Destination Maternity faces plenty of drama next Wednesday at its annual shareholder meeting — including vocal activist shareholders, two slates of directors up for election, and a stock price that everyone is hoping will crack $3 a share after years of dismal performance.
Kenosis Capital, an investment fund headed by Peter O'Malley, and Nathan Miller of NGM Capital are two investors asking other Destination shareholders to vote in a clean slate of four new directors at the beleaguered maternity and baby clothing retailer. Together, the dissident investors hold roughly 9 percent of Destination Maternity, or about 14.6 million shares.
Last fall, Destination Maternity had done battle with French shareholder and competitor Orchestra, and after a bitter proxy battle, gave it a seat on the board. Roughly six months later, Destination Maternity's stock hasn't budged much from where it was, and investors Miller and O'Malley are putting forth four new directors, including three women: Holly N. Alden, cofounder of Skullcandy with her husband, Rick Alden; Anne-Charlotte Windal, a former Wall Street retail analyst with Bernstein Research, and Marla A. Ryan, a 25-year retail executive most recently with Land's End.
Company management is asking shareholders to vote against the new slate and keep the incumbent board. That includes Pierre-André Mestre, recently appointed director, who is chairman of the largest stockholder, French retailer Orchestra; Peter Longo, Barry Erdos, and Melissa Payner-Gregor, the interim CEO.
The vote will take place next Wednesday at the company's Moorestown headquarters at 9:15 a.m., according to public filings.
Two additional outside consultants also disagree: ISS recommended that shareholders vote in a split board at Destination Maternity (including two management board member candidates and two outside board candidates) while Glass-Lewis recommended voting with management's slate.
Amid the drama, Destination Maternity has the opportunity to pick up business from the now-defunct Babies R Us, and take its place as the dominant retailer to expectant mothers and new parents, said Trip Miller, managing partner at Gullane Capital in Memphis. Miller, no relation to Nathan Miller, said his fund Gullane Capital owns roughly 3 percent of Destination Maternity stock, or just over 467,000 shares.
"We bought the stock starting at $2.38 a share starting last year," said Miller of Gullane.
"We think it can double in five to 10 years, and it's a business than can make between $20 million and $30 million" in EBIDTA, or earnings before interest, depreciation, taxes, and amortization, annually. "With the right team in place, it could be a $10 stock or more, but not with current management in place," he added. His firm will vote with the activists for a completely new board of directors.
"We would not be happy with a split board," said Gullane's Miller.
"We'd like to see a clear direction. The people who got the company into this mess shouldn't be the ones getting us out. Like Wynn Resorts, our largest holding, Destination needs a larger female representation on the board."
Destination Maternity shares have dropped from more than $30 a share in 2013 to just under $3 a share currently.
Dissident shareholders O'Malley and Nathan Miller declined to comment, but on May 3 they issued a news release outlining their plans: "Our nominees will seek to implement our strategic plan. We believe our turnaround plan, which seeks to improve margins by rationalizing inventory and cutting wasteful spending," can increase cash flow by approximately $40 million, net income by approximately $30 million, and incremental earning per share by up to $2.
"We believe that Destination Maternity has tremendous potential — as evidenced by our collective ownership of almost 9 percent of the company's stock. With our nominees on the board of directors, we believe we can end and reverse the company's decline with our turnaround plan and meaningfully improve the value of the company's shares," the statement said.
In its latest news release, the company urged shareholders to vote its slate, citing "product extensions into baby soft and hard goods, capitalizing on the immediate opportunity in the market created by the Toys R Us / Babies R Us bankruptcy."
"There has been a lot of change already. We're in a good place right now," said one Destination Maternity executive who requested anonymity, adding "we're always open to offers that would maximize shareholder value, but we have a strategy that's a winner. No one's interested in a bargain sale."
Among the candidates for new board members, Holly Alden, the cofounder of SkullCandy, currently runs the Alden Charitable Foundation, which supports the Holly House, a transitional home for families fleeing polygamy, and the Encircle house in Provo, Utah, supporting LGBT youth.
Marla Ryan worked as senior vice president of retail at Land's End, and before that spent years in retail, including the Gap, Brooks Brothers, J. Crew, and American Eagle, according to Bloomberg.
Currently, the maternity clothing and retailer's board is made up entirely of men — apart from the interim CEO.
ISS agreed with shareholders Ketosis and NGM partly, saying they had "made a persuasive case that additional change at the board level is warranted."