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.

IN PICTURES: 5 Tips To Reading The Balance Sheet

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.

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.

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.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    3 Resilient Oil Stocks for a Down Market

    Stuck on oil? Take a look at these six stocks—three that present risk vs. three that offer some resiliency.
  2. Economics

    Keep an Eye on These Emerging Economies

    Emerging markets have been hammered lately, but these three countries (and their large and young populations) are worth monitoring.
  3. Stock Analysis

    Is Pepsi (PEP) Still a Safe Bet?

    PepsiCo has long been known as one of the most resilient stocks throughout the broader market. Is this still the case today?
  4. Investing

    The ABCs of Bond ETF Distributions

    How do bond exchange traded fund (ETF) distributions work? It’s a question I get a lot. First, let’s explain what we mean by distributions.
  5. Stock Analysis

    3 Stocks that Are Top Bets for Retirement

    These three stocks are resilient, fundamentally sound and also pay generous dividends.
  6. Investing News

    Are Stocks Cheap Now? Nope. And Here's Why

    Are stocks cheap right now? Be wary of those who are telling you what you want to hear. Here's why.
  7. Investing News

    4 Value Stocks Worth Your Immediate Attention

    Here are four stocks that offer good value and will likely outperform the majority of stocks throughout the broader market over the next several years.
  8. Investing News

    These 3 High-Quality Stocks Are Dividend Royalty

    Here are three resilient, dividend-paying companies that may mitigate some worry in an uncertain investing environment.
  9. Stock Analysis

    An Auto Stock Alternative to Ford and GM

    If you're not sure where Ford and General Motors are going, you might want to look at this auto investment option instead.
  10. Mutual Funds & ETFs

    The 4 Best Buy-and-Hold ETFs

    Explore detailed analyses of the top buy-and-hold exchange traded funds, and learn about their characteristics, statistics and suitability.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!