UNITED STATES
`
`SECURITIES AND EXCHANGE COMMISSION
`Washington, D.C. 20549
`
`(I\Iark One)
`
`FORM 10-K
`
`IXIANNUAL REPORT PURSUANT TO SECTION 13 OR l5(d) OF THE SECURITIES EXCHANGE ACT OF
`1934
`
`For the fiscal year ended September 30, 2006
`01‘
`
`EITRANSITION REPORT PURSUANT TO SECTION 13 OR l5(d) OF THE SECURITIES EXCHANGE ACT
`OF 1934
`
`For the transition period from to
`Commission file number 0-21196
`
`Mothers Work, Inc.
`(Exact name of Registrant as specified in its charter)
`
`Delaware
`(State or other jurisdiction
`of incorporation or organization)
`456 North Fifth Street,
`Philadelphia, PA
`(Address of principal executive offices)
`
`13-3045573
`(IRS Employer
`Identification No.)
`
`19123
`(Zip Code)
`
`(215) 873-2200
`(Registrant’s telephone number, including area code)
`Securities registered pursuant to Section l2(b) of the Act:
`Title of each class
`Name of each exchange on which registered
`The NASDAQ Stock Market LLC
`Common Stock, par value $.01 per share
`Securities registered pursuant to Section 12(g) of the Act:
`Series B Junior Participating Preferred Stock Purchase Rights
`(Title of class)
`Indica
`e by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes El No
`Indica
`e by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes El No
`Indica
`e by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
`during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing
`requirements for the past 90 days. Yes
`No El
`In diea e by elieek mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best
`of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form
`10-K. El
`Indica
`e by check mark whether the Registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition o “accelerated filer and
`’ated filer” in Rule l2b-2 oftlie Exchange Aet.
`large aeeelei
`large aeeelerated filer El Accelerated filer
`Non-accelerated filer El
`Imlica e by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes El No
`The aggregate market Value of the voting and non-voting common equity held by non-affiliates computed using $24.02, the price at which the common
`equity was ast sold as of March 31, 2006 (the last business day of the Registrant’s most recently completed second fiscal quarter), was approximately
`$112,000,000.
`On December 11, 2006, there were 1888.374 shares of the Registrant’s common stock, $.01 par value, outstanding.
`DOCUMENTS ll\ CORPORATED BY REFERENCE
`
`Portio
`ns of the Registrant’s Proxy Statement to be filed with the Commission in connection with the Annual Meeting of Stockholders scheduled to be held
`on January 19, 2007 are incorporated by reference i11to Part III of this Fonn 10-K.
`
`Source: DESTIf\i»3Cl'tON s“’|3'%TERNITY' CORR,
`
`tO~t<, It2;'1<t-/20536 1 Powered by Intelligize
`
`
`
`DMC Exhibit 2038_O01
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`

`
`PART I.
`
`Ourfiscalyear ends on September 30. All references in this report to ourfiscal years refier to the fiscal year ended on September 30 in the
`year mentioned. For example, our ‘fiscal 2006” ended on September 30, 2006. Unless otherwise indicated, operating data referred to in this
`report is as ofSep1‘ember 30, 2006. As used in this report, "retail locations” include our stores and leased departments and exclude locations
`where Kohl’s® sells our products under an exclusive product and license agreement.
`Item 1.Business
`
`Overview
`
`We are the leading designer and retailer of maternity apparel in the United States and are the only nationwide chain of maternity specialty
`stores. We operate l,54l retail locations, including 810 stores in all 50 states, Puerto Rico a11d Canada, a11d 731 leased departments located within
`department stores and baby specialty stores throughout the U.S. We are also the exclusive provider of matemity apparel to Kohl’s®, which
`operates approximately 749 stores throughout the U.S. We operate our 810 stores under four retail nameplatesz Motherhood X/Iatemity®, Mimi
`Maternity®, A Pea in the Pod® a11d Destination Maternity“. In addition to our 810 stores. we operate 731 maternity apparel departments, which
`we refer to as leased departments, withi11 leading retailers such as Sears®, Macy’s® and Babies “R” Us®. We are the exclusive maternity apparel
`provider in each of our leased department relationships. We also sell merchandise on the lnternet, primarily through T)estinationMaternity.com and
`our various chain specific websites. We have achieved 9.2% compounded annual sales growth over the past five years, resulting in sales of $602.7
`million for fiscal 2006.
