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Edited Transcript of DEST earnings conference call or presentation 13-Jun-19 1:00pm GMT

Q1 2019 Destination Maternity Corp Earnings Call

PHILADELPHIA Jun 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Destination Maternity Corp earnings conference call or presentation Thursday, June 13, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dave J. Helkey

Destination Maternity Corporation - COO & CFO

* Lisa A. Gavales

Destination Maternity Corporation - Director

* Thomas McCracken

Destination Maternity Corporation - SVP of Finance

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Conference Call Participants

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* Julian Cash

* Agathe Boidin

* Bill Wolf

Hudson Group (HG) Retail, LLC - SVP of Finance

* Pierre -André Mestre

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Destination Maternity First Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would like to introduce your host for today's conference, Mr. Tom McCracken, Senior Vice President of Finance. Sir, please go ahead.

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Thomas McCracken, Destination Maternity Corporation - SVP of Finance [2]

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Thank you, operator. Good morning, everyone, and welcome to Destination Maternity's First Quarter Fiscal 2019 Earnings Call. The earnings release that was disseminated last night is available on the Investors section of our website.

The earnings release contains definitions of various financial terms as well as reconciliations of certain non-GAAP financial measures we will be discussing in today's call. If non-GAAP financial information is provided on this call, a reconciliation of the non-GAAP information to the most comparable GAAP financial measure is available in our press release.

This call will include certain forward-looking statements within the meanings of the federal securities laws. These statements relate to expectations, beliefs, projections, trends and other matters that are not historical facts and are subject to risks and uncertainties that might affect future events or results. Descriptions of these risks are set forth in the company's SEC filings. Also, I'd like to remind you that today's call cannot be reproduced in any form without the expressed written consent of Destination Maternity.

Joining me on the call today is Lisa Gavales, Chair of our Interim Office of the CEO; and David Helkey, our CFO and COO. Lisa will open with some remarks followed by additional commentary by Dave on our financial results. Afterward, Lisa and Dave will be available to take your questions.

It is now my pleasure to turn the call over to Lisa.

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Lisa A. Gavales, Destination Maternity Corporation - Director [3]

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Thank you, Tom. Good morning, everyone, and welcome to our Q1 earnings call. Although today's call is focused on our first quarter results, I want to briefly address our announcement that Marla Ryan by mutual agreement with the Board is stepping down as CEO of Destination Maternity. As the company looks to improve its performance and deliver profitable growth, the Board determined that the business would benefit from new leadership and enhanced execution.

Marla will remain with the company to assist with the transition and will also assume a new role as President of Product Design, Sourcing and Merchandising. We believe that Marla's strong background and experience in apparel and product merchandising makes her the right fit for this new position. I would like to personally thank Marla for her hard work and dedication to the company during the past year as CEO, and we look forward to her continued contributions to the business in this new role.

To ensure a smooth transition, the Board has created an office of the CEO, which will provide ongoing leadership and oversight of day-to-day operations. While a search is conducted for a new CEO, the office of the CEO will be comprised of myself, Marla Ryan and Dave Helkey. I will serve as the Chair of the newly formed office.

For those of you who may not be familiar with my background, I have served on the Destination Maternity Board of Directors for the last several months, working closely with the Board and senior executives on our strategy and business objectives. I have an extensive -- I have extensive experience in retail, marketing, digital and e-commerce, including 14 years at Bloomingdale's, where I led the team that launched bloomingdales.com as well as at Express where I served as Chief Marketing Officer and launched express.com. Following Express, I was CEO of Things Remembered and most recently, I was interim CEO for Bluestem Brands, a $1 billion-plus multi-brand online retailer. I look forward to taking on this new leadership role and continuing to work with the team to accelerate the momentum of change at Destination Maternity.

Before I hand things over to Dave for a review of the financials, I want to briefly touch on our first quarter performance. In short, our results were disappointing. While we were successful in substantially reducing SG&A expense versus the prior year, sales declines more than offset the benefits to our bottom line. And while we are committed to continuous improvement in our cost structure, top line sales remain paramount to the ongoing success of the brand. In Q1, comparable retail sales were down 7.2%, e-commerce sales were down 12.5%, in part due to reductions in markdowns in the quarter.

While the pullback in our promotional cadence helped to improve gross margin rate, the sales miss was too great to drive profit dollars. There is a delicate balance between gross margin rates and sales that's needed to drive incremental profit dollars. Determining the optimal balance will be a primary focus.

