Destination Maternity Corp. (DEST) reported preliminary net sales of $44.9 million in August 2011, up 4.7% from $42.9 million in August 2010. The upside in sales can be attributed 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.
However, the company’s comparable retail sales (comps) for the month declined 1.6% versus a dip of 0.8% recorded in the year-earlier period on a calendar month basis. Comparable store sales for the month reported a further decline of 5.3% versus a 1.9% decrease in the same month prior year. The cannibalization impact of leased department expansion with Macy's in February 2011 hurt Destination Maternity’s August 2011 comparable retail sales by 1–2 percentage points.
August sales performance improved over July. Stronger results came in the second half of August compared with the first half. However, Hurricane Irene upset business to some extent during the last weekend.
For the upcoming fourth quarter of 2011, management targets net sales in the $128.5 million to $131.5 million range based on an expected comparable retail sales decrease of 0.3% to 2.8%. The adjusted earnings per share are expected to be in the range of 21–31 cents versus 33 cents recorded in the fourth quarter of 2010. Destination Maternity anticipates a pick-up in earnings growth fiscal 2012 onward.
The world's largest designer and retailer of maternity apparel ended August with 2,349 retail locations compared with 1,677 stores at the end of August 2010. During the month under review, the company opened one Destination Maternity multi-brand store and closed five. Destination Maternity is also expanding abroad and has exclusive store franchise and product supply relationships in India, the Middle East and South Korea. At August end, it had 61 international franchised locations.
Destination Maternity currently retains a Zacks #4 Rank, which translates into a short-term Sell 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 the above-mentioned steps could prove beneficial for long term, but in the current level, these are generating poor earnings. To add to the worry, continued sluggishness in economic environment is also faltering confidence among the moderately priced consumers.
One of Destination Maternity’s competitors, Cache Inc. (CACH) currently retains a Zacks #1 Rank, which translates into a short-term Strong Buy rating.
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