`
`We have a leading position across all major price points of maternity apparel through our five distinct merchandise brands, enabling us to
`reach a broad range of matemity customers. Through our 810 stores and certain of our leased departments, we offer maternity apparel under our
`three primary merchandise brands, Motherhood Maternity, or Motherhood, at value prices, Mimi Matemity, or Mimi, at contemporary prices and
`A Pea in the Pod, or Pea, at luxury prices. We also have two additional value-priced maternity apparel brands. our Two llearts® Maternity
`collectio11 and our Oh Baby! by Motl1erhoodTM collection whicli we sell exclusively through Sears and Kohl’s, respectively, a11d are the exclusive
`maternity apparel offerings in these chains.
`
`We believe that one ofour key competitive advantages is our ability to fulfill, in a high-service store environment, all of an expectant and
`nursing mothers clothing needs, including casual and career wear, formal attire, lingerie, sportswear and outerwear, in sizes that cover all
`trimesters of the maternity cycle. Our sophisticated vertical1y—integrated business model enables us to offer the broadest assortment of in—stock,
`fashionable maternity apparel. We design and contract for the production of approximately 90% of the merchandise we sell using sewing factories
`located throughout the world, predominantly outside of the U.S.
`ln fiscal 2003, we began to develop and introduce, 011 a limited basis, new multi-brand store concepts that offer merchandise from our
`Motherhood brand, Mimi brand and, sometimes, our Pea brand, in order to provide a broader product assortment at multiple price ranges to our
`customers and to increase average store sales and profitability. We continue to test, develop and expand our new multi-brand store concepts,
`which consist of two—brand Mimi nameplate “combo” stores, three—brand Mimi nameplate “triplex” stores, and Destination Maternity superstores,
`which generally carry all three of our principal merchandise brands as well as a significant array of matemity-related products and customer service
`features. These multi-brand stores are larger and have higher average sales than our average store, provide the opportunity to improve store
`operating profit margins over time by reducing store operating expense percentages through economies of scale, and may increase overall sales in
`the geographical markets they serve.
`
`to
`
`Source: DESTINATION MATERNITY CORP., 10-K, 12/14/2006 I Powered by Intelligize
`
`DMC Exhibit 2038_002
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`

`
`Opening these multi-brand stores will typically involve closing two or more smaller stores and 1na_y frequently result in one—time store closing costs
`resulting primarily from early lease terminations.
`
`We plan to open approximately 15 - '70 new retail stores during fiscal 2007, of which we expect approximately 7 - 12 will be new multi-brand
`stores that carry more than one of our merchandise brands, with the balance primarily under the Motherhood brand. We estimate that we will close
`approxinrately 40 - 55 stores ir1 fiscal 2007, with approximately 15 - 25 of these store closings related to the opening of new rnulti-brand stores.
`We believe our customers, particularly first-time mothers, are entering a new life stage that drives widespread changes in purchasing needs
`and behavior, thus making our maternity customer and her family a highly-valued demographic for a range of consumer products a11d services
`companies. As a result, we have been able to expand and leverage the relationship we have with our customers and generate incremental revenues
`and earnings by offering other value—added baby and parent—related products and services through a variety of marketing partnership programs
`utilizing our extensive opt-in customer database and various in-store marketing initiatives.
`Mothers Work was founded by Dan and Rebecca Matthias in 1982 as a mail—order maternity apparel catalog. We began operating retail stores
`i11 1985 and completed our initial public offering in 1993. To address multiple price points in maternity apparel and improve operating productivity,
`we acquired Motherhood and A Pea in the Pod in 1995 and eSpecialty Brands, LLC, or iMaternity, in October 2001. Since the acquisitions of
`Motherhood and A Pea in the Pod, we have developed and grown these brands along with growing our Mimi brand. Also, since the 1990s we
`have partnered with other retailers to sell our products through maternity apparel departments within their stores. Since the beginning of fiscal
`2005, we have significantly expanded this third-party distribution channel by becoming the exclusive maternity apparel provider to Sears and
`Koh1’s.
