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Edited Transcript of DEST earnings conference call or presentation 16-Apr-19 1:00pm GMT

Q4 2018 Destination Maternity Corp Earnings Call

PHILADELPHIA Apr 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Destination Maternity Corp earnings conference call or presentation Tuesday, April 16, 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

* 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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* Jeffrey Cutshall

* Julian Cash

* Robert Cook

* Roy A. Johnston

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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 Q4 2018 Earnings Conference Call. (Operator Instructions) And as a reminder, this conference call is being recorded for replay purposes.

It is now my pleasure to hand the conference over to Tom McCracken, Senior Vice President of Finance. Sir, you may begin.

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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 Fourth 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 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 would like to remind you that today's call cannot be reproduced in any form without the express written consent of Destination Maternity.

Joining me on the call today is Marla Ryan, our Chief Executive Officer; and David Helkey, our Chief Financial Officer and Chief Operating Officer. Marla will open with some remarks followed by additional commentary by Dave on our financial results. Afterward, Marla and Dave 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 fourth quarter earnings call. Before I provide an update on our progress against our long-term strategic plan, I will provide some commentary on our fiscal 2018 Q4 results and fiscal 2019 Q1 results to date.

In short, our fourth quarter results were both challenging and not acceptable. We experienced a comp sales decline of 5.8% driven by soft conversion results in our e-commerce sites, challenging trends in store and margin performance that was negatively impacted by an aggressive approach to rightsizing our total inventory.

While there were external factors that impacted our business, including the temporary government shutdown, a highly competitive and promotional holiday season along with several delayed shipments due to port congestion, there are a number of factors that we own. We're in the process of course-correcting those, specifically our promotional cadence and marketing strategy. We acted too aggressively to rightsize our markdown inventory. While we expected a significant erosion in selling prices, sales were not incremental, and we traded our customer from regular price into markdown.

Our promotional cadence moving forward is constructed to strike a balance between conversion and margin preservation. From a marketing perspective, we were too reactionary with our e-mail campaigns and did not optimize our paid search spend. While the sales and profit results fell short of our plan, we were able to tightly manage expenses in order to mostly offset the profit impact of the lackluster sales and challenging promotional environment. From an inventory perspective, we reduced our balance sheet inventory by 10% versus the prior quarter, which was better than we had planned, and aged inventory units were reduced by 21% versus the prior year.

Moving forward, we are continuing to rationalize our inventory assortment. As we build on our learnings, we have confidence in our ability to improve both price and margin.

As for fiscal 2019 Q1, results to-date have continued to be below our expectations. February sales were significantly impacted with a delay in spring shipments due to port congestion and a vessel fire. While we did see trend improvement heading into the beginning of March, the final 2 weeks were challenging with the Easter shift to April. To quantify, we anticipate Q1 comp sales to be down mid-single digits, our gross profit margin rate to be relatively flat to last year and lower SG&A than last year in both dollars and as a percent of sales. As we look to the balance of the year, we are actively taking measures to ensure we deliver our plan for the year with an improved CRM strategy, optimized paid search program and promotional efforts that will strike an improved balance between conversion and margin.

Now I'd like to provide an update on our progress on our long-term strategic plan, Destination -> Forward, which I will bucket into our 3 priorities: rightsizing our ship, optimizing our infrastructure and developing innovative product and solutions. First, rightsizing our ship to be a more efficient organization. I mentioned our progress in reducing fourth quarter inventory levels to plan. While margins were negatively impacted by these efforts, we have built a go-forward strategic promotional calendar with enhanced segmentation precision to drive more conversion with margin preservation.

We continue to rationalize our product assortment, shifting product mix towards evergreen core solutions. This shift has allowed us to reduce overall inventory receipts by 18% in fiscal 2019 versus fiscal 2018. This in turn will help deliver improved inventory turns and, ultimately, the $7 million in working capital improvement from reduced inventory we expect to generate this year. Our brick-and-mortar optimization strategy continues to evolve, and Dave will cover this in more detail in a few minutes.

Our second priority, optimizing our infrastructure. We continue to focus our capital investments on items that will fuel e-commerce growth and enable us to be more omni-focused. We are in Phase 1 of a multiyear technology upgrade plan that will allow us to achieve our long-range sales plan for e-commerce while also making store inventories more productive. A few investments we made recently include upgraded product page ratings and review tool, enhanced store locator tool, an additional payments solution, Venmo, as well as providing store inventory visibility on individual product pages.

A second key infrastructure priority is to reestablish our wholesale business channel. Since launching our Amazon wholesale business last fall, we continue to see opportunity to grow the wholesale channel allowing new customers to engage with our brand. During 2019, we anticipate growing our distribution strategy with additional third parties expanding our reach and revenue.

Our third infrastructure update is personnel. Over the last 8 months, we have reshaped our senior leadership team with performance-driven individuals who champion optimization, productivity and profitability. In mid-January, the entire senior management team began executing a detailed transformation initiative aimed at driving alignment throughout the organization with the comprehensive goals and actions needed to deliver and achieve our 2019 budget.

In addition, we recently announced the appointments of 2 new Board members, Lisa Gavales and Greg Kleffner. The Board and the management team are pleased to have Lisa and Greg join us with their extensive public company retail and financial experience.

Our third and final priority is developing innovative products and solutions. From a products standpoint, as we curate a narrower, more evergreen product offer, our focus is on creating solution-based products. We saw strong comparative sales results in the fourth quarter across our top-30 products and anticipate this accelerating throughout fiscal 2019.

From a merchandising strategy standpoint, we continue to test new strategies focused on driving incremental business in our key product categories with new in-store placements, marketing campaigns and strategic promotional campaigns to drive conversion and grow the basket size. Lastly, from a sourcing and costing standpoint, we've begun to platform fabric and reduce product costs, which will deliver improved speed to market as well as savings in the back half of fiscal 2019.