In terms of inventory, our levels are slightly elevated as compared to last year. However, the composition of that inventory is healthier as the overage is predominantly in core evergreen style, which we do not see as a liability. In the coming weeks, we'll be conducting a comprehensive review of the company's initiatives to ensure a focus on issues that will impact our bottom line in the near term, while building a foundation for long-term top line growth.

In closing, I'm encouraged by what I believe this company can do, and I am confident we have a compelling business that has the opportunity to deliver long-term profitable growth and real shareholder value. We know that there's a lot of work ahead of us, and I look forward to keeping you updated on our progress as we move forward.

With that, I'll pass it over to Dave to go through the financials in detail.

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Dave J. Helkey, Destination Maternity Corporation - COO & CFO [4]

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Thank you, Lisa, and good morning to everybody. To begin, I will be providing an update on our Q1 financial performance. Following that, I will provide an update on our fiscal '19 guidance.

First, our fiscal 2019 first quarter results. Sales for the first quarter were $94.2 million, a decrease of $9 million or 8.7% versus the prior year. The decrease in total sales resulted from the net closure of 32 stores and 88 leased departments, a 7.2% decline in comparable retail sales. By channel, comparable retail sales were -- brick-and-mortar were down 5.2%, while e-commerce sales were down 12.5%.

Before I move to gross margin, I want to discuss the way we are reporting our sales with Amazon. We have been selling on Amazon for several years. This relationship began with their marketplace channel and has been included in our e-commerce sales. During late Q4 of 2018, we shifted most of the Amazon business to a wholesale relationship. This change has resulted in most Amazon sales being realized through the wholesale line on our P&L.

Our wholesale business is not included in the comp calculation. If you adjust for this shift, e-commerce sales would improve by 390 basis points to down 8.6% for the quarter, while our total comparable retail sales would improve by 110 basis points to negative 6.1% for the quarter.

Moving on to gross margin. Gross margin for the first quarter was 54.8%, an increase of 110 basis points from the same quarter last year. The year-over-year increase in gross margin was driven primarily by the pullback in our promotional cadence.

Gross profit for the first quarter was $51.6 million, a decrease of $3.8 million or 6.9% from the first quarter last year. The decrease resulted from the previously mentioned sales decline, slightly offset by gross margin rate increases.

SG&A expenses for the first quarter were $48.5 million, a decrease of $3.4 million or 6.5% from the comparable quarter last year and was 51.5% of sales versus 50.2% of sales last year. The decline in SG&A in fiscal 2019 compared to fiscal 2018 reflects reductions in employee costs and occupancy expenses resulting from the closure of underperforming stores and ongoing expense reduction initiatives.

Net income for the first quarter was $0.1 million or $0.01 a share compared to a net income of $0.2 million or $0.02 a share in the prior year. Adjusted net income was $0.6 million or $0.04 a share compared to adjusted net income of $1 million or $0.07 a share in fiscal 2018. Adjusted EBITDA before other charges for the first quarter was $6.7 million, which is down $1.2 million from the comparable quarter last year.

Turning now to the balance sheet. At quarter end, inventory was $72.1 million, an increase of $5.7 million or 8.6% from last year. The inventory increase from last year was due to several factors, including the sales miss versus plan, additional inventory related to our Amazon wholesale business and timing of receipts. Debt, net of cash was $51.5 million, an increase of $10.8 million from last year. At quarter end, we had $10.1 million of availability on our credit facility.

Moving on to capital expenditures. Capital expenditures for Q1 2019 were $2.5 million, an increase of $1.3 million from last year. 2019 Q1 capital outlays were primarily the result of an investment in the implementation of a new OMS platform combined with modest store investments as we optimize our real estate portfolio. These investments represent a measured and revenue-focused approach to capital expenditures that will continue as we move forward.

Now I want to spend a moment on our real estate portfolio. Over the past few months, we have been conducting a comprehensive review of our entire portfolio. The result of this review has told us that we need to be more aggressive in both pruning our fleet and in tightly managing expenses on these locations where we would like to continue operating. During the first quarter of this year, we closed 7 owned store locations and 8 leased departments for a total of 15 store closures. We expect to continue additional store closures through the end of '19. However, we're not providing an update on our outlook for store closures for the full year at this time due to the ongoing review of the company's strategic initiatives and the recently announced CEO transition.

Turning to our outlook to the full year. As mentioned just a second ago, we are in the process of conducting a comprehensive review of our company's strategic initiatives to ensure that we are pursuing an aggressive strategy that will drive real and sizeable change in the business. In terms of our updated adjusted EBITDA guidance for fiscal year 2019, we now expect it will be in the range of $13 million to $17 million.

