Eastern Time on Tuesday, September 17, 2019 through 1:00 p.m. Eastern Time on Tuesday, September 24, 2019 by calling [phone] in the United States and Canada or [phone] outside of the United States and Canada. Passcode for the replay is 6190426.

About Destination Maternity

Destination Maternity is the leading designer and omni-channel retailer of maternity apparel in the United States, with the only nationwide chain of maternity apparel specialty stores, as well as a deep and expansive assortment available through multiple online distribution points, including our three brand-specific websites. As of August 3, 2019, we operate 937 retail locations, including 446 stores in the United States, Canada and Puerto Rico, and 491 leased departments located within department stores and baby specialty stores throughout the United States and Canada. We also sell our merchandise on the Internet, primarily through our Motherhood.com, APeaInThePod.com and DestinationMaternity.com websites. We also sell our merchandise through our Canadian website, MotherhoodCanada.ca, through Amazon.com in the United States, and through websites of certain of our retail partners, including Macys.com. Our 446 stores operate under three retail nameplates: Motherhood Maternity®, A Pea in the Pod® and Destination Maternity®. We also operate 491 leased departments within leading retailers such as Macy’s®, buybuy BABY® and Boscov’s®. Generally, we are the exclusive maternity apparel provider in our leased department locations.

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 loss, 2) adjusted net loss per share - diluted, 3) Adjusted EBITDA, 4) Adjusted EBITDA before other charges, 5) Adjusted EBITDA margin, and 6) Adjusted EBITDA margin before other charges. 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. In addition, certain of the Company's cash and equity incentive compensation plans are based on the Company's level of achievement of Adjusted EBITDA before other charges. The Company provides these various non-GAAP financial measures to investors to assist them in performing their analysis of its historical operating results. Each of these non-GAAP financial measures 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 (loss) or operating income (loss) as an indicator of the Company's operating performance, 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, 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, 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 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.

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands, except percentages and per share data)
(unaudited)
	Three Months Ended						Six Months Ended
	August 3, 2019			August 4, 2018			August 3, 2019			August 4, 2018
Net sales	$	84,901		$	96,395		$	179,114		$	199,622
Cost of goods sold		41,253			46,530			83,869			94,354
Gross profit		43,648			49,865			95,245			105,268
Gross margin		51.4	%		51.7	%		53.2	%		52.7	%
Selling, general and administrative expenses		45,153			50,095			93,643			101,952
Store closing, asset impairment and asset disposal expenses		778			672			1,647			1,641
Other (income) charges, net		(119	)		1,923			543			3,073
Operating loss		(2,164	)		(2,825	)		(588	)		(1,398	)
Interest expense, net		1,340			1,144			2,755			2,301
Loss before income taxes		(3,504	)		(3,969	)		(3,343	)		(3,699	)
Income tax provision		31			56			62			112
Net loss	$	(3,535	)	$	(4,025	)	$	(3,405	)	$	(3,811	)
Net loss per share— Basic	$	(0.25	)	$	(0.29	)	$	(0.25	)	$	(0.28	)
Average shares outstanding— Basic		13,871			13,823			13,848			13,831
Net loss per share— Diluted	$	(0.25	)	$	(0.29	)	$	(0.25	)	$	(0.28	)
Average shares outstanding— Diluted		13,871			13,823			13,848			13,831
Reconciliation of Net Loss to Adjusted Net Loss
Net loss, as reported	$	(3,535	)	$	(4,025	)	$	(3,405	)	$	(3,811	)
Other (income) charges, net		(119	)		1,923			543			3,073
Income tax effect of other (income) charges, net		28			(474	)		(127	)		(746	)
Deferred tax valuation allowance related to cumulative losses		824			991			793			924
Adjusted net loss	$	(2,803	)	$	(1,585	)	$	(2,195	)	$	(560	)
Adjusted net loss per share - diluted	$	(0.20	)	$	(0.11	)	$	(0.16	)	$	(0.04	)

