Destination Opportunity for This Retailer: A SWOT Analysis

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Kate and the Royal baby... who hasn't heard quite enough about the Blessed Royal event? But it has drawn attention to specialty retailer, Destination Maternity (NASDAQ: DEST). It's not a sector of retail you think about much but when you're in the family way, fashionable maternity clothes can make you feel better about the huge changes in your body. In the US there are 4 million babies born annually so there are millions of mothers-to-be who need maternity clothes.


  • The company has a virtual lock on the North American maternity wear market with 40% market share. In business since 1980 and with almost 2,000 stores in the US and Canada and retail partnerships and websites, any organized competitive venture will find it challenging at best to compete.
  • Its merchandise is popular because the company collaborates with designers pregnant women enjoyed wearing before like BCBG, Cosabella, and 7 for all Mankind.
  • It's one of those rarest of beasts, a small cap that pays a dividend, of 2.60%. Gross margin is good at 54%.
  • Its bricks and mortar stores are "destination" experiences that engage not just mom-to-be but also her other children and dad with juice bars, a spa, and maternity learning resources in a nurturing environment.
  • The company is going global with 142 international franchises in South Korea, India, and the Middle East.
  • The company has been closing underperforming stores at the same time increasing their leased shop within shop exposure in Bed Bath & Beyond's buybuyBaby stores from 14 to 44.
  • The company preaanounced earnings at the top half of previous guidance before their scheduled earnings release of July 25 and noted this would mark four straight quarters of comparable store sales increases as well as increased earnings now preannounced to be $0.56 per share. This gives them a trailing P/E of 17.66.
  • The company gets five stars as a maternity apparel retailer, the number one rank by for selection, affordability, and customer service. Neither Target nor Wal-Mart crack their top listing for maternity wear although Gap (NYSE: GPS) received a high rating of only one-half star below Destination Maternity.
  • The company spent the last ten years paying off debt leaving it in the enviable position of increased free cash flow to use to expand the business.


  • Its main competition comes from big box behemoths Target (NYSE: TGT) and Wal-Mart. However, maternity selection is limited at these stores without the variety that Destination Maternity affords. Also, these stores aren't as appealing to the higher income segment of pregnant women who are seeking career clothing.
  • Its retail niche is of limited duration except for during 18 months of an American woman's life, given the average birthrate in the US. Since it does offer nursing wear one can extend that maybe another two years but that's stretching it.
  • The company also closed 124 leased shops in Babies R Us stores in 2012.
  • While gross margin is good, net profit margin is low at 4.07% and operating margin is 7.13%.


  • Its global expansion into emerging markets with growing middle classes is key to future growth of the company. The maternity market in the US and Canada is fairly stable despite the company's expectation of an echo boom, boomer babies having babies and an upturn in the US economy slightly raising the birth rate.
  • There are currently 84 buybuyBaby stores and Destination is expecting to eventually fill all 84 with a maternity apparel leased department.
  • The company sells its merchandise to department stores like Macy's, Boscov's, Kohl's 1,100 oh Baby by Motherhood leased arrangements, and Sears. Expanded cross promotions as well as partnerships are all possible venues for growth.
  • The company offers specialized spa services, edamame spa, specifically for pregnant and post natal women with massages, facials and specials like its Mio BootCamp for Butts, which improves that maternal derriere. Expanding the number of these locations and advertising a gift card as best baby shower present ever couldn't hurt.
  • While it has several designers on board the company should increase that number so that mothers can successfully transition in the clothes they prefer.
  • The company has a huge market in Canada that is virtually untapped. Target is expanding in Canada so Destination needs to get a move on.
  • The company could expand its marketing partnerships as mentioned before by leveraging its very appealing customer base of moms.


  • Gap, as mentioned before, is a threat. Gap has better selection and prices than the big-boxes and their online experience allows moms-to-be to cross order men's, children's, baby clothes and shoes for an all-in-one shopping cart.
  • Gap also has the advantage online of established well run websites that rival Amazon in ease of use and attractiveness. Gap also has its Old Navy stores which offer maternity clothes. Gap has run big since reporting several consecutive beats. It offers a yield of 1.30% at a trailing 17.46 and the stock has gained 55% in the last year. Its PEG at 1.32 is just slightly higher than Destination Maternity's and price/sales at 1.33 is almost twice as high as Destination Maternity.
  • IBIS World notes in its maternity apparel industry snapshot that barriers to entry are low, without regulation, and online competitors are less burdened by initial startup costs. However, reputation is something these more established retailers have and it is hard-won.
  • A downturn in the economy and related delay in maternity onset could derail what analysts expect to be a 15% EPS growth rate over the next five years for Destination Maternity.
  • Target has a big data advantage over Destination as it has records of customer purchases from initial in-home pregnancy tests to vitamin B-12 and can tailor promotion, offer suggested shopping lists, etc. before they begin to show.
  • Target also has new CityTarget stores in major cities which can sell to the urban mother-to-be and has the advantage of a one-stop shop for them offering prenatal prescriptions, groceries et al. It offers a smaller yield at 2.40% and the trailing P/E is 17.21 with a higher PEG at 1.51 than both Gap and Destination.
  • Wal-Mart has sheer size and number of locations and a huge customer base of middle to low income customers who may feel intimidated by the bricks and mortar Destination Maternity store ambiance and prices.

Destination Maternity isn't quite the undiscovered gem it was, up 60.54% this last year, but the PEG is still only 1.14 and price/sales is .74 with a yield unusual for a small-cap name and fundamentals that compare favorably with these rivals. The company has plenty of room to grow in Canada and overseas. I like this name very much on a pullback, but don't be surprised if you don't get one.

AnnaLisa Kraft has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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