`
`Industry Overview
`
`We are unaware of any reliable data on the size of the maternity apparel industry. However, based on our own analysis, we believe that there
`are approximately $1.2 billion of maternity clothes sold each year in the U.S. In addition, we believe that there is an opportunity to grow the
`business by selling maternity clothes to pregnant women who currently purchase loose-fitting or larger-sized non-matemity clothing as a
`substitute for maternity wear. We also believe that the business can grow by reducing the amount of “h an d-me-down” and “borrowing”
`associated with maternity apparel, particularly in the value-priced segment where low-priced, fashionable maternity apparel could provide an
`economical alternative to secondhand maternity wear. Further, we believe that the demand for maternity apparel is relatively stable when compared
`to non-matemity apparel. Expectant mothers continue to need to replace their clothes and the current steady rate of approximately four million U.S.
`births per year has remained stable over the last decade. We believe that maternity apparel is also less fashion sensitive than specialty apparel in
`general, as demand is driven primarily by the need to replace wardrobe basics as opposed to current fashion trends.
`
`Our Competitive Strengths
`
`We are the leader in maternity apparel We are the leading designer and retailer of maternity apparel in the U.S. and are the only nationwide
`chain of matemity specialty stores. We believe that our brands are the most recognized in maternity apparel. We have established a broad
`distribution network, with stores in a wide range of geographic areas a11d retailing venues. I11 addition, we have a leading position across all major
`price points of maternity apparel through our four retail store nameplates and our five merchandise brands. Our exclusive focus 011 maternity
`apparel and our leadership position enable us to gain a comprehensive understanding of the needs of our maternity customers and keep abreast of
`fashion and
`
`Source: DESTINATION MATERNITY CORP., 10-K, 12/14/2006 I Powered by Intelligize
`
`DMC Exhibit 2038_003
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`

`
`product developments. We further enhance our leadership position, increase market penetration and build our brands by distributing our products
`under cxclusivc lcascd dcpartmcnt and liccnscd rclationships.
`
`We offer a comprehensive assortment ofmaternity apparel and accessories. A primary consideration for expectant mothers shopping for
`maternity clothes is product assortment, as pregna11t won1e11 11eed to replace almost their entire wardrobe. We believe that we offer the widest
`selection of merchandise in the maternity apparel industry. We also offer product for multiple seasons, as pregnant women’s clothing needs vary
`depending on their due date. Our ability to offer a broad assortment of product is due, in large part, to our vertically integrated business model,
`which includes our extensive in-house design and contract manufacturing capabilities, as well as our rapid inventory replenishment system.
`
`We are vertically integrated. We design and contract manufacture approximately 90% of the merchandise we sell. We believe that vertical
`integration enables 11s to offer the broadest assortment of maternity apparel, to respond quickly to fashion trends and to maximize in-stock levels.
`We combine our in-house design expertise, domestic and international sourcing capabilities, a rapid inventory replenishment process and
`extensive proprietary systems to enhance operational and financial results.
`
`We utilize a rapid inventory replenishment system We are able to offer a wide selection of merchandise i11 our retail locations due, in large
`part, to our rapid inventory replenishment system. For example, in our stores, our proprietary system enables us to offer more than 3,000 stock
`keeping units, or SKUs, per store without dedicating retail space to “back-stock” storage. We coordinate the rapid replenishment of inventory for
`all of our retail locations through our Philadelphia, Pennsylvania a11d Mississauga, Ontario distribution centers to meet the individualized needs of
`our retail locations, which receive shipments from our distribution centers between two and six times per week. This enables us to maintain a high
`percentage in—stock merchandise position in each of our retail locations.
`We have proprietary systems that support our business. In order to support our vertically integrated business model and inventory
`rcplcnishmcnt system, we have dcvcloped a fully intcgratcd, proprictary cntcrprisc rcsourcc planning (ERP) system. This system includes point-
`of-sale systems, o11r TrendTrackTM merchandise analysis and planning system, our materials requirement planning system and our web-based,
`global sourcing and logistics systems. These systems also support our automated picking and sorting systems and other aspects of our logistics
`infrastructure. We believe that our proprietary systems are a critical competitive strength that enables us to offer a broad product assortment and
`respond quickly to fashion trends as well as helps us to reduce product costs and rapidly replenish inventory in our retail locations.