While the recent results were not what we anticipated, I am encouraged by the progress we have made to date and look forward with excitement as our 3 priorities and many initiatives take -- are taking shape. Our organization was founded on the principle of innovation, delivering solutions to new moms and moms2be. Our brands remain highly trusted and recognized in the marketplace for their quality merchandise, affordable value and knowledgeable sales associates. With these core values and our strategic priorities, we remain committed to our enterprise-wide transformation to a more nimble and profitable organization that generates long-term shareholder value.

With that, let me turn things over to Dave to provide a review of our financial performance as well as fiscal 2019 guidance.

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

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Thank you, Marla, and good morning to everybody. Before reviewing the Q4 results, I want to echo what Marla said. While we did make progress in some key areas, our Q4 results are not where we want them to be and are not acceptable. We need to be laser focused as we move forward with our Destination -> Forward strategy and ensure that we are delivering on our 2019 plan.

With that, I'll turn to the fiscal 2018 fourth quarter results. Sales for the fourth quarter were $91.3 million, a decrease of $13.8 million or 13.1% from the fourth quarter last year. The decrease in total sales resulted from the net closure of 29 stores and 83 leased departments, a 5.8% decline in comparable retail sales and the 53rd week in fiscal 2017. By channel, the comparable retail sales decline of 5.8% with brick-and-mortar comparable sales down 8.8% while e-com sales were up 2.7%. Gross margin for the fourth quarter was 48.4%, a decrease of 200 basis points from the same quarter last year. The year-over-year decrease in gross margin was driven primarily by increased markdowns of promotional activity due to being more aggressive with our aged inventory.

Gross profit for the fourth quarter was $44.2 million, a decrease of $8.8 million or 16.6% from last year. The decrease resulted from the previously mentioned sales decline, gross margin rate decrease and the 53rd week in fiscal 2017.

As mentioned by Marla, we continue to make good progress on rightsizing our organization and our SG&A expenses. Despite the missing sales, we leveraged SG&A as a percent of sales by 190 basis points last year -- or to last year. SG&A expenses for the fourth quarter were $47.8 million, a decrease of $9.2 million or 16.1% from the comparable quarter last year. The decline in SG&A in fiscal 2018 compared to fiscal 2017 reflects reductions in employee costs and occupancy expenses resulting from the closure of underperforming stores, ongoing expense reduction initiatives and expenses related to the additional 53rd week of operations in fiscal 2017.

The net loss for the fourth quarter was $6.4 million or $0.46 per share compared to a net loss of $10.2 million or $0.73 per share last year. Adjusted net loss was $4.4 million or $0.31 a share compared to adjusted net loss of $5 million or $0.36 a share last year. Adjusted EBITDA before other charges for the fourth quarter was positive $0.3 million, which is down $0.3 million from last year's comparable quarter.

I will now turn to the full year results. Sales for the fiscal year ended February 2, 2019, were $383.8 million, a decrease of $22.4 million or 5.5%. The decrease in total sales for fiscal 2018 compared to fiscal 2017 resulted from the net closure of 29 stores and 83 leased departments, a 1.8% decline in comparable retail sales, the recognition of $0.8 million in revenue in fiscal 2017 related to a change in our method of accounting for gift card breakage and the 53rd week in fiscal 2017. For the year by channel, the comparable retail sales decline of negative 1.8% with brick-and-mortar comparable sales down 6.2% with e-com sales increasing 13.6% for the year.

Gross margin rate for fiscal 2018 was 51.6%, a decrease of 100 basis points from fiscal 2017. The year-over-year decrease in gross margin was driven primarily by increased markdowns and promotional activities to more aggressively manage inventory in addition to the increase in e-com sales as a percentage of the total retail sales. Our e-commerce channel generally generates lower gross margins than sales through our retail outlets.

Gross profit for the year was $198.1 million, a decrease of 7.3% or $15.8 million from last year. Some of this decrease came from the 53rd week in 2017.

Again, on expenses, we leveraged SG&A as a percent of sales by 210 basis points to last year. SG&A expenses for fiscal 2018 were $198.3 million, a decrease of $20.4 million or 9.3% from last year. This decline in SG&A in fiscal 2018 compared to fiscal 2017 reflects cost reductions in employee costs and occupancy expenses related from the closing of underperforming stores, our ongoing expense reduction initiatives and expenses related to the additional 53rd week of operations in fiscal 2017.

Our net loss for fiscal 2018 was $14.3 million or $1.03 per share. This compares to a net loss of $21.6 million or $1.57 per share for the prior year. Adjusted net loss was $6.7 million or $0.48 per diluted share compared to adjusted net loss of $10.2 million or $0.74 per share for the 12 months ended February 3, 2018. Adjusted EBITDA charges for the full year were $16 million, an increase of 23% or $3 million from last year.

Now I'll turn to our balance sheet for a moment. At year-end, inventory was $70.9 million, a decrease of $0.4 million or 0.6% from last year. Debt net of cash was $45.4 million, an increase of $10.4 million from last year. The increase in debt net of cash was due mainly to timing of inventory receipts and other payments at year-end. At year-end, we had $15.3 million of availability on our credit facility. And during fiscal 2019, we expect to generate $8.5 million to $13 million in free cash flow as we move forward.

I also wanted to provide an update on the Bank of America refinancing. We filed an 8-K yesterday that communicated the termination of our proposed agreement. We've been pursuing this opportunity in an attempt to reduce our cost of capital. As we worked through the detail, though, the refinancing could have adversely affected the company's credit availability, so we mutually agreed to terminate the commitment. We will continue to look for ways to deliver shareholder value through improved cost of capital, and we are pleased to continue to have the support of our current lenders, Wells Fargo and Pathlight.

