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Executives

John A. Nelson - Vice President, Chief Accounting Officer

Maurice S. Reznik - Chief Executive Officer, Director

Christopher W. Vieth - Chief Financial Officer, Chief Operating Officer, Executive Vice President

Analysts

Omar Saad - Credit Suisse

Scott Krasik - CL King

Mimi Bartel - Telsey Advisory Group

Eric Beder - Brean Murray, Carret & Co.

Gary Giblen - Goldsmith & Harris

Presentation

Maidenform Brands, Inc. (MFB) Q2 2009 Earnings Call August 12, 2009 8:30 AM ET

Operator

Ladies and gentlemen, good morning and welcome to the Maidenform Brands Second Quarter 2009 Earnings Conference Call and Webcast. This conference call is being recorded. Following the conclusion of today's discussion, the Maidenform team will be taking your questions. I'd now like to turn the call over to John Nelson, Vice President and Chief Accounting Officer. Mr. Nelson, please go ahead.

John A. Nelson

Good morning, ladies and gentlemen. Welcome and thank you for joining us today on this conference call to review the second quarter 2009 financial results for Maidenform Brands. Joining me on the call is Maurice Reznik, Chief Executive Officer of Maidenform Brands, and Chris Vieth, Executive Vice President, Chief Operating Officer, and Chief Financial Officer.

Maurice will provide an update on overall business conditions and business drivers, as well as highlight some of our strategic focus areas going forward. Chris will then review our financial performance in the quarter, as well as our expectations for the remainder of the year, prior to taking your questions.

As always, elements of this presentation may include forward-looking statements. These statements are based on best view of the business as we see it today, but their nature are uncertain. We assume no obligation to update the forward-looking statements contained in this presentation as are results of new information or future events or developments.

The company's actual results and financial condition may differ possibly materially from what is indicated in those forward-looking statements. For a discussion of some of the risks and factors that could affect the company's future results, please see the description of risk factors in our annual and quarterly reports filed with the SEC. I also refer you to forward looking statements, disclaimers, and safe harbor statements set out in this press release that was issued earlier this morning and is available on our website and in our filings with the SEC.

Now let me introduce Maurice Reznik. Maurice, please go ahead.

Maurice S. Reznik

Thank you, John, and good morning, everyone. This morning we will cover our second quarter financial performance and provide you with a business update and some financial commentary on our expectations for the remainder of the year. Let me start off by noting that we are pleased with the second quarter and year-to-date operating performance, including our ability to grow our sales in such a challenging retail environment.

In the first half of 2009, we have been aggressively building on our success in our core styles, identifying and securing new business opportunities, and expanding our distribution across channels. We have also been collaborating with retailers to improve margins and inventory productivity resulting in positive results for both our retail partners and for us.

While we are pleased with our '09 performance, we're not resting, and remain sharply focused on building sustained long-term growth. To this end, the company is making significant investments to strengthen the organization and improve its product offerings, while increasing its marketing and branding efforts as well.

We believe these actions, combined with our product leadership and innovation, will continue to fuel our future growth. During the first half of 2009, the intimates market as a whole consisting of bras, panties, and shapewear, declined in the mid-single digits while the broader women's apparel market declined in the upper single digits.

Sales of our branded products, by contrast, significantly outperformed the intimate apparel market with overall share gains across channels and categories according to our calculations.

In addition, we're encouraged to see that the average out-the-door price of our products also increased in the first half of 2009, with Maidenform bras increasing 4% and Flexees shapewear increasing 8% as compared to the first half of 2008, evidence that consumers are willing to pay for the innovative solutions that we provide.

Through the first half of this year our sales were up 11%, including a 6% increase in the second quarter. As we announced this morning, we have raised our sales and EPS guidance, including a projected sales increase in the upper single digits to low double digits percentage range for the full year.

As a company, we're controlling our margins, inventory and spending, and we are focused on executing against four key strategic goals which are: driving innovation across all products and channels, further diversification across channels and markets, continued growth in shapewear, and investing in our future.