`
`We are able to obtain prime real estate locations. We believe our ability to lease attractive real estate locations is enhanced due to the
`brand awareness of our concepts, our multiple price point approach, our highly sought afier maternity customer and our dedicated in-house real
`estate management a11d procure111ent team. We are the only maternity apparel retailer to provide mall operators with the ability to choose fro111 three
`differently priced concepts, depending on the mall's target demographics. We are also able to provide multiple stores or a multi-brand store for
`malls that want to offer their maternity customers a range of price alternatives. In addition, in the case of multi—mall operators, We have the flexibility
`to provide scvcral storcs across multiple malls. As a rcsult. we have bccn able to locate storcs in many of what wc bclicvc arc the most desirable
`shopping malls in the country and are able to obtain attractive locations with in these malls.
`We are able to enhance our leadership position by distributing our products under exclusive leased department and licensed
`relationships. We operate 73] leased departments within leading retailers such as Sears, Mac)/’s and Babies “R” Us. We are also the exclusive
`provider of maternity apparel to Kohl’s pursuant to an exclusive licensed relationship. Over the past several years, we have increased the sales we
`generate from our leased department and licensed relationships and believe that we have an opportunity to
`
`Source: DESTINATION MATERNITY CORP., 10-K, 12/14/2006 I Powered by Intelligize
`
`DMC Exhibit 2038_O04
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`

`
`continue to increase the sales we generate from these relationships through expanding our relationships with our current partners as well as
`dcvcloping rclationships with new partners.
`
`We have a highly experienced management team Da11 Matthias, our Chairman and Chief Executive Officer, and Rebecca Matthias, our
`President a11d Cl1ief Operating Officer, founded tl1e Co1I1pany over 20 years ago a11d are leaders i11 mateinity apparel retailing. Additionally, we
`have a management team with significant experience in all aspects of the retail and apparel business.
`
`Merchandise Brands
`
`We believe that our brands are thc most rccognizcd brands in thc matcrnity apparcl business. We scll our mcrchandisc under the following
`five distinct brands:
`
`BRAND
`Motherhood
`Mimi
`Pea
`Two Hearts Maternity
`Oh Baby! by Motherhood
`
`BRAND POSITIONING
`Broad assortment, fashion, quality and everyday low price
`Contemporary, fun, trendy and affordable
`Exclusive, designer and luxury
`Select assortment of quality fashion sold at value price points
`Select assortment ofbasics and fashion sold at value price points
`
`APPAREL
`PRICE RANGE
`$59-$49
`S18-$168
`S60-$395
`$9-$44
`$9—S-18"‘
`
`*Kohl’s, which sells our Oh Baby! by Motherhood brand under an exclusive product and license agreement, sets the apparel price range for this
`merchandise.
`
`]LIOtherh00rl]V1m‘ernity. Our Motherhood Maternity brand serves tl1e value-priced portion of tl1e maternity apparel indushy, which l1as tl1e
`greatest number of customers. The Motherhood brand is positioned with a broad assortment of quality fashion at everyday low prices. We believe
`that the Motherhood customer shops at moderate-priced department stores and discount stores when she is not expecting.
`
`Mimi Matemity. Our Mimi Matemity brand serves the medium—priced portion of tl1e maternity apparel industry. The Mimi brand is
`positioned as trendy, contemporary, fun and affordable. We believe that the Mimi c11ston1er shops at department stores and specialty apparel
`chains when she is not expecting.
`
`A Pea in the Purl. We believe our A Pea i11 tl1e Pod brand is the leadi11g luxury 111ate1nity brand i11 tl1e U.S. The Pea brand is positioned as
`exclusive, designer and luxury. Publicity, including celebrities wearing our clothes, is a11 important part of the marketing and positioning of the
`brand.
`
`Two Hearts Maternity. Our Two Hearts Maternity brand is the exclusive matemity apparel offering i11 549 Sears stores that offer maternity
`apparel. Two Hearts Maternity is a new fashionable collection including career and casual sportswear as well as dresses, lingerie, swimwear a11d
`nursing sleepwear, with most items priced under $40.