Moving to capital expenditures for the year. Capital expenditures for 2018 were $4.6 million, a reduction of $2 million from last year. The 2018 capital outlays were primarily a result of modest store investments as we optimize the real estate portfolio as well as investments in our systems, primarily in our e-commerce platform. These investments represent a measured and revenue-focused approach to capital expenditures that we would continue as we move forward.

Now I want to switch and spend a moment on our real estate portfolio. As part of our Destination -> Forward bricks-and-mortar strategy, we are continuing to maximize opportunities to prune unprofitable stores and lease locations and are beginning to test new smaller-sized store formats. During the fourth quarter of fiscal year 2018, we closed 16 owned locations and 80 leased departments for a total of 31 store closings and 85 leased departments for fiscal 2018. Additionally, we generated $2.5 million in incremental occupancy savings in fiscal 2018 from continued lease renewal negotiations on owned stores.

As we look to fiscal 2019, we remain on track to close another 42 to 60 stores and estimate there will be approximately $1.5 million to $2 million in occupancy savings in fiscal 2019 related to our ongoing rent negotiation efforts and smaller footprints for continuing stores. We are continuously evaluating the store portfolio based on both the stores results and trends by market. If there is an opportunity to be more aggressive with the portfolio, we will take advantage of that and update you as we progress.

Turning to our outlook for full year fiscal 2019. Today, we are updating our fiscal year 2019 full year guidance as follows: total sales to be in the range of $370 million to $380 million; comparable retail sales to be in the range of down 1% to up 1%; gross margin to be in the range of 51.5% to 52%; SG&A to be in the range of $185 million to $189 million; SG&A to be in the range of 49.5% to 50.5% as a percentage of sales; operating cash flow to be in the range of $13 million to $18.5 million; capital expenditures to be in the range of $4.5 million to $5.5 million; free cash flow to be in the range of $8.5 million to $13 million; adjusted EBITDA before other charges to be in the range of $17 million to $22 million; adjusted EPS diluted to be in the range of negative $0.12 to positive $0.08; and inventory turns to be in the range of 2.8 to 3.0x for this year -- for 2019.

As Marla mentioned, we're disappointed in the first quarter results to-date. However, we believe that the initiatives we have in place will allow us to improve performance for the balance of the year. As much as we would like to think this turnaround is going to be linear, we recognize that we have some highs and lows as we move forward. We made progress in 2018, and we expect to continue that progress in 2019.

I will now turn it back over to Marla -- or to the operator for the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question will come from the line of Jeff Cutshall with Swan River Capital.

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Jeffrey Cutshall, [2]

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Can you hear me?

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

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Yes.

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Jeffrey Cutshall, [4]

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So can you dig a little bit more into the reason to terminate the refinancing? I apologize, I haven't read the 8-K yet, so if you addressed it in there, just bear with me but just trying to understand what the negative implications would have been if you had proceeded with that?

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Dave J. Helkey, Destination Maternity Corporation - COO & CFO [5]

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Yes, Jeff. So the commitment was about being opportunistic with our interest costs. However, after kind of looking at the deal as it relates to today, the deal on the table as presented would have reduced our overall availability after you take into account, among other things, the prepayment penalties associated with our existing facility. So due to the fact that our net availability would have actually decreased in the existing deal, we mutually agreed to terminate the commitment.

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Jeffrey Cutshall, [6]

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Are you having active discussions with other lenders right now? Or has this been -- has the whole idea for this been tabled temporarily?

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Dave J. Helkey, Destination Maternity Corporation - COO & CFO [7]

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From a liquidity perspective, we're comfortable where we are today. Our liquidity planning includes both upside and downside scenarios with some different levers. We're actively working as a group and with others to evaluate where we are and can see where we want to be when we go forward. But again, I'd say that we're comfortable with our liquidity projections for the balance of the year.

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Jeffrey Cutshall, [8]

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Okay. So -- look, you guys -- you had this -- let's see, it was on the third quarter earnings, December 11. We had a month left in the quarter. Here we are with a pretty dramatic -- or not dramatic, dramatic enough, I guess, revision downwards in terms of expectations. You missed your guidance for the fourth quarter despite being 1.5 months through that. The inventory, while reduced year-over-year and more than double what your intention was in terms of reducing aged inventory, is effectively flat versus last year. Inventory turns were lower year-over-year in the fourth quarter. I don't need to tell you this, but the math never works where you're doing 51% gross margin and 51% SG&A. I'm trying to understand what progress, if any, is being made on this restructuring story that you guys laid out because it's certainly not showing up in the results.

And my issue with this, and I voiced this concern 1 or 2 quarters ago, is that any plan that's predicated on flat growth is not worth its weight in paper. I don't know why all of a sudden you're targeting flat comps year-over-year when you just generated negative 6% year-over-year and you haven't had a positive quarter in 5 quarters -- sorry, let me rephrase that. Bricks-and-mortar hasn't had a positive comp in over 6 quarters and total comp stores have been negative for, I don't know, whatever, 5 of the last 8. You should really be targeting a cost structure for about a $350 million top line organization. And then when sales, which you can't control, do what they do, the company is going to be nicely profitable. Instead, we continue to hear about these goals and these initiatives to fix the sales, targeting comps that continually are overly optimistic, and naturally what happens is, the company continues to languish.

And so how do I refine all that down into a question? I guess the question is I'm looking for some confidence that you guys are effecting the rate changes internally, you are targeting the right issues, your focus is on the correct issues. The Board, which has had a lot of transitions in the last, really, 2 years, but even in the last couple months, there have been a couple new additions. The Board is constituted with the right people. There is a right eye -- there are enough eyes with -- on restructuring, people who've been there and done this before. Because if not, I think the organization and shareholders need to rethink the direction this company is going and who's at the helm.

