September Sales Rise at Destination

Destination Maternity Corp. (DEST - Snapshot Report) reported net sales of $44.2 million in September 2011, up 6.6% from $41.4 million in September 2010. The company’s fourth quarter net sales are expected to grow 4.2% to $129.4 million.

The upside in sales can be attributed to increased revenue from the expansion of the company's leased department relationship with Macy's as well as higher Internet and international sales partially offset by the decrease in comparable store sales and closure of underperforming stores.

The company’s comparable retail sales (comps) for the month grew 1.5% versus a 1.3% dip recorded in the year-earlier period on a calendar month basis. Comps for the upcoming fourth quarter are expected to decrease 1.7%. The cannibalization impact of leased department expansion with Macy's in February 2011 will hurt Destination Maternity’s fourth quarter 2011 comparable retail sales by 1–2 percentage points.

September sales performance improved over August. However, price promotional activity and additional markdown pricing in order to clean inventory and encourage sales momentum, upset the gross margin of the company.

The lower-than-planned gross margin compelled management to curtail the earnings guidance for the fourth quarter. For the upcoming fourth quarter, the adjusted earnings per share are expected to be at or slightly higher than the low end of its prior guidance. Management’s prior guidance was 21–31 cents versus 33 cents recorded in the fourth quarter of 2010. 

The world's largest designer and retailer of maternity apparel ended September with 2,352 retail locations compared with 1,725 stores at the end of September 2010. During the month under review, the company opened three stores and closed one. Destination Maternity is also expanding abroad and has exclusive store franchise and product supply relationships in India, the Middle East and South Korea.

Destination Maternity currently retains a Zacks #1 Rank, which translates into a short-term Strong Buy rating. While we remain optimistic about growth in Internet sales, the cannibalization effect from Macy’s leased department stores keep us on the sidelines.

The company’s 2012 earnings also will have a dilutive effect due to this initiative. Additionally, the company is shutting down its underperforming stores. Both these steps could prove beneficial for the long term, but at the current level, these are generating poor earnings. To add to the worry, continued sluggishness in economic environment is also faltering confidence among the middle-income consumers.  

One of Destination Maternity’s competitors, Cache Inc. (CACH - Snapshot Report) currently retains a Zacks #2 Rank, which translates into a short-term Buy rating.

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