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Sydnee Gatewood
Sydnee Gatewood
Articles (1624) 

Chuck Royce’s Firm Cleans Out Its Closet, Sells Destination Maternity

The bankrupt specialty retailer is being acquired by Marquee Brands

Investment firm Royce & Associates revealed Monday that it exited its position in Destination Maternity Corp. (DESTQ) on Nov. 30 as the struggling company prepared to close its doors ahead of the holiday season. Then, on Tuesday, the retailer canceled its bankruptcy auction and disclosed it is being acquired by a global marketing and media company that is owned by investor funds managed by Neuberger Berman.

On Dec. 10, Marquee Brands announced it won the bid to acquire the Moorestown, New Jersey-based company’s intellectual property, e-commerce business and other assets for around $50 million. The brands in question, Motherhood Maternity and A Pea in the Pod, are expected to help diversify the New York-based company’s portfolio of women’s fashion.

While it has not been fully determined if the individual stores will remain open, Marquee President Michael DeVirgilio said there are plans to build the maternity clothing brands’ online presence in an effort to more effectively compete in the digital age.

“At Marquee Brands, we have established a successful formula of targeting brands with a devoted customer base and a true need to exist,” he said. “There are few brands that better fit our model than the Destination Maternity portfolio. Its young, affluent and highly educated consumer is the most sought-after market segment and we plan to apply our playbook to further elevate her experience.”

Destination Maternity filed to restructure under the chapter 11 bankruptcy processes in October.

The deal is expected to close by Dec. 20.

Firm cleans Destination Maternity out of its closet

Founded in 1972 by Chuck Royce (Trades, Portfolio), the New York-based investment firm specializes in small-cap companies. The portfolio management team picks stocks based on an active, bottom-up, risk-conscious and fundamental approach. They also look for value opportunities among companies trading at a discount to enterprise value.

According to GuruFocus Real-Time Picks, a Premium feature, the firm sold its remaining 212,000 shares of Destination Maternity on Nov. 30. The stock traded for an average price of 6 cents per share.

GuruFocus estimates the fund lost 76% on the investment since establishing it in the second quarter of 2012, when the stock was trading around $19.80 per share.

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Stock performance and company financials

With a $600,000 market cap and an enterprise value of $197.46 million, shares of the maternity clothing retail company, which also sells nursing apparel, accessories and equipment, were trading around 4 cents on Wednesday with a price-book ratio of 0.02.

According to the price chart below, the stock has tumbled nearly 100% year to date. Shares kicked off 2019 at around $2.84 before peaking at $3.27 in mid-January. It has been all downhill since then.

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Weighed down by approximately $6.69 million in new long-term debt, Destination Maternity’s financial strength was rated a weak 3.2 out of 10 by GuruFocus. Further, the low Altman Z-Score of 0.73 warns the company is in financial distress.

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The retailer’s profitability did not fare much better, scoring a 4 out of 10 rating on the back of negative margins and returns that underperform a majority of competitors. It also has a low Piotroski F-Score of 2, which indicates the company has poor operating conditions. Although Destination Maternity’s revenue per share has declined over the last five years, it still has a business predictability rank of one out of five stars. GuruFocus says companies with this rank typically see their stocks gain an average of 1.1% per annum over a 10-year period.

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Jim Simons (Trades, Portfolio)’ Renaissance Technologies is the company’s largest guru shareholder with 5.68% of its outstanding shares. Prem Watsa (Trades, Portfolio) also has a position in the stock.

Royce’s portfolio composition and performance

The small-cap specialist's $10.8 billion equity portfolio, which was composed of 1,150 stocks as of the end of the third quarter, is heavily invested in the industrials and technology sectors.

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Other cyclical retail stocks Royce & Associates currently owns include Bed Bath & Beyond Inc. (NASDAQ:BBBY), Zagg Inc. (NASDAQ:ZAGG), MarineMax Inc. (NYSE:HZO), Winmark Corp. (NASDAQ:WINA), Barnes & Noble Inc. (NYSE:BKS), Genuine Parts Co. (NYSE:GPC), The Container Store Group Inc. (NYSE:TCS), Vitamin Shoppe Inc. (NYSE:VSI) and Conn’s Inc. (NASDAQ:CONN).

According to its website, the Royce Premier Fund slightly outperformed its benchmark in 2018 with a return of -10.4%. The Russell 2000 posted a -11% return.

Disclosure: No positions.

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About the author:

Sydnee Gatewood
I am the editorial director at GuruFocus. I have a BA in journalism and a MA in mass communications from Texas Tech University. I have lived in Texas most of my life, but also have roots in New Mexico and Colorado. Follow me on Twitter! @gurusydneerg

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