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Marla A. Ryan, Destination Maternity Corporation - CEO & Director [9]

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Jeff, those were a lot of questions. We want to be able to answer them. Is there one in particular that you would like us to start with?

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Jeffrey Cutshall, [10]

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Yes. How can you give us confidence that you're going to be able to execute on the goals that you've just outlined for 2019?

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Marla A. Ryan, Destination Maternity Corporation - CEO & Director [11]

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Okay. So like we said, we've been focused for quite some time on trying to get all the different initiatives lined up and to actually start getting them executed. When we got here, the inventory for the year was purchased in 2018, and we could not alter that. The assortment was -- what it was, we couldn't alter that. So the first chance we got to really impact not only receipts and the composition of the product was beginning February 2019. Throughout the entire fall season, we put a lot of test-and-learn strategies together to be able to essentially walk into this year and execute on those strategies. We did our top-30 test, which has proven itself very successful. It continues to be successful as we walk into this year.

We have several other initiatives that we're working on that we will roll out as we walk into the second quarter and the third quarter. I think we've made improvements on the SG&A line. We are continuing to look to figure out how to cut costs. We are heavily stored. And we know that we need to rightsize that fleet, and we're pushing on our e-commerce. We did not estimate or anticipate that we would have positive store comps for 2019. We're really looking to the e-commerce channel. But as we look back at over last year and even in late 2017, a lot of the business that was driven on e-commerce was done at significantly reduced AURs and margins, which we know, for the long haul, isn't what we need to do. We have to have a probable e-commerce...

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Jeffrey Cutshall, [12]

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But that -- if I may interrupt. But this is the point, right? The consumer -- you need to focus -- not you specifically, but the collective, whether it's Destination Maternity or any other company out there. You need to focus on the things that you can control and that you can dictate and not the things that become based on hope. And the consumer is going to do what it's going to do, and we're seeing that across the world in -- across the world of retail. Waiting for the consumer to go in the direction that you're expecting it to go is based on hope, in my eyes, and so...

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

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We're not -- we are not -- Jeff, we are not waiting. We have been testing, and I am very confident in a number of the pricing strategies that we've put into place and tested that we have found a path that's going to take us forward that strikes the right balance between conversion because we do need to convert that customer online but also with margin preservation. We have been working with an inventory that we were handed, and we are trying to price and dice it as best we can as profitably as we can to get through the aged and make sure that we are bringing in receipts to stand behind the items that are really working and selling, which, by the way, we've also worked on cost structure of those items to be able to get better margins as we move forward.

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Jeffrey Cutshall, [14]

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Right. But there was a lot of confidence a quarter ago, and margins just declined by 200 basis points. So right, let's put that aside for a second. What can we hold you guys accountable to in terms of the cost structure? And actually before you talk about that, I'd love to know where the heck all this SG&A is being spent because there are organizations with 1 unit and there are organizations with thousands of store units and they can make the ratios work. This company is stuck in this world of purgatory where gross margins equal SG&As and I -- despite all the initiatives that have been laid out, I guess we're making progress but not in terms of -- I mean marginally in terms of percentage of sales. And so do you have a breakdown for SG&A? How much of it's incorporate? How much of it's rent? What is in-store labor? How do we think about that?

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Dave J. Helkey, Destination Maternity Corporation - COO & CFO [15]

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Jeff, it's not something we share publicly in terms of that detail of a breakdown. What I would say...

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Jeffrey Cutshall, [16]

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Okay. How about this? Qualitatively, where does the opportunity lie because something in there is got to be bloated?

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

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Again, what I would say, Jeff, is -- I mean we look at everything from a cost perspective. We're continuously evaluating that on the SG&A line, whether that's store payroll, home-office payroll, travel. Our biggest checks are our rent, payroll, inventory and marketing.

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Jeffrey Cutshall, [18]

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What's home-office payroll? What does that mean?

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

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So we -- when you say we...

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Jeffrey Cutshall, [20]

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Corporate?

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Dave J. Helkey, Destination Maternity Corporation - COO & CFO [21]

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Corporate, I'm sorry. Those are our biggest checks, and we continuously reevaluate kind of whether we're spending that money effectively is what I would say. So I've been here a couple of months, and there are opportunities for us to continue to find savings in our cost stack, but we're going to be as judicious about it as we can because what we don't want to do is cut a department too lean and then come back later and have some challenges. So we do think there's some opportunity there, but again, our guidance -- we revised our SG&A guidance down a bit in terms of expenses. We expect to be on the low end of that number from [expense] perspective.

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Jeffrey Cutshall, [22]

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Last question and I'll let someone else jump on. Given what's going on with the Board and maybe there are some Board members that would reel in to, to weigh on this, but do you think the Board would be amenable to having a shareholder or a stakeholder on the Board?

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Marla A. Ryan, Destination Maternity Corporation - CEO & Director [23]

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I mean I think we've taken on 2 new board members. We're always looking to find the right experience and talent, and we're always open to having those conversations.

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Operator [24]

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And our next question will come from the line of Julian Cash with Savrin.

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Julian Cash, [25]

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Guys, can you hear me?

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Marla A. Ryan, Destination Maternity Corporation - CEO & Director [26]

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Yes.

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Julian Cash, [27]

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Marla, you mentioned that the first quarter is starting -- hasn't started off very well. I know there's plenty of reasons for that. The fourth quarter has been cited by a number of other retailers as well. I was just wondering if -- can you elaborate on what do you think the problems are in the first quarter? Is it just the continuation of what was going on in the fourth between weather, government shutdown, things like that? Why hasn't things -- why don't -- why do you think things haven't picked up?

