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Edited Transcript of DEST earnings conference call or presentation 11-Dec-18 2:30pm GMT

Q3 2018 Destination Maternity Corp Earnings Call

PHILADELPHIA Jan 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Destination Maternity Corp earnings conference call or presentation Tuesday, December 11, 2018 at 2:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Marla A. Ryan

Destination Maternity Corporation - CEO & Director

* Thomas McCracken

Destination Maternity Corporation - SVP of Finance

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Conference Call Participants

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* Doug Parker

- Analyst

* John Lawrence

Sidoti & Company - Analyst

* Paul Edwards

RBC Capital Markets - Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to Destination Maternity's Third Quarter Fiscal 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

I'd now like to turn the conference over to Thomas McCracken, Senior Vice President of Finance.

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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 Third Quarter Fiscal 2018 Earnings Call. The earnings release that was disseminated this morning 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 meaning 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 would 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 Marla Ryan, our Chief Executive Officer. Marla will open with some remarks, followed by additional commentary by me on our financial results. Afterward, Marla and I will be available to take your questions.

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

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Marla A. Ryan, Destination Maternity Corporation - CEO & Director [3]

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Thank you, Tom. Good morning, everyone, and welcome to our third quarter earnings call. We spoke with you several weeks ago, outlying our Destination -) Forward strategic plan aimed at rationalizing expenses, accelerating revenue growth and improving profitability across the organization. We shared, as an organization, our focus on 3 strategic priorities: right sizing our ship, optimizing our infrastructure and developing innovative product and solutions.

Our third quarter results saw continued improvements in SG&A and a significant increase in adjusted EBITDA before other charges of $3.9 million or up 95% year-over-year. Total revenue declined 3.7% to $92.8 million from $96.4 million in the third quarter of fiscal 2017, owing in part to our strategy of closing unprofitable stores.

Sales were negatively impacted by several items, including the net closure of 27 stores, extreme weather over Labor Day weekend versus last year, 2 multistate hurricanes and a decrease in comparable sales. Comparable sales for the third quarter decreased 2.6% compared with an increase of 1.1% in the third quarter last year.

Based on year-to-date results and expectations for the fourth quarter, we are updating our full year 2018 and 2019 guidance. Our updated guidance reflects expected slight softness in our brick-and-mortar sales through year-end, driven by recent declines in traffic, coupled with our continued efforts to manage inventory levels and further rationalize expenses. We continue to reaffirm our long-term guidance for 2022 and expect to see a stabilization in key metrics as we move through fiscal 2019 and beyond.

Turning to our operational highlights. Rightsizing our ship remained a primary focus to drive profit in the third quarter. We decreased SG&A expenses by $4.6 million or 8.7% from the comparable quarter last year, hitting 52.4% of sales with a 280 basis point improvement over Q3 2017. The decrease in expenses for the quarter primarily reflects a reduction in employee costs, occupancy expenses from store closures and ongoing expense-reduction initiatives.

Year-to-date, we've decreased our SG&A expense by $11.1 million and anticipate full year 2018 savings of $17 million to $21 million. As we look to fiscal 2019, we are reaffirming our previously announced SG&A expense reduction of $11 million or 50% to 51% of sales.

As announced on our investor call last month, we are actively reducing total inventory levels, both aged and future receipts, as well as rationalizing our future product assortments. We expect to generate at least $7 million in adjusted free cash flow from inventory-reduction efforts in fiscal 2019.

In the short term, however, inventory levels are higher than optimal. At the end of Q3, inventory was up by $5 million versus last year. The increase was driven primarily by 2 factors. First, we invested approximately $2 million in inventory to support the new Amazon Wholesale business. Second, fall seasonal products previously committed to by the previous management team were too high relative to sales expectations.

The additional fall inventory was factored into our previously announced fiscal 2019 guidance as we do not reflect improved margins next year and expect to generate at least $7 million in working capital improvement from inventory-reduction efforts. We are confident we can convert this inventory into cash over time while not significantly impacting margins.

To achieve this initiative, we've implemented a 2-pronged approach to speed up markdown turns and purchase less overall inventory. First, markdown turns will increase as we sharply price markdowns online and in-store to clear seasonal products faster. Second, as we shift our product mix to focus on evergreen core solutions, combined with significantly reduced style count, we will lower our inventory receipt plan for fiscal 2019. We project our total inventory turns will increase between 2.8x to 3x by year-end 2019 as a direct result of these actions.