With that, I'll turn it back over to the operator for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Pierre Mestre with Yeled.

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Pierre -André Mestre, [2]

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Yes, I have 3 questions. Pierre Mestre. My first question is, can you renew the company assurance given at the 2017 meeting that liquidation is not being considered? My second question is has the Board discussed this surprise director and management changes with selected shareholders? And my third question is, will the current directors promise not to stand for reelection in 2020 unless there is a major improvement in share price? These are my 3 questions.

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Dave J. Helkey, Destination Maternity Corporation - COO & CFO [3]

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Can you restate your first question? We've had a hard time on our side hearing it.

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Pierre -André Mestre, [4]

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Can you renew the company's assurance given at the 2017 meeting that liquidation of the company is not being considered?

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Lisa A. Gavales, Destination Maternity Corporation - Director [5]

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Yes. So as we've -- I think we still missed a couple words, but I think you're asking us if we are considering liquidation. And the answer to that is no. The second question, anybody? Okay. So the third question is, will the current Board members promise to stand down at the next election if the business doesn't get better? I don't think we're prepared to make that promise. And I'm sorry, the second question was -- who has got the notes?

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Pierre -André Mestre, [6]

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Discussed with -- surprise director and management changes with selected shareholders?

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Lisa A. Gavales, Destination Maternity Corporation - Director [7]

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Okay. Yes. I mean, it was not discussed with shareholders before the releases last night.

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Pierre -André Mestre, [8]

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So you didn't discuss these changes with any shareholders before its -- this announcement being public? Should I understand it like that?

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Lisa A. Gavales, Destination Maternity Corporation - Director [9]

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We wouldn't discuss that information with anyone who didn't have an NDA.

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Operator [10]

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(Operator Instructions) And I am showing our next question comes from Julian Cash with Savrin.

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Julian Cash, [11]

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The explanation on the same-store sales drop was helpful too, specifically the breakdown for e-commerce and bricks. Just wondered -- so obviously, the last quarter wasn't great. Have you guys seen any stabilization in those numbers since the quarter ended, where you've been in the last month?

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Dave J. Helkey, Destination Maternity Corporation - COO & CFO [12]

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Yes, Julian, this is Dave. I don't think we're prepared to comment on that. Like Lisa said earlier and I said earlier, we're in the process over the next couple of weeks of reviewing all of our strategic initiatives and at a time in the future, we'll give the investment community, et cetera, an update.

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Julian Cash, [13]

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Okay. I guess, moving forward, I will hope, and your answer to Pierre's question was somewhat illuminating, again too, that some greater shareholder interaction might be helpful, especially at this juncture. I know that there's guys that are willing to get on the Board that have -- people with significant experience in the retail space that are willing to help. I don't -- I'm not sure why their help wouldn't be embraced, especially at this point. So I hope you guys will take a hard look at that. That's all I had.

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Lisa A. Gavales, Destination Maternity Corporation - Director [14]

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Thank you.

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Operator [15]

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And our next question comes from the line of [Gary Brimley], private investor.

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Unidentified Participant, [16]

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Do you anticipate renewing efforts to refinance the debt?

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Dave J. Helkey, Destination Maternity Corporation - COO & CFO [17]

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So Gary, at this time, we look at liquidity quite frequently and have upside, downside scenarios, and we're comfortable with where we are from that perspective. If an opportunity arises to lower our cost of capital, we certainly would pursue it.

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Unidentified Participant, [18]

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Okay. Does the current debt situation show any signs of turning around where you'll be able to start paying it down because I noticed that it just keeps increasing year-over-year?

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Dave J. Helkey, Destination Maternity Corporation - COO & CFO [19]

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Our plan for the year has been and continues to be to generate free cash flow and that free cash flow will be utilized to pay down the debt.

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Operator [20]

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And our next question comes from the line of Agathe Boidin with -- private investor.

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Agathe Boidin, [21]

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I have 3 questions, more on the business side. First one about the product. What is your strategy of -- on the product and enlarging the offer? It seems that you have made some tests on baby clothes. I would like to know also what's your strategy about that. About international sales, it's still really small and there is potential in Europe. You have really a good line of products and you could invest in expanding Europe or elsewhere globally. And also your strategy on omnichannel and web sales because I heard your comments, but still I am quite surprised that the web sales did go down $3 million, so that's my 3 questions.

