Destination Maternity’s new CEO steps down as sales disappoint; stock down 35 percent

Destination Maternity CEO Marla Ryan stepped down Thursday after a tumultuous 13 months at the helm.

Ryan will now serve as the company’s president of product design, sourcing, and merchandising. The company’s shares, which hit a high of $6.36 last June, tumbled about 35 percent Thursday to 78 cents.

Until a new CEO is appointed, Destination will have an " Office of the Chief Executive Officer" headed by Lisa Gavales, who has been on the board of directors for the last three months.

Moorestown-based Destination Maternity is the largest retailer in the maternity field but is struggling in an increasingly competitive market where pregnant women can turn to subscription and rental services, or general mass merchants like Target to find what they need.

Destination Maternity has about a quarter of the market share in an industry with $1.2 billion in revenue, according to a 2018 report from the research group IBISWorld, which did not include online sales. Even as overall industry sales fell 1.6 percent from 2013 to 2018, the IBISWorld report said many “niche and upscale maternity wear businesses have flourished.”

Ryan was appointed the interim CEO in May 2018 after a proxy fight that also swept in a new board where three of the four directors would be women. Ryan signed her three-year employment contract about seven months ago.

For the period Ryan was CEO, Destination Maternity saw falling comparable-store sales in three out of the last four quarters. Most recently, the company reported Thursday that comparable-store sales in the first quarter fell 7.2 percent and e-commerce sales fell 12.5 percent.

Net sales for the first quarter, a three-month period ended May 4, decreased 8.7 percent to $94.2 million, compared with the same period last year. Destination Maternity have 998 stores — about 120 fewer stores from last year — 32 owned and 88 leased.

“We had a challenging start to the year," Dave Helkey, the company’s chief financial officer, said in a news release.

Gavales, 56, will serve as chair of the Office of the CEO for an initial 30-day period, which will automatically extend until a CEO is appointed, the company said in a news release. Others who will be part of that office include Ryan, who stepped down from the board, as well as David Helkey, the CFO and COO.

Before joining Destination Maternity, Gavales was interim CEO of Bluestem Group Inc., and worked for three years as the chairman, chief executive officer, and president at Things Remembered. Her other leadership roles include Talbots president and chief marketing officer, Express executive vice president and chief marketing officer, and Bloomingdale’s senior vice president of marketing.

Eugene Davis, 64, was appointed chairman of the board of directors, a position Ryan previously held, effective Thursday, the company announced Wednesday. Davis is the CEO and chairman of PIRINATE Consulting Group LLC, a consulting firm that lists its specialties as “turnaround management, merger and acquisition consulting, hostile and friendly takeovers, proxy contests, and strategic planning advisory services for domestic and international public and private business entities.”

Shareholders seem increasingly frustrated with Destination Maternity’s leadership.

“The company has a very big chance right now at failing,” said shareholder Trip Miller, partner at the Memphis-based hedge fund Gullane Capital Partners, in an interview Thursday. Miller called the company’s inability to finish a turnaround strategy in the last year concerning for investors and the thousands of employees working for Destination Maternity.

The company, which sells clothing under Motherhood Maternity, A Pea in the Pod, and Destination Maternity brands, had 1,100 full-time and 2,300 part-time employees as of Feb. 2, 2019, according to its most recent annual report.

Analysts peppered Gavales with questions about the company’s plans, during a call Thursday.

Julian Cash, of Savrin, asked if there had been any improvements in same-store sales since the quarter ended last month. Bill Wolf, the senior vice president of finance at Hudson Group Retail LLC., looked for answers on negative sales and asked if it was because of demographics, competition, or company execution.

Gavales responded by saying that the company will be “conducting a comprehensive review of all of our initiatives.”

“We have to get through the business review,” Gavales said on the call. “We need to be able to look at what is, to your point, self-inflected and what is industry and what we can do to offset both.”

Investors also questioned leadership strategies during the last earnings call in April when the company reported that for the period including holiday sales, which is usually a boost for stores, comparable retail sales declined almost 6 percent.

At the time, Ryan asked investors to be patient with her strategic plan which was announced in November and included three priorities: “right-sizing our ship, optimizing our infrastructure, and developing innovative product and solutions." This meant changes like store closures, new items in stores, and upgrades to personnel and technology.

“I’m trying to understand, you know, what progress if any is being made on this restructuring story that you guys laid out, because it’s certainly not shown up in the results,” Jeff Cutshall of Swan River Capital asked Ryan in April.

Ryan told Cutshall that her team was stuck with poor inventory ordered before her arrival. She said at the time they were testing items in the fall to find the top-selling clothes.

Cash, of Savrin, asked in April if Amazon was taking some of their customers away and if an increase in e-commerce sales related to declining in-store sales.

“At the highest level, the birth rate has declined over the last three to four years and it continues to drop each year,” Thomas McCracken, the company’s senior vice president of finance responded at the time. “We’ve maintained our position in the market in spite of that.”