In addition to reductions in our 2019 product assortment, we streamlined our corporate, product and sourcing teams early last month, with an expected net savings in fiscal 2019 of $1.2 million to $1.4 million.

In recent weeks, we hired 2 key senior leaders to oversee our product sourcing and inventory teams. Both leaders bring extensive industry experience while possessing the owner-led mentality we are striving for as we drive transformational change.

With 2 months left in the fiscal year, we continue to drive rent negotiations for all renewals with estimated occupancy savings of $2.3 million to $2.5 million by year-end 2018, and are projecting an additional $1.5 million to $2 million in savings by year-end 2019.

As we communicated earlier, we will have executed 31 to 33 store closings and 84 least-shopped exits during fiscal 2018, and expect to execute another 42 to 67 closings in fiscal 2019. On this front, we will be testing a smaller store format for our Motherhood brand in the first quarter, allowing for higher productivity and reduced overhead costs.

Finally, as part of our overall efforts to rightsize our ship, we have formed an internal Expense Control Committee to find additional savings from all aspects of the business in addition to the already identified savings of $11 million planned for fiscal 2019. This committee will be providing monthly updates to myself and the board.

Moving to optimizing our infrastructure. We continue to focus on growing our digital flagship and serving the needs of our new moms and moms2be. During the third quarter, we made the conscious decision to run our e-commerce division for improved profitability, focusing on improving gross margin profit rather than driving revenue. This meant less ship from store options and fewer clearance flash sales.

As a result, total e-commerce gross margins improved to 54.9% versus 52.6% last year. Total gross margin dollars for total e-commerce sales were up 3.9%. Excluding third-party e-commerce, margin dollars were up 13.9% versus last year. Our Motherhood brand was up 20% versus last year.

Total e-commerce revenue was flat. Excluding third-party e-commerce sites, sales were up 8%, with our Motherhood brand up 19.5% versus last year.

Total online sales continue to be fueled by our mobile channel over desktop and tablet. Mobile sessions were up 29% versus last year, reaching an all-time high of 75% of total online sessions. Demand sales from mobile were up 29% year-over-year, driving 54% of total online sales with an average order increase of 4%.

Recognizing the busy lives of our new moms and moms2be and in tandem with the increase in our mobile channel sales, we are continuing to provide new customer service solutions. In early November, we launched Apple Pay as an additional digital payment solution. To date, 12% of mobile transactions used Apple Pay to make purchases, and we saw significantly higher conversion and revenue. We will follow this launch up with the addition of Venmo to the checkout page in late first quarter of fiscal 2019.

In response to our new mom and moms2be desire for increased convenience, we launched same-day shipping feature for New York Metro area in mid-October. We are pleased with the early sales results and will be testing 2 additional cities late in the first quarter of fiscal 2019.

As we end the year, we are also completing the migration of several providers. These new service providers will allow us enhanced customer service features, such as live chat, launching in early February; inventories in store look up, launching late February; as well as personalized e-mails and content, which we estimate will drive 3% to 5% increase in demand.

As part of this effort, we're excited to partner with Yotpo to have a complete, unified customer content marketing platform solution. Completion of this integration is slated for the beginning of January and will allow us to integrate customer reviews, UGC, curation from Instagram, questions and answers and loyalty solutions.

We believe this partnership will lead to 2.5x more reviews on site; an improvement in site visitors; a higher return on ad spend; and on-site improvements, including increased conversion rates, average order value and time spent on the site. We will continue to evaluate key investments in technology and customer service features to aid our digital experience on both the mobile phone and website to drive increased traffic, higher conversions and sales.

Meeting the needs of our new moms and moms2be, we also launched our Amazon retail strategy in late September. While it's early days, our top products are performing to expectations, and those top products are driving 40% of units shipped.

As we move forward, we are actively seeking new wholesale partnerships to broaden our network of distribution, with a total revenue goal of $20 million to $25 million by year-end 2022.

We announced early last month, in recognition of Veterans Day, we now offer a 10% discount in store for all veterans, active service members and their spouses in all of our retail-owned stores. We're extremely proud to offer this special ongoing discount in recognition of those who have sacrificed their time and safety to serve. Additionally, in late first quarter 2019, we'll offer this ongoing special discount online as well.

As we optimize our infrastructure, we continue to review our operations and assess future business. Moving into fiscal 2019, we will simplify our work streams and automate our processes across the entire enterprise, using data analytics to inform our future decisions. Our goal is to build a flat, nimble, flexible and digitally driven organization. We continue to identify key leadership roles within the organization and are routinely evaluating top talent to help drive our transformation.