`Oh Baby.’ by Mutherhuutl. Our Oh Baby! by Motherhood collection was launched in February 2005 at Kohl’s stores throughout the U.S. and
`on Kohls.com. The Oh Baby! by Motherhood collection is available at all Kohl’s stores under an exclusive product and license agreement. The
`collection features a modern and complete assortment of sportswear, intimate apparel and sleepwear, with most items priced under $40. The
`collection is available at all ofKohl’s stores.
`
`Source: DESTINATION MAT'ERNITY CORR,
`
`‘lO~K, 1.?/'14/2086 | Powered by Intelligize
`
`DMC Exhibit 2038_O05
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`

`
`Store
`Nameplate
`Stores:
`
`Motherhood
`
`Mimi (l)
`
`Pea (2)
`
`Destination Mater11ity (3)
`
`Leased Departments:
`Maey’s
`
`Exclusive Licensed
`Relationship:
`Kohi’s
`
`Mid-priced regional malls Motheihood
`and lifestyle centers
`Mimi
`
`Pea
`Exclusive, high-end
`Mimi Designer
`regional malls and
`affluent residential areas Merchandise
`
`Primarily outdoor and
`power centers and
`central business districts
`
`Motherhood
`Mimi
`Pea
`
`Mid-priced regional malls Motherhood
`Mimi
`
`Single brand Mimi
`3518-8168
`Mimi combo
`S9-$168
`$60-S395
`
`Single brand Mimi
`1,700
`Mimi combo
`2,700
`2,300
`
`S‘)-$395
`
`6,900
`
`S9-$168
`
`$9-S49
`$9—S44
`
`—
`
`—
`
`—
`
`Retail Nameplates
`
`We sell maternity apparel through the following stores, leased departments and licensed relationships:
`
`Description of
`Target Location
`
`Brand(s)
`Carried
`
`Apparel
`Price Range
`
`Average
`Size (Sq. Ft.)
`
`Moderate regional malls,
`strip centers and power
`centers
`
`Motherhood
`
`$9—S49
`
`1,700
`
`Babies “R” Us
`Sears
`
`Big box power centers
`Moderate malls
`
`Motherhood
`Two Hearts
`Matemity
`
`Big box power centers
`
`Oh Baby! by
`Motherhood
`
`$9-$48 (4)
`
`(l)Our two—bra11d Mimi combo stores carry a full line of both Mimi and Motherhood brand merchandise while our triplex stores carry all three
`brands
`
`(2)Nearly all Pea stores carry a full line of both Pea and Mimi brand merchandise.
`
`(3)While most Destination Matemity stores carry Pea brand merchandise. some do not.
`(4)Kohl’s, which sells our Oh Baby! by Motherhood brand under an exclusive product and license agreement, sets the apparel price range for this
`merchandise.
`
`Major regional malls with several department stores and a wide range of price points may be able to accommodate a multi—brand store, or more
`than one maternity store. We have the ability to address multiple priee alternatives at a given mall. with Motherhood as our value-oriented brand,
`Mimi as our mid-priced brand and A Pea in the Pod as our luxury brand. As of September 30, 2006, we had at least two of our store concepts in 41
`major regional malls. In addition, almost all 33 ofour A Pea i11 the Pod stores
`
`Source: DESTINATION MATERNITY CORR,
`
`‘lO~K, 12/'14/2006 | Powered by Intelligize
`
`DMC Exhibit 2038_O06
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`

`
`and 11 of our Motherhood stores carry Mimi-branded merchandise, and 36 of our Mimi stores carry Motherhood—branded merchandise.
`Motherhaad Illuternity Stores. Motherhood Maternity is our largest chain with 659 stores as of September 30, 2006. Motherhood is
`positioned with a broad assortment of quality fashion at everyday low prices. Motherhood stores average approximately 1,700 square feet a11d are
`located primarily in moderate regional enclosed malls, strip and power centers and central business districts. Motherhood stores include 97 outlet
`locations that carry Motherhood—branded merchandise as well as some closeout merchandise. Between 1998 and 2000, we successfully broadened
`Motherhood’s customer base by lowering price points approximately 40% to 45%. This reduced price position significantly expanded the brand’s
`target market, increased revenues per store and increased unit volumes. In fiscal 2006, we opened l3 new Motherhood stores and outlets,
`including one store as a result of a store conversion from Mi1I1i to Motherhood, a11d closed 44 Motherhood stores and outlets, with nine of these
`store closings related to multi-brand store openings. As of September 30, 2006, we operate 34 Motherhood stores ir1 Canada and believe that
`market opportunities may permit us to open additional stores in Canada in the future. We may also have the opportunity to grow the number of our
`Motherhood leased departments in the U.S.
