Dive Brief:

• Destination Maternity's upcoming proxy meeting on May 23 promises a fight between the existing board and activist shareholders who are staging a rebellion over the direction and control of the struggling retailer.
• Last week, two investors — Nathan Miller of NGM Asset Management and Peter O'Malley of Kenosis Capital Partners — released an open letter to Destination Maternity shareholders lambasting the company's board and management, faulting them for a 21% revenue decline and a $20 million income swing that has led the the retailer into the red in recent years. The letter urged stockholders to vote for alternative board members selected by the investors.
• In its own letter to shareholders, Destination Maternity's board advocated for their own choice of directors and said changes already made at the retailer were starting to pay off. Specifically, the board pointed to the retailer's omnichannel investments, which they said "generated significant positive momentum," with e-commerce sales rising 54% in the third quarter of 2017 and 60% in the fourth quarter, for an overall increase of 41% during the fiscal year. In an effort to cut costs, the retailer is also on pace to close 30% of its nearly 500 locations this year and close 50% by the end of 2019, according to the board's letter.

Dive Insight:

Destination Maternity, which bills itself as the largest designer and retailer of maternity apparel, has had a troubled run in recent years. The CEO left last year, during a quarter when top-line sales fell by more than 7% and shortly after bringing on Berkeley Research Group to help in turnaround efforts and bring finances under control. Since then, the company is already on its second interim CEO.

In their letter, Miller and O'Malley put that "turnaround" in quotation marks, pointing out that it had been in progress for more than three years. "Despite the company's rhetoric about its supposed plan and its focus on ‘maintain[ing] a stringent profit focused philosophy,' the company's financial and operating performance has collapsed," they wrote. "In fact, the company hasn't had a profitable year since 2014."

The retailer disputed any notion that it has not worked to adapt to change. "While the company has succeeded in establishing and maintaining its leadership position within this specialty retail sector, the past few years have undoubtedly been difficult due to a number of factors and industry headwinds, including the overall weakness in the women's specialty apparel retail space as well as declining mall-based traffic," the board wrote.

Along with upgrades in omnichannel capabilities, they pointed to investments in sourcing, planning and buying, as well as a new $25 million loan to provide operating cash and an expanded product offering that includes baby apparel and hard goods.

Without providing details, Miller and O'Malley said in their letter that their board nominees would roll out their own turnaround plan that would boost profits by "rationalizing inventory and cutting wasteful spending." (The retailer's board noted in their letter that Miller earlier tried to buy the company outright.)

Unlike many recent uproars from retail activists — such as those at Macy's and Hudson's Bay, where investors agitated for the sell-off of valuable assets — Destination Maternity's activists are calling for a change in operating strategy. The spat could ultimately determine the direction of Destination Maternity, which has suffered not only from the decrease of traffic at its own stores, but also from the closure of partnering department stores and the wind-down of a relationship with Kohl's.