20

Destination
Maternity
Corporation
Matt's Fundamental Stock
Analysis
Content Disclaimer: I am only a retail investor and I only
intend these reports to be used as a guidance. I
recommend you do your own research as this will better
help you to understand how companies work and operate
and what drives their growth. What stocks you decide to
purchase, should be chosen by you and this report is
made only to display companies which I think are
worthwhile to look at and discuss. Just because it is a
good company or I like the company does not mean that
it will do good in the future.
If you want to copy or replace my report, please do so
with a link connecting to my blog.
Destination Maternity Corporation(DEST)

Company Business

Destination Maternity Corporation is the only nationwide chain of maternity specialty retail stores. As
of September 2011, they had 658 stores in all 50 states, Puerto Rico, Guam, and Canada, and 1,694
departments leased to department stores and baby specialty stores throughout the US and Puerto Rico.
They also sell products through their e-commerce business and are expanding internationally in the
Middle East, India, and South Korea. They operate under 3 main segments; Motherhood Maternity and
A Pea in the Pod, and Destination Maternity.

Motherhood Maternity:
 Maternity apparel offered at valued prices
 Has the greatest amount of customers

A Pea in the Pod

 Maternity apparel offered at valued prices along with luxury prices
 Publicity such as celebrities wearing their clothes is a huge deal for this brand

Other Segments
 Oh Baby by Motherhood collection - sold exclusively through Kohl's at valued prices
 Two Hearts Maternity by Destination Maternity Collection - sold exclusively at Sears stores at
valued prices

In recent years, they have started to create Destination Maternity stores which aim to provide
customers with a multi-brand store and hence have closed a number of single brand stores.

The currently have a competitive advantage over other companies since they are the leaders in the
industry. They believe their brands are the most recognized within the maternity apparel industry.

Competition

 The major competitors are found with value-priced retailers who sell maternity apparel
o Forever 21, Gap, H&M, JC Penney, Old Navy, Target, and Wal-Mart

Financial Statement Notes:

 Dividends - Started paying quarterly dividends of $0.175 per share beginning in Q2 2011
 Repurchase of common shares - Available from July 2008 was $7 million of shares
o However, to date no shares have been repurchased
o Expires July 31, 2012
 Goodwill Impairment Expense amounted to $50.4 million in 2009
 Loss on Extinguishment of Debt
 o Fiscal 2011 - prepaid $12.6 million principal amount, resulted in pretax charges of
$37,000 for the write-off of unamortized deferred financing costs
o Fiscal 2010 - prepaid $10 million principal amount of outstanding Term loan resulting in
pre-tax charges of $51,000
o Fiscal 2009-prepaid $20 million principal amount resulting in pretax charges of $123,000
 Long Lived Assets Write Downs
o Fiscal 2011 - $0.8 million
o Fiscal 2010 - $1.9 million
 Significant amount of operating leases

Threats:
 Revenues can be directly affected by the birth rate within the U.S.
o Believe that demand for maternity clothing is more stable than demand for non-
maternity clothing
 Current rate is 4 million U.S births per year and has remained relatively stable over the past
decade
o Birth rate has decreased by approximately 7.2% from 2007 to 2010
 Cyclical industry and hence performance is directly affected by the overall economy
 They require a significant amount of cash to pay off their debt which will reduce their cash
available to finance any growth along with interest rates in the future may increase their
interest expenses on their debts
 Commodity prices increases
o Mostly related with cotton and wool, as well as fuel, oil, and natural gas to a lesser
extent
o Increases in food priced may also raise the labor rates
Historical Ratio Analysis
**If the value is green than the number is believed to be better than the previous number, vice versa if the value is
red

Profitability Ratios 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
ROE 22.7% 22.8% 8.9% -0.3% 11.3% -0.5% -1.6% -81.7% 23.5% 24.8%
ROA 4.6% 5.7% 2.3% -0.1% 3.2% -0.1% -0.5% -20.8% 8.2% 11.6%
ROIC 11.6% 11.7% 7.4% 1.2% 8.6% 9.4% 6.1% 11.4% 19.6% 17.9%
CROIC 10.3% 5.5% -1.6% -4.7% 12.7% 5.8% 6.0% 22.6% 11.1% 6.1%
 Ratios are very volatile and got massively hit in both 2005 and 2008 - 2009 period
o Proves how volatile the fundamentals become when the market gets hit with an absolute
horrible ROE in 2009 of -81.7%

Solvency Ratios 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Quick Ratio 0.64 0.64 0.59 0.38 0.84 0.50 0.56 0.57 0.75 0.74
Current Ratio 2.10 2.29 2.42 2.27 2.29 1.91 2.02 1.77 1.94 2.38
Total Debt/Equity Ratio 3.91 3.02 2.79 3.32 2.57 2.12 1.86 2.94 1.87 1.14
Long Term Debt/Equity Ratio 2.69 2.08 1.92 2.02 1.46 1.04 0.86 1.01 0.55 0.31
Short Term Debt/Equity Ratio 0.01 0.00 0.00 0.01 0.01 0.02 0.02 0.14 0.08 0.03
 Debt historically has been massively high in the past and although it has been reduced significantly it still
raises a concern, especially as interest rates will rise in the future

