Destination Maternity Delivers Growth

By Will Ashworth | March 08, 2011 AAA

Around the corner from where I live there is a retail store called Motherhood Maternity. Although I've never actually entered the store, I always assumed it sold baby clothes. Boy was I wrong. It turns out Motherhood Maternity is part of Philadelphia-based Destination Maternity (Nasdaq:DEST), a retailer that sells attractive maternity clothing for expectant mother's. Its future looks brighter today than it has in some time. I'll tell you why.

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What It Does
It got its start in 1982 as a maternity apparel catalog business, expanded into retail stores three years later and went public in 1993. Its original brand, Destination Maternity, along with two acquisitions: Motherhood and A Pea In The Pod, represent its product offering. Motherhood Maternity provides value pricing while A Pea In The Pod is more upscale. It's the world's largest maternity apparel retailer with over 1,700 retail locations in the US, Canada, India and the Middle East. Growth will come in several ways.

Growth
At first glance, it appears to be a dog with fleas. Revenues today are actually lower than they were five years ago. Dig deeper and you'll see that the tide is turning. Change began in earnest back in 2008 when it changed its corporate name from Mother's Work to Destination Maternity to reflect diversity in its product offering. Although it got its start providing pregnant women comfortable work clothes, it had evolved into so much more and the new name reflects this.

Its growth will come in several ways. First, it is opening Destination Maternity Superstores that range in size from 4,000 to 11,000 square feet and are much bigger than its traditional stores. Offering the entire product line, seven, including the flagship New York City store, have a spa inside where women can go to unwind. At the same time, it's closing a bunch of its smaller under-performing stores so it's only natural that sales would plateau while working through the transition. Secondly, it's expanding its leased store relationship with Macy's (NYSE:M) from 115 locations to 631 across the US. Already leasing departments in Kohl's (NYSE:KSS), Sears (Nasdaq:SHLD) and Gordmans (Nasdaq:GMAN), these relationships help keep the brand in front of consumers no matter where they shop. That's key. Lastly, it's expanding internationally with stores in Canada, India and the Middle East. With just 36 stores in Canada, it could easily double that number. There's plenty to keep it busy.

Financial Situation
Management's acutely aware it needs to bolster profitability. In its investor presentation from February's annual meeting, it mentions that it doubled adjusted EBITDA margins to 10.2% in the past three fiscal years. And it's getting better. It improved its adjusted EBITDA margin by 110 basis points to 9.8% in the first quarter ended December 31. Revenues in 2011 should increase and GAAP diluted earnings per share are expected to be at least $1.81, 37% higher than in 2010. The steps taken to improve profits are working.

Valuation
Its current price-to-earnings ratio is 13.9, which is lower than many of its peers. However, this ratio is based on trailing twelve-month earnings per share of $1.62. Destination Maternity's EPS guidance for 2011 suggests a forward P/E of 12.2 or lower. Its enterprise value is just 5.5 times EBITDA. At the end of December, net debt was $6.3 million, $30.7 million less than a year earlier. When you consider its earnings are rising and its net debt falling, something has to give. With its financial health improving, I find its stock has a compelling valuation.

Bottom Line
Destination Maternity has 35% to 45% market share of the US maternity apparel business. There's no reason it can't do the same in other countries. With its online business growing at 20% a quarter and revenues likely to pass $600 million sometime around Christmas, I see a bright future ahead. (Take a page from the tortoise and the hare fable by investing in these constant growth stocks. Check out Steady Growth Stocks Win The Race.)

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