We have always prided ourselves on our innovation and are continuing to build our leadership position by developing and bringing to market compelling products.

By way of example, in July we introduced our newest compressive collection in Maidenform called Decadence. The majority of Decadence bras we ship in the third quarter of '09 with Decadence shapewear and panties shipping in early 2010. This department and chain-store collection offers women decadence that they can afford at every touchpoint with unprecedented comfort due to the technology incorporated into the construction of each of the products.

Early sales indications are very encouraging, witnessed by high sell-throughs, and consumers willingness to pay 15%-25% more for these products in this offering than our brand average.

With the introduction in the first half of 2010 of the Dream Collection, we continued to refine what women seek most from us, expert functionality with optimal all-around comfort. The Dream Collection includes bras, shapewear, and panties, and key products that feature our innovative Dream wire technology. The market for the Dream Bra is sizable, as underwear bras comprise over 75% of bra sales in department store and national chains in the first half of 2009.

We expect that the Dream Collection, which will be supported with extensive launch activity, will expand our footprint with existing customers, and attract new consumers to our brands. Custom Lift, which provides personalized fit by bra-cup size has become an industry bestseller in department and chain stores under our Maidenform brand and in the mass channel under the Sweet Nothings and Self Expression brands.

In fact, according go the MPD group, our Custom Lift satin bra was one of the top new styles introduced in the first half of '09 in department and national chains.

In shapewear, our Flexees Fat Free Dressing Program continues to be a significant driver of growth in our shapewear business. This functional and innovative and highly successful collection is made up of meant-to-be seen shapewear products that provide women all around shaping and hidden tummy control in everyday silhouettes like camisoles and t-shirts.

We are working to increase our supply of these styles in order to meet increased demand and to expand the category by introducing new silhouettes and creating Fat Free Dressing shops with our retail partners. We are very pleased that this collection is not only driving sales for our customers, but also appears to be bringing in first-time users to the shapewear category.

As stated on earlier calls, only two out of every 10 women wear shapewear on a regular basis, so this is an area where there is a lot of potential to increase our consumer base.

Turning next to channel and market diversification, Maidenform is committed to offering our consumers high-valued products and a fair price, everywhere they shop. To this end, we are constantly evaluating opportunities across all channels of distribution.

In the mass channel, we have significantly grown our market share by increasing the footprint of our core styles adding new bras and shapewear in our Sweet Nothings brand, adding new Self Expressions personalized lift-bra collection called I-Fit, and growing bras and shapewear sales in our Inspirations brand, which we launched in Q2 last year with a mass merchant in 1,400 doors.

We launched a Donna Karan, a DKNY license collection, in the first quarter of '09, with selected domestic and international retailers. Despite the economic challenges facing the better-best segment of the market, we continue to believe that the addition for these brands will allow us to penetrate new domestic, and particularly, international channels of distribution, expand our department store base, and provide us with an important and incremental leg of our long-term sales growth.

Turning to the retail segment, our net sales were flat compared to the same quarter last year, with same-store sales down 6.4% versus an increase of 2% last year. Comp sales are strengthening compared to Q1, driven primarily by increased sales in our Maidenform bra and shapewear brands, Flexees, and Control It! We have also been able to selectively reduce our promotional cadence, resulting in higher sales per transaction during Q2 this year versus last year.

Internet sales were flat in the quarter due to a nonrecurring specialty program. As indicated on prior calls, we're in the process of replatforming our website in order to optimize sales and strengthen our brand, and are scheduled to launch a new website in January.

In summary, while the marketplace remains challenging, we continue to be excited about the opportunities we are creating in the marketplace. As we invest in our future, expand our channels of distribution, and grow our business and product offerings, we remain committed to managing our cost and maintaining a strong balance sheet. Building off of our successes and unique product strengths, we would expect to grow our branded top line by mid-single digits and our total sales in the low-to-mid single digits in 2010, barring any unforeseen shocks to the economy.

We will provide you with more visibility on 2010 during our next call. Thank you for your time this morning and your continued interest in Maidenform. I will now turn the call over to Chris Vieth, our COO and CFO, who will review our financial results and forward outlook.