Lastly, as we end fiscal 2018, we're placing a renewed level of importance on our internal customer, our employees. We are launching a Center of Excellence Committee dedicated to driving excellence within the organization. We want to reward individuals who are groundbreakers, who challenge the status quo and constantly seek to drive our transformation. The committee will work to cement our mission statement, redefine our vision and align our corporate culture with our comprehensive strategic plan, Destination -) Forward, across the organization to deliver profit and growth.

Our organization was founded on the principle of innovation and solutions for new moms and moms2be. Our brand continues to be highly trusted in the marketplace, as evidenced by the recent win of our Motherhood brand, which was voted Best Maternity Brand by What to Expect, the best-known and most trusted pregnancy and parenting brand, as part of their Annual What to Expect Awards. Our Motherhood brand was recognized for its quality merchandise, affordable value and knowledgeable sales associates.

As we enter fiscal 2019, we are shifting our product mix to more evergreen styles, allowing us to focus on the core solutions, reducing markdowns and limiting inventory risks associated with unprofitable fashion purchases. We will create value and transformational growth as we innovate our brand, putting product first, followed by strong, clear messaging around the solutions we provide for our new moms and moms2be.

Third quarter saw double-digit sales increases on our nursing apparel products as a direct result of our first-ever August National Nursing Campaign. We launched 2 product innovation campaigns around our seamless bra in August and our hospital-approved delivery gown, with both products exceeding plan.

As we enter February 2019, we will continue to highlight our solution products with everyday marketing campaigns, along with reenergizing 2 areas we feel are underserved: Wear to Work and extended sizes. With 65% of our new moms and moms2be in the workforce, we saw the opportunity to expand our product offer. From our Secret Fit Belly pant technology for moms2be, BOUNCEBACK compression technology to be used with hidden zippers and modesty panels in our tops and dresses for our new mom, she will be comfortable, confident, with style points in the workforce.

Beginning February, we will offer 70% of our product assortment in extended sizing, 1x to 3x, up from our historical 30% level. This product assortment increase in extended sizes will also allow us to alter our pricing cadence, offering the same retail price for all sizes we carry. We expect the additional assortment, same retail pricing for all sizes and new marketing campaigns to fuel this previously underserved market segment, driving an estimated increase of 10% to 15% by year-end 2019.

Continuing around the theme of innovation and solutions, we have formed an Internal Innovation Committee dedicated to bringing new solutions to our new moms and moms2be. The committee will be centered around new material and fabric innovation, advanced manufacturing capabilities, speed to market and customization. We will finalize details around our store of the future, creating a new format with reduced square footage, increased technology and carefully selected locations implementation.

Lastly, we will focus on how, when and where we message our new moms and moms2be through local community engagement, social media, personalized content and loyalty-using technology updates.

Overall, I'm pleased with the progress we have made against our comprehensive strategic plan, Destination -) Forward. There's still much work to do, but myself and the entire Destination team are excited as we rightsize our ship, optimize our infrastructure and provide innovation and solutions for our new moms and moms2be.

As we look forward to fiscal 2019, we are committed to transforming this business to a more nimble and profitable organization that generates long-term shareholder value. On behalf of myself and the entire Destination Maternity team, we wish you a happy holiday season and a healthy New Year.

With that, let me turn things over to Tom to provide a review of our financial performance.

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Thomas McCracken, Destination Maternity Corporation - SVP of Finance [4]

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Thank you, Marla. This morning, I will review our fiscal 2018 third quarter and year-to-date performance and key items on our balance sheet and cash flow.

Sales for the third quarter were $92.8 million, a decrease of $3.6 million or 3.7% from the comparable quarter last year. Comparable retail sales were down 2.6%, which was primarily driven by a 3.3% decrease in comparable brick-and-mortar sales. Additionally, sales were impacted by the net closure of 27 owned locations in addition to 12 leased locations and a decline in sales to franchise partners. E-commerce sales represented 22% of retail sales compared to 21% last year.

Gross margin for the third quarter was 52.4%, a decrease of 40 basis points from the same quarter last year. This decrease was primarily driven by increased markdown and promotional activity to more aggressively manage inventory in addition to the increase in e-commerce sales as a portion of our retail sales.

Gross profit for the third quarter was $48.7 million, a decrease of $2.2 million or 4.4% from the comparable quarter last year.

Selling, general and administrative expenses for the third quarter were $48.6 million, a decrease of $4.6 million or 8.7% from the comparable quarter last year. The decrease in expense for the quarter primarily reflects reductions in employee costs and occupancy expenses resulting from the closure of underperforming stores and ongoing expense-reduction initiatives. As a percentage of sales, SG&A was 52.4%, a decrease of 280 basis points from the third quarter of last year.