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Marla A. Ryan, Destination Maternity Corporation - CEO & Director [28]

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Sure. So government shutdown and weather aside, we thought a significant delay in our spring goods, port congestion, which a lot of that was retailers, cramming shipments in because of the entire tariff situation, there also was a vessel fire that quite a few retailers were caught up on, and that is a big one for us in terms of a lot of our seasonal basics. So we definitely got out of the gate in -- a little bit slower than we had wanted to. And we do have the shifted Easter from March into April. I would say that when we look at our strategies that we've lined out previously in top -- in terms of our top 30, some of the category expansions that we detailed out in the Destination -> Forward plan, those items are all checking. In terms of misses, we are continuing to strike that balance between full price and markdown and how much promotion we need to convert her. We are -- we're trying to take the needle out of what has been done over time. We've seen AURs decline over the last 3 years as inventories piled up, and we know that's not the answer as we look forward. We've got to have a healthy business. We need to be able to have the right items, which I think that we have, and we need to have them at the right price and the right cost structure, which we are definitely there from a cost structure, and it's just striking the right balance as to how we can convert her on a daily basis whether it be online or in-stores.

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Julian Cash, [29]

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So if the court issue and kind of the seasonality of Easter this year is the issue, when would you expect that sales to start to normalize again?

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Marla A. Ryan, Destination Maternity Corporation - CEO & Director [30]

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As we come through this month, we've definitely been working overtime to be able to make sure that we can see that start to realize. And I think as we go into May, it gets only better.

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Julian Cash, [31]

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Okay. So the same-store sales that have been kind of drifting lower for the last number of quarters, I was wondering -- as your brick-and-mortar sales fall, obviously more is going online. Do you know kind of where it's going online to? Is it just other vendors and people not differentiating between the Destination Maternity brands and others? Do you have any insight on that?

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Marla A. Ryan, Destination Maternity Corporation - CEO & Director [32]

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Well, I think you have to understand that from -- at the highest level, the birth rate has declined over the last 3 to 4 years, and it continues to drop each year. We've maintained our position in the market in spite of that. And so I think it's really making sure that we have the right product and the right solutions for her. And as we've brought in our spring product, we are encouraged by the results. We feel that we're hitting on those principles that we said we would deliver on in terms of what she wants from us, whether it be silhouette, price, fabric, print pattern. So I think we continue to make strides in that area. Part of what we did to ourselves in the fourth quarter was trying to move through that aged inventory that we inherited and the over-receipts that we were saddled with when we walked in. Unlike other retailers, it's just not all incremental. There's a spending limit with the customer, and we've learned that, and now it's about striking that right balance as we go forward.

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Julian Cash, [33]

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So there's no -- you can't kind of pin it down to 1 or 2. I realize your percent of sales has remained constant, but is it strictly just the lower birth rate that you think that's doing it?

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Marla A. Ryan, Destination Maternity Corporation - CEO & Director [34]

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Well, it certainly doesn't help. And there's certainly...

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Julian Cash, [35]

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Is it Amazon, anything you point to like that or just straight mainly the birth rate?

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Marla A. Ryan, Destination Maternity Corporation - CEO & Director [36]

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I mean, I think the birth rate is probably a large part of it. There's definitely competitive pressures out there from a costing perspective. We don't see a direct line to that. So I think it's on us to continue to keep having the strong voice that we have in the market, and it's continuing to fuel the awareness that we have that's been strong for the last couple of years and remains constant as well, and we have to deliver the right product at the right price at the right time. That's our job. And I think that's why we feel as we move through the rest of the year that we'll be able to deliver the plan that they've outlined.

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Julian Cash, [37]

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Any sense about how many more quarters it will take to get through the aged inventory issue?

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Marla A. Ryan, Destination Maternity Corporation - CEO & Director [38]

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Well, as we outlined in the Destination -> Forward, the inventory is being worked on, on a weekly basis. We definitely have a good 24 months ahead of us as we start to move through it. We're doing it in a really conservative manner, and I think learning from some of the challenges that we had in fourth quarter, we're not going to just let the firehose open. So it's about making sure that we're getting through it, chipping away at it. It's moving in the right direction. We're really happy with the results. And we continue to keep evaluating how we can push more through the pipeline without impacting the margins.

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Julian Cash, [39]

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24 months sounds like a long time. Do you guys have any alternatives to accelerate that? Or is it just going to take time?

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Marla A. Ryan, Destination Maternity Corporation - CEO & Director [40]

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I think it's just going to take time. I mean there's a limit to the amount of market share that this particular category, maternity, has. To flood it out into the marketplace doesn't serve us well. And we definitely have found some avenues that are working really well for us to be able to move it and to move it at a decent clip. And that's the time frame that we're estimating.

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Julian Cash, [41]

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You say that the new merchandise that you guys have is testing pretty well. Can you elaborate on that a little bit? Like what are some measures that we can kind of think about what were you looking in this tests?

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Marla A. Ryan, Destination Maternity Corporation - CEO & Director [42]

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So we are looking at a total as a percent of sales, which is definitely one of the initiatives that we came in with, which was to rightsize the assortment, to rationalize the inventory and to really focus on our top core products. And those items are checking. They continue to deliver strong comparable sales. They did in the fourth quarter as well. And in terms of some of the other category expansion, which we outlined in Destination -> Forward, those items are checking as well, and we're continuing to feel those sales where need be.