Christopher W. Vieth

Thank you, Maurice. Good morning everyone, and thanks for joining us. Our strategies are working and products are performing well, despite the choppy marketplace. Sales were up roughly 6% in the second quarter and 11% year-to-date and we're taking share in each of our major segments while we continue to create new opportunities.

Based on current market conditions, we're expecting second half sales to increase along the lines of the first half, and I'll provide additional details on our outlook in a moment. Turning to our results in the second quarter, reported EPS were $0.31 per share versus last year's $0.33 and above our guidance on higher sales with gross margin and SG&A consistent with our guidance.

Our second quarter net-sales increase over last year was led by 9% growth in shapewear, sales increases at select mass customers, the launch of our Donna Karan businesses, sales to a specialty customer, and new programs we developed and launched in the quarter for off-price retailers. These specialty and off-price sales are included in the other wholesale category in our press release.

Sales in the department stores and chains channel declined 2% on lost sales to bankrupt regional retailers like Mervyns, and would have been up about 3% on a comparable basis. International sales were down $2 million in the quarter from declines in Russia and unfavorable currency rates.

Sales in the mass channel have declined 7% in the quarter due to the timing of a significant non-recurring new style offering last year at a warehouse customer, and an elimination of a private label program. We expect sales in this channel to increase in the double digits in the third and fourth quarters and year as we continue to pickup market share.

Our consolidated gross margins were 36% in the second quarter 2009 versus 38.7% last year. The primary drivers of the change were our deliberate investments with retailers to address inventories, and the impact of product mix from increased sales in the lower margin other channel.

Turning to SG&A, our expenses totalled $28 million in the second quarter and were 3% above last year. This was consistent with the low-end of our prior guidance on increased costs, mainly associated with the launch of our DK businesses.

Operating income in the second quarter of 2009 was $13.1 million or 11.5% of sales versus $14.5 million or 13.4% of sales in the second quarter of 2008. The company's effective income-tax rate for the second quarter of 2009 was 41.9% versus 41.7% last year, and is expected to be about 41% for the year.

We'll utilize approximately $5 million of net operating loss carryforwards on our 2009 tax return, and as a result of these NOLs, our cash-tax payable rate will be around 37%.

Our cash balance increased roughly $20 million from the end of last quarter to $46 million and our net debt at the end of the second quarter 2009 was $41 million versus $74 million this time last year. This debt matures in 2014.

We also continue to focus on managing the level and productivity of our overall inventory, and our inventory position at the end of the quarter was about flat with last year at $66 million, and included stocking up to service a number of new brands and products like Luleh, Inspirations, and Donna Karan.

Our capital expenditures totalled about $1.4 million in the quarter versus roughly $800,000 in 2008.

Looking out to the third quarter and balance of the year we expect the overall economy in the retail marketplace to continue to be mixed for our customers and retail partners. Despite the 2008 regional customer bankruptcies and a choppy retail environment, we remain focused on offsetting these topline pressures with net sales increases from our core shapewear products, continued expansion in the mass channel, sales of our Donna Karan and DKNY lines, and new business with a specialty retailer and with off-price retailers.

Based on these assumptions, we anticipate net sales for the third quarter to be up 12%-16% over 2008, with upper-single digit declines at department stores and chains, double-digit increases in mass, roughly $15 million of incremental business in the other channel, and around flat sales in our retail segment.

Gross margin rates are anticipated to be in the low-to-mid 30% range and below rates in the second quarter as a result of our channel mix with declines in department stores and chains and meaningful increases in the mass and other channels.

SG&A is expected to increase in the mid-to-upper single digits over 2008 primarily due to the launch of our DK brands and timing of additional investments and product development, and replenishment of incentive plans as compared to last year. Fourth quarter SG&A expense growth is expected to return to the low-single digits.

EPS is expected to be in a range of $0.34-$0.38 for the third quarter. For the full year, sales are expected to increase in the upper single to low-double digits percentage range over 2008. This full year guidance includes expected fourth-quarter channel performance of mid-to-upper single digit increases in the department store and chains channel, double-digit increases in the mass channel, and double-digit declines in the other channel as we anniversary new programs launched in 2008.