Efficiency Ratios 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Asset Turnover 1.94 2.00 2.06 2.05 2.09 2.11 2.20 2.71 2.59 2.74
Cash % of Revenue 3.3% 4.2% 2.5% 0.5% 3.1% 1.7% 2.1% 3.9% 4.6% 2.8%
Receivables % of Revenue 1.1% 0.5% 0.6% 1.4% 1.9% 2.1% 1.3% 1.2% 1.9% 2.0%
SG&A % of Revenue 45.8% 46.7% 49.0% 48.1% 47.2% 48.4% 48.6% 48.9% 47.4% 47.2%
R&D % of Revenue 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Liquidity Ratios 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Receivables Turnover 2.25 3.89 2.23 -0.04 0.94 -0.03 -0.15 -5.99 2.00 2.16
Days Sales Outstanding 3.9 1.8 2.0 5.0 7.0 7.6 4.6 4.5 7.1 7.4
Days Payable Outstanding 34.7 31.8 30.2 26.2 24.8 36.7 27.1 23.9 29.6 27.2
Inventory Turnover 2.76 2.79 2.70 2.79 2.88 2.89 2.99 2.98 3.01 2.90
Average Age of Inventory (Days) 132.41 130.72 134.97 130.61 126.82 126.43 122.23 122.65 121.26 125.66
Intangibles % of Book Value 2.5% 90.6% 83.0% 81.0% 0.9% 0.7% 0.8% 1.8% 1.5% 1.3%
Inventory % of Revenue 16.9% 17.2% 17.9% 18.9% 15.6% 17.3% 15.6% 14.9% 15.2% 16.6%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
P/E 21.86 9.04 12.19 -272.00 26.23 -207.75 -29.83 -2.57 13.74 7.75
P/S 0.33 0.26 0.14 0.10 0.40 0.17 0.07 0.20 0.44 0.33
P/Tang BV 3.25 21.84 6.41 4.76 3.01 1.10 0.48 2.15 3.29 1.94
P/CF 4.40 3.09 2.41 6.56 6.14 1.56 0.74 1.60 5.17 4.14
P/FCF 8.05 11.73 -21.93 -5.55 8.48 8.10 3.58 3.56 15.17 20.19
 Overall on a multiple basis they seem to be around fairly-valued when compares to the past 4 years
Relative Ratio Comparison

 DEST does classify some of its competitors in their latest's annual statement. I believe there
direct competitors to consist of Target (TGT), Wal-Mart (WMT), and The Gap (GPS).
TGT WMT GPS DEST
Stock Price $ 58.19 $ 61.09 $ 26.68 $ 18.89
Mkt Cap ($M) $ 38,900.00 $ 209,210.00 $ 13,030.00 $ 251.25
EV $ 56,040.00 $ 256,550.00 $ 12,890.00 $ 250.12
52 Wk High $ 58.95 $ 62.63 $ 26.89 $ 25.28
52 Wk Low $ 45.28 $ 48.31 $ 15.08 $ 12.17
% off 52Wk Low 28.5% 26.5% 76.9% 55.2%
Multiples
P/E(TTM) 13.7 13.5 17.1 12.5
P/S(TTM) 0.6 0.5 0.9 0.5
P/Tang BV(MRQ) 2.5 4.1 4.8 2.8
P/CF 7.8 8.5 9.8 7.7
P/FCF(TTM) 124.5 36.8 22.7 33.3
EV/EBITDA(TTM) 7.5 7.4 6.6 5.3
Dividends
Div Yld 2.0% 2.6% 1.9% 3.7%
Div Yld - 5yr avg 1.6% 2.1% 2.1% 1.0%
Div 5yr Grth 20.1% 16.9% 7.1% 0.0%
Payout Ratio(TTM) 26.5% 32.0% 28.0% 46.1%
Growth Rates
Sales(MRQ) v 1yr ago 3.0% 5.9% -1.9% 0.7%
Sales(TTM) v 1yr ago 0.6% 0.5% 0.9% 0.5%
Sales 5yr Grth 3.3% 5.1% -1.8% -2.0%
EPS(MRQ) v 1yr ago 0.3% 7.1% -25.7% -57.5%
EPS(TTM) v 1yr ago 6.9% 8.2% -16.9% -6.2%
EPS 5yr Grth 6.0% 9.2% 10.1% 16.6%
Balance Sheet
Quick Ratio(MRQ) 0.6 0.2 1.3 0.9
Current Ratio(MRQ) 1.2 0.9 2.0 2.3
LTD/Eq(MRQ) 0.9 0.7 0.6 0.2
Tot D/Eq(MRQ) 1.1 0.7 0.6 0.3
Margins
Gross %(TTM) 30.9% 25.0% 36.3% 53.7%
Gross % 5yr 30.5% 25.1% 38.0% 52.8%
Op %(TTM) 6.4% 5.9% 9.9% 6.1%
Op % 5yr avg 6.3% 5.9% 11.0% 2.0%
Net %(TTM) 4.2% 3.7% 5.7% 3.7%
Net % 5yr avg 4.1% 3.6% 6.8% -0.1%
Returns
ROA(TTM) 6.5% 8.8% 11.5% 10.1%
ROA 5yr avg 6.1% 8.7% 12.9% -0.2%
ROE(TTM) 18.7% 22.6% 24.4% 23.4%
ROE 5yr avg 17.7% 21.4% 23.0% -0.7%
Efficiency
Rec Turnover(TTM) 11.6 81.1 0.0 65.0
Inv Turnover(TTM) 6.2 8.7 5.7 3.3
Asset Turnover(TTM) 1.6 2.4 2.0 2.8

