NASDAQ:DEST Destination Maternity

Sector financial performance:

This company, who primarily designs and retails maternity apparels through its own stores /ecommerce sites, has been grouped into maternity apparel –retailers sector in clothing industry.

Conceptually, the demands for maternity apparels should be less influenced by some of factors such as macro-economy.  However, as indicated by our data the decrease in sales of companies in this sector is apparent in the past several years compared with what it has been in the past decade. Some company has experienced 11% - 13% declining in total sales and decrease of more than 5% in comparable stores sales in 2016/17. Therefore, we think the decrease in sales of companies in this sector probably is due to sales’ shifting to smaller online maternity retailer and companies but not to declining demand. As indicated by data after the second half in 2017, the key of competition has focused on online sales, which was actually the driver behind the recent rebound of comparable sales (flat in 2018) while in- store comparable sales’ decline continued.

A typical gross margin is about 52% in this sector (depreciation and distribution expenses included and stores rental costs excluded) with an average SG&A as percentage of sale of 53%. And this makes an average operating margin of below 0% (-0.8%, 2018).

According our analysis, a typical companies’ enterprise price/sales ratio is 0.27 with an interest/EBITDA ratio of 27%.

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Company performance:

The sales of maternity apparels of this company have continued to decrease in the past three years as indicated by its double digits decrease in net sales in fiscal 2016 and first half of 2017 and the decrease of an average 5% in its comparable stores sales during the same time. However, it seems that while the trend of declining in-store sales has no changes after the second half of 2017 total comparable sales is rebounding as faster increasing ecommerce offset the decrease in in store comps.

The first three months of fiscal 2017 compared with same period of 2016

The net sales decreased by 3% primarily attributable to decrease of 0.1% in comparable stores sales and as well to stores closure and decrease in wholesales. Decrease in comparable stores sales is mainly due to decrease of 9% in store sales offset by increase of 43% in ecommerce.

The fiscal 2017 compared with 2016

The net sales decreased by 6.3% primarily attributable to decrease of 1.5% in comparable stores sales and as well to stores closure and decrease in wholesales. Decrease in comparable stores sales is mainly due to decrease of 9% in store sales offset by increase of 41% in ecommerce.

The first six months of fiscal 2017 compared with the same period of 2016

The net sales decreased by 11.4% primarily attributable to decrease in comparable stores sales of 5.5% and as well to stores closure and decrease in wholesales. Decrease in comparable stores sales is mainly due to decrease in traffic and decrease in average selling price as result of products mix shifting and promotion.

Fiscal 2016 compared with 2015

The net sales decreased by 13% primarily attributable to decrease in comparable stores sales of 5.3% and as well to stores closure and decrease in wholesales. Decrease in comparable stores sales is mainly due to decrease in transaction and transaction size as a result of slowing down traffic.

Fiscal 2015 compared with 2014

The net sales decreased by 2.3% primarily attributable to stores closure and as well decrease in comparable stores sales of 1.5%. Decrease in comparable stores sales is mainly due to a slowing down of traffic and promotion.

The average selling price of products of this company decreased largely in fiscal 2015 due to promotions and markdowns but it reduced promotion and price markdowns since then. Therefore,

this company’ gross margin is currently about 52.4% (depreciation and distribution expenses included and stores rental costs excluded) up from 52.1% of 2015 primarily as a combined result of less discount and promotion and higher margin of product mix. The deleveraging of SG&A expenses as a result of deceased sales in the past several years offset all improvement in gross margin and caused its operating margin to go down from 3.7% of 2014 to current -0.8% (12 months trailing).

Stock price

This stock currently has an enterprise price/sales ratio of 0.27($4.5). We think that its stock is being relatively overvalued considering that its in-store comparable seems to still be declining at around 9% when other apparel companies are seeing a slowing down inside store (raising price and more transactions).

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