`Alimi Jllaternity Stores. As of September 30, 2006, we had 106 Mimi Maternity stores that serve the medium—priced portion of the maternity
`apparel industry. The brand is positioned as contemporary, fun, trendy and affordable. Mimi stores average approximately 2,000 square feet and
`are located primarily in mid-priced regional malls, lifestyle centers and central business districts.
`Szng1e—Brarza’Zl1imz Stores. As of September 30, 2006, 70 of our Mimi stores predon1ina11tly cany Min1i-branded product, as well as a
`small selection of maternity merchandise developed by contemporary vendors for Mimi, and average approximately 1,700 square feet.
`Mimi was historically price positioned just below A Pea in the Pod. When M0therhood‘s prices were lowered. there was an opportunity
`for Mimi to broaden its customer base by including lower price points. Mimi was, therefore. repositioned during fiscal 2002 and its
`merchandise price points now range from just above Motherhood to the lower end of A Pea in the Pod. This repositioning resulted in an
`expansion of Mimi’s target customer base, and provided 11s the opportunity to increase the number of Mimi stores over time.
`
`M/mi Camlvo Stores. We are continuing to test, develop and expand o11r Mimi combo multi-brand store concepts. Our current Mimi
`combo store concepts operated u11der the Mimi name include two—brand stores (which carry both the Mimi and Motherhood brands) and
`triplex stores (which carry the Mimi, Motherhood and A Pea in the Pod brands). These Mimi combo stores are larger (average of
`approximately 2,700 square feet), have higher average sales volume than our average store and provide the opportunity to improve store
`operating profit margins over time. A ncw Mimi combo store will typically involve closing one Motherhood store and onc single-bra11d
`Mimi store, although we may occasionally close only one store i11 a given geographical market in situations where we believe we can
`expand sales through replacing a single-brand Motherhood or Mimi store with a Mimi combo store. Store closings will often involve
`one—time store closing costs resulting primarily from early lease terminations. As of September 30, 2006, 36 of our stores are Mimi combo
`stores using the Mimi name. consisting of 34 two—brand Mimi stores and two Mimi triplex stores. Based on our internal research, we
`believe that over the next several years we have the potential to expand the Mimi combo store chain to approximately 70 to 80 or more
`total Mimi combo stores in the U.S.
`
`In fiscal 2006, we opened one single-brand Mimi Matemity store and closed l2 Mimi stores, including two multi-brand Mimi stores. One of
`the multi-brand Mimi closings was as a result of a store conversion fi‘om Mimi to Motherhood.
`
`Source: DESTINATION MATERNITY CORP., 10-K, 12/14/2006 I Powered by Intelligize
`
`DMC Exhibit 2038_O07
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`

`
`A Pea in the Pad Stores. As ofSeptember 30, 2006, we had 33 A Pea in the Pod stores. A Pea in the Pod stores average approximately 2,300
`square feet and are located in upscale venues, including Madison Avenue, Oak Street, Beverly Hills, South Coast Plaza and Bal Harbour. In
`addition to offering a wide selection of both A Pea in the Pod and Mimi branded products in almost all A Pea in the Pod stores, we seek out
`designer a11d contemporary brands and assist them in developing maternity versions of select styles exclusively for our A Pea in the Pod stores.
`As scarcity is part of the concepts luxury image, we have chosen to further develop the brand primarily by optimizing our customers’ in-storc
`experience rather than by opening new stores. We therefore continuously upgrade the quality of the locations, our store designs, the product
`styling and our publicity to enhance our brand image.
`
`Destination 1|/Iaternity Superstores. In March 2004, we opened o11r first Destination Matelnity superstore in Danlnny, Connecticut.
`Destination Maternity superstores typically carry all three of our primary merchandise brands (Motherhood, Mimi and Pea), plus a greatly
`expanded line of nursing accessories, fertility-related products and maternity-related exercise gear, books, and body and nutritional products.