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Julian Cash, [43]

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Okay. Great. I want to -- I would like just to reiterate one thing that Jeff mentioned, and as a shareholder, I would be greatly encouraged to see another significant shareholder on the Board. I don't necessarily care who it is, but I think it would just make me feel better overall in the long run to know that there's another shareholder there with significant skin in the game as far as going forward. I know, Marla, that you've bought some shares in the past. Comparatively though, it's just -- it's not a lot. And it does give us a lot more faith in what's going on to know that somebody on that Board might actually be advocating for us. Because in total, the total amount of shareholder ownership on the Board is quite low. And to do something to fix that, I think, would be a great help.

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Operator [44]

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And our next question will come from the line of Roy Johnston with Austin Perry.

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Roy A. Johnston, [45]

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Yes. I just don't want to pile on, but I would like to get more details -- I mean I think the biggest issue here is the cost-cutting plan. And if you -- what details you can give us kind in benchmarks? What are you looking for from the various categories in cost cutting? And I think personnel was one of them. I'm trying to remember what some of the others were. If you could give us kind of dollar numbers or something so that we can hang our hats on points of SG&A?

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Dave J. Helkey, Destination Maternity Corporation - COO & CFO [46]

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Roy, it's Dave. What I would say again is that I'm new here, so my take on this is pretty straightforward. Everything is up for grabs. Everything -- every dollar that we spend should be efficient and effective for us. Again, the large categories in this business from a cash point of view is inventory. I know that's not necessarily expense, but it's a big, big check in working capital. Rent, payroll across the board and then marketing, and there's obviously other things. But from that perspective on rent, we've targeted $1.5 million to $2 million in savings this fiscal year. We're obviously hopeful to do more. In totality, from an expense point of view, we've lowered our guidance, meaning we've decreased the expenses that we expect to spend this year. We'll continue to look for ways to lower that number even further if it makes sense. So again, to me the 2 questions are is the expense efficient and is it effective. And if it's not efficient, we need to do something about it. And if it's not effective, we should probably remove it from the cost stack. So that's what I'd share.

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Roy A. Johnston, [47]

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Okay. And then on the other large category you laid out there, rent obviously is a huge one. What about payroll? I mean where do we stand on that? And what do we hope to save this year? And I mean what is the total headcount for the company? And where do you guys expect for it to be at year-end?

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Dave J. Helkey, Destination Maternity Corporation - COO & CFO [48]

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I don't know -- the total head count for the company, I don't know that we've shared before. The payroll situation, we've made a number of adjustments to payroll over the past couple of years and even in the last 8 months, 9 months since the summer of last year. I don't have all -- I wasn't here for that, but we've made quite a few adjustments. Again, we continue to look at our work chart for places to be efficient and effective. And I would say, if we're missing a skill set, we look at it that way too because we want to drive revenue and reduce expenses. So if there's a place we don't feel like we have the right skill set in our own chart, we also have those conversations as well. I'm not going to break out kind of the differences between payroll, rent, et cetera, in terms of our targets. But again, what I would tell you is that we're being as judicious as we can as we move forward, recognizing that this is a complicated business, and we have to have the right resources in place to get the job done and deliver on our 2019 plan.

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Roy A. Johnston, [49]

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I guess what is concerning it doesn't seem like there's the same -- given the radical changes that are happening in retail and traditional retail, I just don't get the sense of urgency about righting the ship. And I'm not trying to beat a dead horse, but it's just like that's something that seems palpable. And I just -- I'm trying to get a little bit -- that's what I'm driving at is kind of like what do you guys have that you can share that shows us that you guys are really motivated to right this ship and right it quickly. Because as Cutshall said, the issue is, like, if you keep kind of incrementally cutting costs, we're not going to get there. We're just going to get into a bunch of paper cuts and overachieve meaningful profitability, and it seems like radical action needs to be taken.

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Marla A. Ryan, Destination Maternity Corporation - CEO & Director [50]

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So I mean -- this is Marla. We outlined this when we gave Destination -> Forward in November, and we've talked about this on our other calls. SG&A is a big one for us. As Dave said, we continue to look at every single line of expense, whether it be payroll or otherwise. We have gotten to what I would call a very lean, efficient team on our stores side. We continue to evaluate all of our talent needs across the organization in the home office. We've made a number of changes over the last couple of months. We'll continue to evaluate if we need to make more changes, but we also need to have talent in the building to deliver the business that we've said we're going to deliver this year as well. We're making technology investments so that we can be more efficient. We're doing everything that we can to be able to continue to lower that SG&A spend.

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Roy A. Johnston, [51]

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Okay. And then switching gears. E-commerce you commented on, it was still positive, but it's a little bit of a slowdown from what we've seen kind of previously. Can you talk to that a little bit? What was -- what drove was it 2.8% increase in comparable e-commerce year-over-year?

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Marla A. Ryan, Destination Maternity Corporation - CEO & Director [52]

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So we have 2 components to our e-commerce business. We have our own sites and then we have our third-party sites. I will speak to our own sites. We continue to deliver significant comps on our own sites. And as I said before, we inherited the inventory that we had. We inherited the assortment that we had. And we were making the best of what we had. We've had a lot of conversation with our third-party vendors. I think we've got a great strategy as we walk into this year in terms of addressing those individual customer needs as well as our own and making sure that we're in-stock on our best items and that we are able to have that conversion that we need.

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Roy A. Johnston, [53]

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And then -- so was it other sites -- can you break down, like, what was the growth on your internal site versus (inaudible)?

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Marla A. Ryan, Destination Maternity Corporation - CEO & Director [54]

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So our own sites were plus 9%.

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Roy A. Johnston, [55]

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Okay. Great. And so it was negative on the externals?

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Marla A. Ryan, Destination Maternity Corporation - CEO & Director [56]

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Yes.

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Roy A. Johnston, [57]

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Okay. And then this inventory issue that you addressed that you thought might take 24 months to right -- address. How large of a dollar item are we talking about? Are we talking about $10 million, $20 million, $30 million?

