Destination Maternity Corp (NASDAQ:DEST) is the world’s largest designer and retailer of maternity apparel with approximately 40% of the U.S. market. The company operates approximately 1,893 retail locations, including about 606 of its own stores under the names Motherhood Maternity, A Pea in the Pod, and Destination Maternity. The rest of its locations are leased department store locations. Destination Maternity also sells maternity apparel online and has approximately 140 international franchised locations. Destination Maternity sells maternity wear from Jessica Simpson and Heidi Klum.
Strong economic moat
One thing that I really like about Destination Maternity Corp (NASDAQ:DEST) is the non-discretionary nature of its business. Mothers have to shop for maternity wear and Destination Maternity is the market leader. The company’s offerings range from career and casual wear to lingerie, formal attire, outer wear and swimwear.
A key reason for Destination Maternity Corp (NASDAQ:DEST)’s success is the company’s vertically integrated business model. Because of this, the company had a gross margin last quarter of 54%. The vertical integration allows the company to make merchandise changes and adjust to market demand.
Destination Maternity Corp (NASDAQ:DEST) just increased its guidance for the third quarter. The company now expects third quarter fiscal 2013 earnings to be in the top half of its prior guidance and to significantly exceed last year’s results. Net sales increased 2.2% to $141.9 million. Comparable store sales rose 4.9% in the third quarter. Comparable store sales continue to outperform as the company aggressively works to close underperforming stores and direct resources towards high performing stores.
Going forward, Destination Maternity Corp (NASDAQ:DEST)’s strategy is to continue franchising and leasing more department store space. This will increase profitability and reduce cost overhead. By doing so, the company has been able to reduce debt and increase the dividend. Destination Maternity only has $1.83 million in debt. The annual dividend was just increased 7.1% and is now $0.75 per share for a yield of 2.70%. The dividend payout ratio is only 43%, and I see the dividend increasing with the company’s new focus. Earnings are forecast to grow 15% annually over the next five years.
Sales growth is likely to come from continued international expansion. Destination Maternity has tremendous opportunities in Canada to roll out its stores and position its apparel in more Canadian department stores. Internationally, the company is only in the markets of South Korea, India and the Middle East. Populations are growing faster internationally and the company has plenty of room for growth in the fast-growing regions of Asia and Latin America.
Destination Maternity has a partnership with Kohl’s Corporation (NYSE:KSS) to distribute its Oh Baby by Motherhood collection. This replaced Kohl’s existing maternity lines and is available at over 1,100 Kohl’s stores and at Kohl’s online site.
The partnership with Destination Maternity is key for Kohl’s Corporation (NYSE:KSS). Kohl’s focus is on women and women are its biggest customers. By having the Oh Baby by Motherhood collection, it strengthens that customer relationship for Kohl’s.
Going forward, Kohl’s focus is e-commerce. In the latest quarter, e-commerce sales increased 31% and contributed 210 basis points to comparable sales. By the end of this year, Kohl’s will have rolled out online order fulfillment to 200 stores. This will allow customers to order online and go to their nearest Kohl’s and pick up their merchandise. This will further strengthen online sales and continue to boost comparable sales at Kohl’s.
Another key partnership for Destination Maternity is with Bed Bath & Beyond Inc. (NASDAQ:BBBY) and its buybuy BABY stores. To enter this partnership with Bed Bath & Beyond, Destination Maternity terminated its relationship with 124 Babies ”R” Us stores. This was a smart move for Destination Maternity as there are only 84 buybuy BABY stores and their parent Bed Bath & Beyond looks to grow that number substantially. Effectively, the company went from a partnership with a struggling company to one with a strong company.