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands)
			(unaudited)
			August 3, 2019		February 2, 2019
ASSETS
Current assets:
Cash and cash equivalents			$	1,142	$	1,154
Trade receivables, net				7,012		7,945
Inventories				67,691		70,872
Prepaid expenses and other current assets				9,961		9,407
Total current assets				85,806		89,378
Property and equipment, net				48,215		51,483
Operating lease assets				125,283		—
Other assets				5,835		5,313
Total assets			$	265,139	$	146,174
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Line of credit borrowings			$	23,300	$	20,400
Current portion of long-term debt				3,841		4,372
Accounts payable				21,477		21,854
Operating lease liabilities				30,301		—
Accrued expenses and other current liabilities				24,226		31,056
Total current liabilities				103,145		77,682
Long-term debt				21,343		21,784
Operating lease and other non-current liabilities				119,225		19,557
Total liabilities				243,713		119,023
Stockholders’ equity				21,426		27,151
Total liabilities and stockholders’ equity			$	265,139	$	146,174
Selected Consolidated Balance Sheet Data
(in thousands)
	(unaudited)				(unaudited)
	August 3, 2019		February 2, 2019		August 4, 2018
Cash and cash equivalents	$	1,142	$	1,154	$	1,317
Inventory		67,691		70,872		67,753
Property and equipment, net		48,215		51,483		59,177
Line of credit borrowings		23,300		20,400		7,300
Total debt		48,484		46,556		35,983
Stockholders’ equity		21,426		27,151		37,415

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands, except percentages and per share data)
(unaudited)
	Six Months Ended
	August 3, 2019			August 4, 2018
Operating Activities
Net loss	$	(3,405	)	$	(3,811	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		6,992			7,961
Stock-based compensation expense		290			584
Loss on impairment of long-lived assets		1,172			1,519
Loss on disposal of assets		259			68
Grow NJ award benefit		(1,296	)		(1,412	)
Amortization of deferred financing costs		346			336
Changes in assets and liabilities:
Decrease (increase) in:
Trade receivables		933			(145	)
Inventories		3,181			3,503
Prepaid expenses and other current assets		(554	)		479
Operating leases and other non-current assets		8,583			12
Increase (decrease) in:
Accounts payable, accrued expenses, operating leases and other current liabilities		(4,822	)		(1,831	)
Operating leases and other non-current liabilities		(10,262	)		(1,417	)
Net cash provided by operating activities		1,417			5,846
Investing Activities
Capital expenditures		(3,780	)		(2,579	)
Net cash used in investing activities		(3,780	)		(2,579	)
Financing Activities
Decrease in cash overdraft		759			(2,657	)
Decrease in line of credit borrowings		2,900			(700	)
Proceeds from long-term debt		1,802			2,500
Repayment of long-term debt		(3,075	)		(2,537	)
Deferred financing costs paid		—			(160	)
Withholding taxes on stock-based compensation paid in connection with repurchase of common stock		(35	)		(29	)
Net cash used in financing activities		2,351			(3,583	)
Effect of exchange rate changes on cash and cash equivalents		—			(2	)
Net Decrease in Cash and Cash Equivalents		(12	)		(318	)
Cash and Cash Equivalents, Beginning of Period		1,154			1,635
Cash and Cash Equivalents, End of Period	$	1,142		$	1,317

DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES
Supplemental Financial Information
Reconciliation of Net Loss to Adjusted EBITDA^(1)
and Adjusted EBITDA Before Other Income and Charges,
and Operating Loss Margin to Adjusted EBITDA Margin
and Adjusted EBITDA Margin Before Other Income and Charges
(in thousands, except percentages)
(unaudited)
	Three Months Ended						Six Months Ended
	August 3, 2019			August 4, 2018			August 3, 2019			August 4, 2018
Net loss	$	(3,535	)	$	(4,025	)	$	(3,405	)	$	(3,811	)
Income tax provision		31			56			62			112
Interest expense, net		1,340			1,144			2,755			2,301
Operating loss		(2,164	)		(2,825	)		(588	)		(1,398	)
Depreciation and amortization expense		3,438			3,910			6,992			7,960
Loss on impairment of long-lived assets		610			632			1,172			1,519
Loss on disposal of assets		71			55			259			68
Stock-based compensation expense		147			256			290			584
Adjusted EBITDA (1)		2,102			2,028			8,125			8,733
Other (income) charges, net		(119	)		1,923			543			3,073
Adjusted EBITDA before other charges	$	1,983		$	3,951		$	8,668		$	11,806
Net Sales	$	84,901		$	96,395		$	179,114		$	199,622
Operating loss margin (operating loss as a percentage of net sales)		(2.5	)%		(2.9	)%		(0.3	)%		(0.7	)%
Adjusted EBITDA margin (adjusted EBITDA as a percentage of net sales		2.5	%		2.1	%		4.5	%		4.4	%
Adjusted EBITDA margin before other income and charges (adjusted EBITDA before other income and charges as a percentage of net sales)		2.3	%		4.1	%		4.8	%		5.9	%

(1) Adjusted EBITDA represents operating income (loss) before deduction for the following non-cash charges: (i) depreciation and amortization expense; (ii) loss on impairment of tangible and intangible assets; (iii) loss on disposal of assets; and (iv) stock-based compensation expense.