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Marla A. Ryan, Destination Maternity Corporation - CEO & Director [58]

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Give us one second.

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Roy A. Johnston, [59]

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Okay. No. Thank you.

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Dave J. Helkey, Destination Maternity Corporation - COO & CFO [60]

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$10 million to $13 million.

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Marla A. Ryan, Destination Maternity Corporation - CEO & Director [61]

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$10 million to $13 million.

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Roy A. Johnston, [62]

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Okay. Okay. Yes. Is it something to be more concerned with, tend to -- yes. That...

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Marla A. Ryan, Destination Maternity Corporation - CEO & Director [63]

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And I think the thing to remember too is that this inventory has stacked up over time. And as with most aged inventories, there's the good and there's the middle and then there's what you're left with. And what we're trying to do is we're trying to do it in a really smart, efficient way. We want to be able to get as much profit out of it as possible, but we know that we have a contained market. So it doesn't make sense, as I said before, to flood the market with all of this. And we've found some very efficient streams to be able to move it. And we're going to continue to keep levering on those and push as much as we can as it makes sense. So our hope is that it doesn't take 24 months. Our hope would be that we would be able to get through it faster, but that's what we have really built out.

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Operator [64]

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And our next question will come from the line of [Chris Moyer], retail investor.

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Unidentified Participant, [65]

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Can you hear me?

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Marla A. Ryan, Destination Maternity Corporation - CEO & Director [66]

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Yes, we can.

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Unidentified Participant, [67]

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So I was wondering if you could provide some more color on the gross margins moving forward. Specifically, what will margins look like on the brick-and-mortar side versus the e-commerce side as the inventory eventually will normalize and shifts to, I guess, more profitable product mix?

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Marla A. Ryan, Destination Maternity Corporation - CEO & Director [68]

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Sure. So we've put a number of measures in place to be able to make sure that we've got the best costs behind our products as we go forward. We have had, I would say, healthier margins in our brick-and-mortar than on our e-commerce side over the last couple of years. And in terms of our aged inventory, previously, most of that was being moved through on the e-commerce side. So as we sort of shift some of that balance, we're looking to be able to find different ways for our e-commerce business, the margins to actually increase. We need to be able to increase margin in general, but we know that we don't want to be where we've been in the past with the e-commerce margins because, as we grow the e-commerce business as a bigger percent to total, that's just going to drag us down.

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Unidentified Participant, [69]

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Right. And then -- so then, how do you think you're going to go about increasing those margins on the e-commerce side? Is that through technology enhancements? Is it through better marketing? I mean, could you give me just a little bit more picture on how you can potentially get those gross margins on the e-commerce side to increase and almost potentially maybe surpass the brick-and-mortar side?

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Marla A. Ryan, Destination Maternity Corporation - CEO & Director [70]

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Sure. So I think it's a couple of things, right? We have to work on a couple of different points. One, working on just the pure product cost. Two, we're constantly evaluating our ticket price or out-the-door price and with that comes promotions and what it takes to convert her. We are really hitting hard on our CRM and just the precision in which we can segment our file. I think there's definitely more opportunity on the table in terms of how we speak to her by trimester, how we speak to her in terms of pure product needs or solutions. In some cases, you need something at one point in your pregnancy, and in others, you may not need it at all. So if we can have much clearer segmentation around the file and hit her when we know she actually needs that item, we have greater ability to get that conversion and more than likely not have to do it at a reduced price. So all of that is in work in addition to the fact that, in the back half of this year, we won't be as promotional as we had been this past year.

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Unidentified Participant, [71]

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Okay. And I guess, my last question would be so you guys just mentioned that e-commerce right now was a lower-margin business than the -- on the brick-and-mortar side. Do you have any, like, hard numbers to kind of give us a better sense? Or do you guys not release that publicly?

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Marla A. Ryan, Destination Maternity Corporation - CEO & Director [72]

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We don't release that publicly.

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Operator [73]

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And our next question will come from the line of Robert Cook with Cook Capital.

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Robert Cook, [74]

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I won't down pile. Much of the questions I have, have been addressed. But I would like to ask what your process for deciding pricing is. Because clearly, quarter after quarter after quarter, we keep hearing the same thing of not getting it right. So is there a science that you use for pricing and discounting? And then, very separately, because I want a full answer to that question. Is -- talk about the now desire to expand in the wholesale market and specifics on the margins you expect from that. And if you know that there's more than a hope on that sort of -- those 2 strategies?

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Marla A. Ryan, Destination Maternity Corporation - CEO & Director [75]

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So with regards to pricing, I think that we go through a competitive process every season as we look at what future buys we're making, what current products we're selling, and then we go through a hind-sighting process. We are constantly looking at market competition and trying to make sure that we are relevant. We don't ever want to be in a place where we're too cheap, and we don't want to be in a place where we're too expensive. So there's a lot that goes into making sure that we are hitting the sweet spot. If you look over the last 3 years, both online and in-stores, we have denigrated and declined those AURs, and most of it has come from promotions. And that is a direct result of the fact that there's just been far too much inventory that has been bought over the last 3 years.

To be able to move that inventory is -- had to have happened at a significantly reduced price. Cut the receipts by 18% this year for fiscal 2019. We'll continue to evaluate and cut where necessary. Our goal is not to continue to keep this business as hard-driving against promotion. There is great value that we deliver, and we have plenty of test case across the business where we don't have to be as promotional. But you've got to be able to have the right inventory levels to have that approach. And that's what we're trying to do right now is to shift those tides so that we can get ourselves into the right inventory positions behind the right products, and we know what the right prices need to be. With regards to...