Gross margin rates are anticipated to be in the lower mid-30% range for the year, reflecting increased promotional activities in 2009 and shifts in the company's channel mix resulting from reduced department store and chain and retail store sales and increased sales in the mass-merchant channel and to off-pricing specialty retailers.

Expense reductions in 2009 are expected to partially offset increased costs for full year spending for our DK businesses, and targeted investments and product development for replenishment of incentive plan provisions. As a result, SG&A expenses are planned to only increase in the low-single digits over 2008.

Capital expenditures in 2009 will total $4-$5 million and include spending to replatform and modernize our e-commerce website, and infrastructure investments in technology and in our distribution centers, to improve processes and efficiency, and we plan to outfit two new retail outlet stores.

Finally, EPS for the full year of 2009 is expected to be in the range of $1.10 to $1.16 and above our previous guidance of EPS and a range of $1-$1.10.

And with that I’ll now turn the call back over to Josh to open up the phone lines for your questions.

Question-and-Answer Session

Operator

(Operator's Instructions) Our first question comes from the line of Omar Saad from Credit Suisse. Omar, you may proceed.

Omar Saad - Credit Suisse

Thanks. Good morning, guys. Congratulations on some very nice performance here, job well done. So I had to do a double take, Maurice. Did you — I think I heard you right, did you give 2010 topline guidance? I just want to make sure I heard —

Maurice S. Reznik

We did.

Omar Saad - Credit Suisse

That is actually what you did, and if that is true, I think you got to be the first consumer company out there to talk about 2010 at this point. What gives you the comfort and what gives you the position to be able to kind of grow that decision to be able to put that out there.

Maurice S. Reznik

Well, as we look at particularly our branded business, and we have also some commitments on a go-forward basis into the first part of 2010, and so we see a cadence and a stability to our branded business, and that's really what's driving it.

Omar Saad - Credit Suisse

Okay. It's not like you're looking for an acceleration or anything like that. In fact, based on some of your second-half guidance, it sounds like you're being more conservative about 2010.

Maurice S. Reznik

Our view is that we will continue to gain market share on a go-forward basis.

Christopher W. Vieth

And it's appropriate given where we are, Omar, to be somewhat conservative, and we'll continue to fill out the assumptions as we travel through the next couple of quarters, but we wanted to give you a little insight as to what we're starting to see.

Omar Saad - Credit Suisse

Sure, sure, thank you. One quick question on gross margin, Chris, you mentioned the mix shift impacting the third quarter — I was a little bit surprised the mix shift didn't help you more this quarter. Can you help me understand the dynamics there?

Christopher W. Vieth

Well, we actually came in roughly at the top end of our guidance for the second quarter so we're pretty pleased with the way things came out, but in large round numbers in the second quarter, roughly half of the decline is related to mix and the other half is related to the promotional activity — the deliberate actions that we took and guided to taking in the second quarter.

That mitigates in the third quarter and fourth quarter as we move forward — the promotional activity does. So in the third quarter, three-quarters of the decline versus last year is really related to mix.

Omar Saad - Credit Suisse

Got it. Thank you.

Operator

And our next question comes from the line of Scott Krasik with CL King. Scott, you may proceed.

Scott Krasik - CL King

Thanks, good morning, guys. I just missed right off the bat, you spoke about what the category has been doing versus what your brands have done, could you just repeat that Maurice?

Maurice S. Reznik

Well, what I said was that the category performance has been down in the low-single digits versus female apparel in the high-single digits, and within that environment, we have gained a significant share. We didn't specify exactly what we did, but it's been — we've outperformed the market significantly.

Scott Krasik - CL King

Okay, excellent then. You had, I think it was a $6 million shift of sales last year from Q2 into Q3 from a department-store customer, does that impact Q2-Q3 at all, either on the top line or gross margin, Chris?