`These stores also typically feature a dedicated “leaming center” area for matemity-related classes, a “relax area” for husbands and shoppers alike,
`a11d an inside play area for tl1e pregnantmo1n’s toddlers a11d young children, with several of our superstores also having our Edama111e The
`Maternity Spa®. These elements combine to give our Destination Maternity superstore not only the largest assortment of maternity apparel and
`accessories available. but also a unique a11d engaging atmosphere and experience for the maternity customer. A new Destination Maternity
`superstore involves closing at least two, and typically more, single brand stores, is expected to decrease store operating expense percentages
`through economies of scale, and may increase overall sales i11 tl1e geographical areas they serve. Destination Matemity superstores range from
`nearly 4,000 square feet to approximately 11,000 square feet, with an average of approximately 6,900 square feet for the 12 stores open as of
`September 30, 2006. We opened four of these Destination Maternity superstores during fiscal 2006. In February 2006, we celebrated the grand
`opening of our Destination Maternity store on the corner of 57th Street and Madison Avenue in Manhattan. This is the largest maternity store in
`the world, spanning three floors and including our Edamame The Maternity Spa, all three of our primary apparel brands, maternity yoga classes,
`juice bar, relax area and children’s play area. As the only national retailer that is solely focused on maternity, we are fiirther differentiating
`ourselves as the ultimate maternity destination with these large, well-assorted, “must visit” superstores. Based o11 our i11ter11al research, we believe
`that over the next several years we have the potential to expand tl1e Destination Maternity chain to approximately 40 to 50 or more total
`Destination Maternity superstores in the LIS.
`Leased Departments. In addition to the stores we operate, we have arrangements with department stores and baby specialty stores, including
`Scars, Macy’s, Babies
`Us and Bloomingdalc’s®, to operate maternity apparel departments in their stores. We recently entered into
`arrangements for exclusive leased department relationships with Boscov’s® and Gordmans®, two regional department store chains. We are tl1e
`exclusive maternity apparel provider in each ofour leased department locations. VVe staff these leased departments at varying levels and maintain
`control of the pricing terms and the timing and degree of the mark downs of our merchandise that is sold in the leased departments. We operate
`our leased departments during the same hours and days as the host store and are responsible for replenishment of the merchandise in the leased
`departments. These leased departments typically involve the lease partner collecting all of the revenue from the leased department. The revenue is
`remitted to us, less a fixed percentage of the volume earned by the lease partner as stipulated in the agreement.
`
`Exclusive Licensed Relationship. Our Oh Baby! by Motherhood collection is available at all Kohl’s stores under an exclusive product and
`license agreement. The collection was launched in February 2005 at Kohl’s stores throughout the U.S. and on Kohls.com. Kohl’s operates
`approximately 749 stores throughout the U.S.
`
`Source: DESTINATION MATERNITY CORP., 10-K, 12/14/2006 I Powered by Intelligize
`
`DMC Exhibit 2038_O08
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`

`
`International We believe that in the future, an opportunity for sales growth may come from the development of international sales outside of
`North America. Currently, our only product sales outside of the U.S. are generated in Canada, where we operate 34 Motherhood stores. We
`anticipate that our long-term strategy may include both licensing arrangements with foreign partners as well as potentially developing our own
`operations in certain countries. However, we presently have no commitment, agreement or plans relating to any product distribution or
`development ofselling operations outside of North America.
`
`Internet Operations
`
`We sell our merchandise on the Internet at our Destinationktaternity.com, MaternityMall.com and iMatemity.com websites, as well as our
`chain—specif1c websites such as Motherhood.com. We believe that many pregnant women use the Internet to find maternity—related information
`and to purchase maternity clothes. Our websites are therefore important tools for educating existing and potential customers about our brands and
`driving traffic to our stores. In addition to providing links to all of our web sites, our DestinationMaternity.com and MaternityMall.com web sites
`contain maternity advice and i11fo1matio11, related baby product i11fo1mation and editorial co11te11t. Our marketing a11d technology capabilities and
`the replenishment capabilities of our distribution center and stores enable us to incorporate Internet design, operations and fulfillment into our
`existing operations. Over the past several yea