Adjusted EBITDA, before other charges and effective change in accounting principle, for the third quarter was $3.9 million, an increase of $1.9 million or 95% from the comparable quarter last year.

The net loss for the third quarter was $4.1 million or $0.30 per share compared to a net loss of $7.5 million or $0.55 per share for the prior year. Adjusted net loss was $1.7 million or $0.12 per share compared to adjusted net loss of $2.7 million or $0.20 per share for the third quarter of fiscal 2017.

I will now turn to our year-to-date results. Sales for the first 9 months ended November 3, 2018, were $292.5 million, a decline of $8.6 million or 2.9% from the comparable period last year. Comparable retail sales were down 0.5%, which reflects the net effect of the 18.1% increase in e-commerce sales, offset by a 5.4% decrease in comparable brick-and-mortar sales.

Additionally, sales were impacted by the previously mentioned decrease in store counts and the decline in sales to franchise partners. E-commerce sales for the first 9 months were 22.7% of retail sales compared to 18.5% last year.

Gross margin for the first 9 months of 2018 was 52.6%, a decrease of 80 basis points from the comparable period last year. This decrease is primarily driven by the previously mentioned growth of our e-commerce business as a percentage of retail sales.

Gross profit for the first 9 months was $153.9 million, a decrease of $7 million or 4.3% from last year.

Selling, general and administrative expenses for the first 3 quarters of 2018 were $150.6 million, a decrease of $11.1 million or 6.9% from the comparable period last year. The decline in expense primarily reflects reductions in employee costs and occupancy expenses resulting from the closure of underperforming stores and ongoing expense-reduction initiatives mentioned previously. As a percentage of sales, SG&A decreased 220 basis points from last year to 51.5%.

Adjusted EBITDA, before other charges and effective change in accounting principle, for the first 9 months was $15.7 million, an increase of $3.3 million or 26% from the comparable period last year.

Net loss for the first 9 months of fiscal 2018 was $7.9 million or $0.57 per share. For the comparable period last year, the net loss was $11.4 million or $0.83 per share. Adjusted net loss was $2.3 million or $0.17 per share compared to adjusted net loss of $5.2 million or $0.38 per share for the 9 months ended October 28, 2017.

Turning now to the balance sheet. At quarter-end, inventory was $79.1 million, an increase from last year of $5.1 million. The increase is due to the reasons mentioned earlier by Marla. Debt net of cash was $47.9 million, an increase of $8.5 million from last year.

Through the third quarter of 2018, we opened 0 stores and closed 6 stores for a net reduction of 6 retail stores. We ended the quarter with 474 retail stores.

Capital expenditures for the first 9 months of 2018 were $3.5 million, a reduction of $2.0 million from last year.

This concludes the prepared remarks. I will now turn the call over to the operator to initiate the question-and-answer portion of the call.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from [John Lawrence] with Sidoti.

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John Lawrence, Sidoti & Company - Analyst [2]

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Yes, could -- you spoke at the very beginning about sales in retail stores. Could you -- I missed part of that. Could you just sort of walk back through all of those items that you thought that caused the decline in comps, please?

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Marla A. Ryan, Destination Maternity Corporation - CEO & Director [3]

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Sure. It's Marla. So as we have said, we saw a softness in the brick-and-mortar, primarily related to the traffic declines that we've seen and also impacted by our net closures of 27 stores. We had extreme weather over Labor Day, so almost 30 points higher. In weather, it was roughly 90 to 100 degrees this Labor Day versus last year, which was in the 50s and 60s in the Northeast. So a significant impact on outerwear, sweaters and some of our warmer weather items as well as we had 2 different hurricanes, both in September and October, and then a decrease in comparable sales.

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John Lawrence, Sidoti & Company - Analyst [4]

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Great. And just sort of new to the story. What -- I mean, obviously, SG&A is phenomenal, getting those declines. Would that -- would you point to, Marla, as you look to sort of this quarter and the #1 -- sort of strategically, what was on the drawing board and what you wanted to accomplish in the second half with this -- would that SG&A reduction be sort of the highlight?

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Marla A. Ryan, Destination Maternity Corporation - CEO & Director [5]

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Sure. When we had spoke with the investors last month, we said rightsizing our ship, optimizing our infrastructure and then, obviously, continuing to work on delivering innovation and solutions. And rightsizing our ship is our most important initiative. We want to be able to stabilize our base so that we can concentrate on how to grow it and grow it in a healthy way.