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Lisa A. Gavales, Destination Maternity Corporation - Director [22]

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Okay. Well, as you know, this is a relatively new role for me. We are committed to conducting a comprehensive review of all of our initiatives to ensure that we're pursuing an aggressive strategy to effect real and sizable change. We will be looking at everything.

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Agathe Boidin, [23]

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Okay. Yes. Because I knew that you have started to test with baby clothes in certain stores. Can you give us some feedback about that?

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Lisa A. Gavales, Destination Maternity Corporation - Director [24]

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I am sorry, one more time?

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Agathe Boidin, [25]

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I know that you started to put -- as we did with Orchestra because I was the former CEO of Orchestra. We started this partnership 2 years ago and it was a great start. I know that, like I think, months ago, you started again to put some baby clothes in your store, in 10 stores. So I was wondering can you give us some feedback about that because I think it makes sense when you have this great and huge customer base to give them -- to offer them other product than just mother-to-be products? So what are you on this strategy?

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Dave J. Helkey, Destination Maternity Corporation - COO & CFO [26]

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So this is Dave. We -- as Lisa mentioned, we're looking at everything. What I would say is we continue to test categories in-store from accessories to baby clothes to some degree. We're not prepared at this time to talk about the results of those tests, but we certainly test different types of products, et cetera, to see what she will buy, won't buy, et cetera. So what I would say is those tests are ongoing. We're not prepared to speak to the results at this time. And with our strategic initiative review, as Lisa mentioned, pretty much everything is on the table. So we'll be talking about that as well.

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Operator [27]

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And our next question comes from the line of [Sarah Charleston], who is also a private investor.

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Unidentified Participant, [28]

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Your press release in the fourth bullet point mentions a change in accounting principle. But there is no further discussion of this anywhere in the press release or in the filed 10-Q. Can you provide some insight into what this is and what the monetary impact is for the periods presented, please?

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Dave J. Helkey, Destination Maternity Corporation - COO & CFO [29]

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Yes. This is Dave. I am pretty sure you're referencing our lease accounting changes that we made at the end of the last year to the -- due to some FASB guidance that we had to adopt.

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Unidentified Participant, [30]

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Well, any impact from the adoption of the new leasing guidance is going through your equity statement. It's not an EBITDA thing. And it's certainly not a change in accounting principle, if it's adoption of new guidance.

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Dave J. Helkey, Destination Maternity Corporation - COO & CFO [31]

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Yes. So sorry, I misunderstood. It's -- we made a change in the way we record our vacation accrual. It had a minor impact on Q1, it wasn't material which is why there is no additional disclosure.

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Unidentified Participant, [32]

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So there's just an inconsistency in the caption from the bullet point to everything else in your published documents?

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Dave J. Helkey, Destination Maternity Corporation - COO & CFO [33]

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Again, I would say that the change wasn't material, so I wouldn't say that any of the other documents are different from that perspective.

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Operator [34]

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Our next question comes from the line of [John Davies], who is also a private investor.

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Unidentified Participant, [35]

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My question concerns the decline in e-commerce. So aside from the Amazon change, e-commerce comp is down 8.6%. So can you help me understand that significant decline, how much was volume, how much was AUR?

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Lisa A. Gavales, Destination Maternity Corporation - Director [36]

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It's disappointing to us, too. It's part of the reason why we are going to do a comprehensive business review to ensure that we have the most impactful initiatives focused on, and clearly e-commerce is one of those.

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Unidentified Participant, [37]

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So can you help me understand, is that volume or price?

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Lisa A. Gavales, Destination Maternity Corporation - Director [38]

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I'm sure it was some combination of both.

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Operator [39]

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And our next question comes from the line of Bill Wolf with Hudson Group Investments.

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Bill Wolf, Hudson Group (HG) Retail, LLC - SVP of Finance [40]

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I apologize I was unable to get on the call until little late. You may have covered this. Is there something going on either demographically or competitively that is affecting the sales or is it just purely company execution?

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Lisa A. Gavales, Destination Maternity Corporation - Director [41]

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I think we have to get through the business review. I really need -- we need to be able to look at what is, to your point, self-inflected and what is industry and what we can do to offset both.

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Operator [42]

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And I am showing no further questions, and I'd like to turn the conference back over to Ms. Lisa Gavales for any further remarks.

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Lisa A. Gavales, Destination Maternity Corporation - Director [43]

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Thanks, everyone, for joining us. Lots of news today, and we look forward to keeping you apprised of what's happening in our company as time goes by. Thanks again.

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Operator [44]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.