 On a relative multiples basis DEST looks under-valued compared to competitors

 Currently payout a higher dividend yield
 Take on less debt than their competitors
 Sales growth figures are slacking while long-term EPS looks attractive although their 1 yr EPS
growth is largely
 Gross margins are significantly better than competitors but both operating and net margins are
seriously lacking
 Short-term returns are average while long-term ROA and ROE are significantly underperforming
Investment Valuations

Reverse DCF

Starting with a reverse DCF valuation, I will assume a discount rate of 12% and a terminal growth rate of
2.5%. (The terminal growth rate of any company should never be higher than the growth rate of the
economy.) A reverse DCF valuation should be used just to see a rough picture of where the market has
currently priced DEST based on fundamentals. Based on my assumptions the market has currently
priced DEST to have a FCF growth rate of around a -4% year after year for the next 10 years with it
gradually decreasing over the years, where then it will grow at its terminal growth rate. The range of
the FCF growth is given due to the difference between TTM, annual, and average owners earning FCF
input. This is a rough estimate number, however this is below its 5 year and 10 year historical averages.
FCF growth is best to be looked at over multi-year periods as it is very volatile on a year to year basis.

Actual Owners Earnings DCF

This is the heart of my valuation of a company. I believe that a more reasonable estimate of around 2%
for the next 10 years with it slowing down in the later years. Under my assumptions, I believe the
intrinsic value to be around $22.35 on the safe side and on the more optimistic side $24.54.

5 Yr Price vs Intrinsic Value

30

25

20

15

10

0
18/07/2005 18/07/2007 18/07/2009 18/07/2011
Historical Price Intrinsic Value Buy Price
Graham Valuation

The graham valuation is based upon EPS growth over time and includes analysts estimates of future EPS.

I require a huge amount of margin of safety for this model as it is not as accurate as FCF, so around a 60-
80% discount. Based on this model with a long-term EPS growth ate of 2% and an expected EPS fiscal
2012 of $1.53, the intrinsic value comes out to $17.40 making it fairly valued.

FCFE Valuation

The growth rate for this model is built around fundamentals, where it is equal to the non-cash return on
equity multiplied by the equity reinvestment rate which gives us a net income growth rate of 16.16%.
Reason being that we do not want to just guess a growth rate and it is better to get one from
fundamentals, obviously the option to adjust these ratios can occur if needed. I believe this growth rate
in net income is overstated and a growth rate of 5% is more reasonable. When I normalize the earnings
for this company, there is a huge change of value and I believe normalized is a better number since it
has reported quite a bit of net loss years. According to this model, the intrinsic value is roughly around
$3.30 - $3.59 making it largely over-valued.

Technical Analysis

Looking at the chart below, technical analysis provides only a little help on this stock. It seems to found
resistance around both the $12 and $16 level. However, I find that if fundamentals do not line up, then
technical analysis usually will not work out as well.
Overview

From a fundamental perspective, I have a neutral rating on this stock largely due to the different
conclusions of each of the valuation models. Too much inconsistency of growth with the addition of the
large downside risk in economic downturns, make this stock very difficult to value. It is a stock that I
would not wish to own probably even when a recession hits because they take on too much debt during
recessions. I believe there are a lot of better opportunities within the retail industry elsewhere.

From a technical perspective, I am not willing to place a bet on this stock.

Stock Rating: Neutral

Price Target: Not Interested

Best Regards,

Matthew

Matt's Fundamental Stock Analysis

Content Disclaimer: I am only a retail investor and I only intend these
reports to be used as a guidance. I recommend you do your own research
as this will better help you to understand how companies work and operate
and what drives their growth. What stocks you decide to purchase, should
be chosen by you and this report is made only to display companies which I
think are worthwhile to look at and discuss. Just because it is a good
company or I like the company does not mean that it will do good in the
future.
If you want to copy or replace my report, please do so with a link connecting
to my blog.