And so the first thing that we did from when I came in at the end of May was to really work through the entire organization and understand what are we paying for items, contracts, our cost of goods. How we can be more efficient? How we can automate where we have manual processes or systems? And it's really been an effort across the entire enterprise with the team to be able to make the necessary cuts and create those efficiencies so that we can be healthier.

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Operator [6]

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(Operator Instructions) Our next question comes from [Doug Parker].

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Doug Parker, - Analyst [7]

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I did have a couple of quick ones. First on -- with respect to the guidance for fiscal '19. I'm just wondering kind of relative conservatism built into that and the bridge to get there.

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Thomas McCracken, Destination Maternity Corporation - SVP of Finance [8]

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Sure. As we think about the fiscal '19 guidance, our plan is to drive about 100 basis points of improvement in SG&A and then 50 basis points in margins. So our plan is to drive a 150 basis point improvement in our EBITDA margin next year, which is upwards of $6 million of EBITDA.

So our guidance, we think, is conservative because our plan is to drive towards that $6 million. And that's why the range kind of starts at the high end at that $6 million that we're targeting and then coming down somewhat off of that just in the event not everything materializes as planned.

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Doug Parker, - Analyst [9]

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Understood. And then just a follow-up on -- in terms of kind of separately, with respect to -- when we talked a while back with respect to the turnaround plan and making some forward progress and then getting out there and kind of getting the story in front of people, I'm just wondering, Marla, specifically, if you have any plans to reach out to the institutional investor community, pitching the turnaround story, any conferences, anything along those lines that you could comment on?

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Marla A. Ryan, Destination Maternity Corporation - CEO & Director [10]

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We have been working on that, and we're firming up what the schedule is going to look like as we think about first quarter and second quarter. And we'll be able to let everybody know probably in the next 2 to 3 weeks, what that's going to look like. But yes, our plan is to get out there.

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Operator [11]

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And our next question comes from Paul Edwards with RBC.

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Paul Edwards, RBC Capital Markets - Analyst [12]

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I think near the end of the call, you mentioned a category called new service providers, which included live chat, inventory store lookup and one or two other items. I thought I heard you say you thought it could drive 3% to 5% in demand? Now I guess my question is, is that in your bricks-and-mortar stores? Is that across the store-in-store format? Can you -- how comprehensive is that incremental 3% to 5%? And how should I think about that?

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Marla A. Ryan, Destination Maternity Corporation - CEO & Director [13]

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Sure, it's Marla. So those service providers are for our online business. And what we've done is gone out and researched different providers and also looking at costs of different providers. And so we're switching 4 current ones to 4 new ones. Yotpo is one of those. There's some capabilities that come with those changes to the new service providers. And as I said, we are able to enhance the customer service features on the site.

Particularly with live chat, we'll be able to allow the customers to look up and say -- and see stores that are near them where they have inventory in a size or style that they prefer, so that before they actually make the trip to the store, they know that it's there. And so that was all online, and that demand that we spoke to, the 3% to 5%, is demand sales of our online channel.

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Paul Edwards, RBC Capital Markets - Analyst [14]

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And is that what you realized in the quarter that just completed? Or is that kind of the run rate we're seeing in the current quarter?

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Marla A. Ryan, Destination Maternity Corporation - CEO & Director [15]

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No, that's for the go-forward. So those service providers, 2 are in midstream of implementation, and 2 are going to begin shortly. So we look at that 3% to 5% as we go through 2019.

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Operator [16]

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I'm not showing any further questions. So I'd like to turn it back over to Ms. Ryan for closing remarks.

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Marla A. Ryan, Destination Maternity Corporation - CEO & Director [17]

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Yes, just one following update. I wanted to follow up on some things that [Doug] had asked about with regard to the investor community. We do have some meetings scheduled this week, actually today and tomorrow, with a couple of new investors. So I wanted to just give that update since I had omitted that before.

Again, we have a lot of work ahead of us. We're very excited in where we're going. We think that there's a lot of value in the stock. We're going to be purchasing some stock, both management and the board, as soon as our trading window opens later this week. We have a lot of confidence in what we've been able to do so far, and we're looking forward to the new year. And so we wish you a happy holiday and a happy new year, and we will speak with you at fourth quarter earnings call.

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Operator [18]

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Thank you. Ladies and gentlemen, that does conclude today's conference. Thank you very much for your participation. You may all disconnect. Have a wonderful day.