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Robert Cook, [76]

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Hold on. That stuff's very old. It's not like it's coming back into fashion, and I'm sure it's not on the balance sheet for hardly anything. Why don't you just take the tough medicine and just get rid of it? It's just clouded. It clouds every pricing decision you make going forward, and you can't grow your healthy business. It's staggering. It's staggering beyond that the e-commerce business is a lower-margin business than the bricks-and-mortar.

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Marla A. Ryan, Destination Maternity Corporation - CEO & Director [77]

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So Robert, what I would say is that the approach that we took in fourth quarter definitely was not the right answer. And we have shifted and adjusted our approach as we go through the rest of this year. The goal is not to flood all of those markdowns and aged inventory through our e-commerce business. We know that, that does not do anything for the health of the margins. While there is definitely a long -- in terms of the age of the actual product, there is a fair amount of that product that is usable, that is desirable, that we can actually get real money for. And that's what we've been working is to work the top of that pile.

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Robert Cook, [78]

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Where can you get that? Because you're not getting it here. And it's just killing your everyday sale. You ought to sell it and burn it. Sell it in Indonesia. It's killing us. It's absolutely killing us. The house is on fire. You need to rightsize this thing immediately. Everyone kept saying it quarter after quarter after quarter. And I get it, everyone saying you guys have no skin in the game, but you've taken the job. You're there. I know you must care. So that's not the issue. Of course, we'd love everyone to have more skin in the game. But whatever, you're going to make that decision, send those signals by yourself. But I don't know what stock indicated, but this house is on fire.

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Marla A. Ryan, Destination Maternity Corporation - CEO & Director [79]

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I think we've gotten through a fair amount of the aged inventory that we inherited. We have made a commitment to rightsize the inventory as we go forward. As we said, we've reduced the receipts by 18%. We've cut 50% of the assortment out of what we offer today. We are seeing dramatic increases in our sales in our top-30 products. We've continued to see that since the third quarter when we put that strategy into place, and we are trying to move as quickly as we possibly can without flooding the market with a bunch of aged inventory. And we've found a couple of different levers. It is working very nicely. We are moving through it without it being a distraction to our full-priced products.

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Robert Cook, [80]

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Okay. I'm not going to be argumentative. Sorry, I guess I just needed to vent a little. Can you talk about wholesale and then SKU reduction?

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Marla A. Ryan, Destination Maternity Corporation - CEO & Director [81]

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Sure. So with regards to wholesale, we know that there's an opportunity for us to be able to continue to keep gaining market share and for us to be in different places where our customer might be. That is one of the reasons why we went with the Amazon. 54% of our customers don't have a Prime account, and we wanted to be able to engage with her on that platform. We see opportunity to continue to keep looking at other third-party wholesale opportunities. It is definitely something that we're happy with, with the sales so far, and we're going to continue to keep pursuing that.

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Robert Cook, [82]

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And do you have an idea of the margins? Or you're just looking at top line?

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Marla A. Ryan, Destination Maternity Corporation - CEO & Director [83]

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So I mean our wholesale margins are between 25% and 35%. It offers us the opportunity to sell that inventory, but it gets us into avenues that we wouldn't normally be able to penetrate.

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Robert Cook, [84]

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So is that the idea to sell the old inventory there and not new stuff at greatly reduced margins?

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Marla A. Ryan, Destination Maternity Corporation - CEO & Director [85]

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No. No.

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Robert Cook, [86]

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Can you talk about SKU reduction, please? And what percent down? What mix is evergreen because I think that's important?

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Marla A. Ryan, Destination Maternity Corporation - CEO & Director [87]

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Sure. So when we came in and what we've said is we cut 50% of the assortment starting with spring 2019. So if you were to walk into a store or if you were to go online, you would see about 50% less than you've seen in prior years. We continue to look at that and evaluate. And I would say that we're continuing to shave where necessary. In addition to that, we are probably upwards of 75% of our assortment being in what we would call evergreen or evercore. These are our hardest-working items. They're our solution-oriented items. They're really what has delivered the majority of the business in prior years, and we are eliminating a lot of that risky fashion.

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Robert Cook, [88]

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So one other suggestion I would make is you talked about some of the initiatives that are working. Everyone's dying for some good news. If we can be specific on initiatives that are working, we'd all love to know. And then lastly, what do you think has happened with the e-commerce on other sites? And what are you doing to address it?

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Marla A. Ryan, Destination Maternity Corporation - CEO & Director [89]

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I would say that we have not addressed some of the customer-specific needs, and after much research and due diligence, we know where we need to point the ship. We're moving in that direction. Some of it has to do with pricing. Some of it has to do with actual product offer. But we've made those adjustments, and we'll start to see things improve as we get through the back half of this year.

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Robert Cook, [90]

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Is there a new e-commerce head? Did I remember?

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Marla A. Ryan, Destination Maternity Corporation - CEO & Director [91]

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So we have several new e-commerce members in addition to some of the other senior leadership that we've brought in.

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Operator [92]

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Thank you. Ladies and gentlemen, this concludes our question-and-answer session for today. It is now my pleasure to hand the conference back over to Marla Ryan, Chief Executive Officer, for any closing comments or remarks.

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Marla A. Ryan, Destination Maternity Corporation - CEO & Director [93]

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Thank you, everybody, for joining us today. As we've said before, the results from the fourth quarter are not what we anticipated nor what we expected. We realize that they are not where they need to be. And we continue to work very diligently not only on our SG&A line but also in terms of growth. And as we look forward to the balance of the year, we will be back for the first quarter earnings call and speaking with you in just a few short weeks. So thank you for your time today.

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Operator [94]

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Ladies and gentlemen, thank you for your participation on today's conference. This does conclude our program, and we may all disconnect. Everybody, have a wonderful day.