Christopher W. Vieth

Yeah. You've got a great memory, Scott. Last year we had $6 million that shifted out of the second quarter into the third quarter. We also were up against a little over $2 million in loss sales from bankrupt retailers like Mervyns. So on a comp basis for the third quarter where we've guided for a decline in the mid-to-upper single digits we'd actually be up in the mid-to-upper single digits.

Scott Krasik - CL King

So basically it's a very solid third quarter as you see it?

Christopher W. Vieth

Yeah.

Scott Krasik - CL King

Okay. Maurice, your mention that you feel good about the math because you are taking share, I would assume that the competitors that you are taking share from probably are going to try and get that back in 2010. Do you feel comfortable that you guys can maintain the business that you've taken from some of your larger competitors?

Maurice S. Reznik

Well, let me just tell you that I and the company are extremely paranoid about our competitors. We have a lot of respect for them so we know we have a giant bulls-eye on our back. However, we do have momentum that we're building on and we have some visibility with our major customers and what their plans are, so we're feeling as good as we can. But again, can't discount the competition.

Scott Krasik - CL King

Sure, and then just lastly, do you have any read yet on Donna Karan, DKNY, in the first half of '10 and clearly it is underperforming the original expectations this year in a tough environment, can you really begin to accelerate that next year?

Maurice S. Reznik

Yeah. We really view Donna Karan and DKNY on a go-forward basis as a very important piece of our growth, particularly international. The DKNY, which is really the bridge business and the majority of the volume — we're seeing some very good selling in some of the new styles that we've introduced, and we see that business on a go-forward basis really strengthening.

Scott Krasik - CL King

So good sell through here begets better selling for spring, is that the thought?

Maurice S. Reznik

Yes.

Scott Krasik - CL King

Okay, great. I'll jump back in queue. Thanks, and congratulations.

Operator

And our next question comes from the line of Mimi Bartel from Telsey Advisors. Mimi, you may proceed.

Mimi Bartel - Telsey Advisory Group

Hi. Good morning, thanks, and really nice quarter, guys. Question on the Decadence line, what are the margin characteristics around that business relative to the rest of the assortment?

Maurice S. Reznik

Internal or external margins — you mean to the retail or to us?

Mimi Bartel - Telsey Advisory Group

To you.

Maurice S. Reznik

In general, new styles first year out have comparable or lower margins than the rest of our line and then as we reengineer it they have higher margins, but I would say Decadence is comparable to the rest of our line.

Mimi Bartel - Telsey Advisory Group

Okay, great. And then just thinking about the shapewear business, just wondering if we could get an update on that, the initiative — placing some of the shapewear in the women's ready to wear and anything just on the consumer education on that front?

Maurice S. Reznik

Yes. So as far as secondary placement, wherever we've been able to do it, but it's just a few hundred department and chain stores right now, the performance has been excellent. As a matter of fact, the turnover has actually been faster in the shapewear department with no cannibalization.

Shapewear in general — and I touched upon what's going on within one of our businesses within shapewear which is Fat Free, which his really bringing in first-time users to the category that basically — because to get the kind of sell-throughs that we're getting and some of the exit into these that we've done with consumers, they don't even realize it's shapewear until they wear it. So a lot of the communication is happening at point of sale, which is where consumers often make their decision, and when you look at shapewear, by the way just in general, and the overall trend of shapewear, it's also the best performing segment within intimate apparel today.

Mimi Bartel - Telsey Advisory Group

Great. Thanks, guys.

Operator

And our next question comes from the line of Eric Beder from Brean Murray. Eric, you may proceed.

Eric Beder - Brean Murray

Good morning. Nice quarter, guys. Could you remind us how much in the second half you have with the bankrupt retailers so we can kind of get an apples to apples for the department store business?

Christopher W. Vieth

Yeah. It was $2-$3 million.

Eric Beder - Brean Murray

A quarter or for the entire second half?

Christopher W. Vieth

The entire second half. Most of that's in the third quarter.

Eric Beder - Brean Murray

Okay. So that should kind of normalize after this quarter then?

Christopher W. Vieth

That is right.

Eric Beder - Brean Murray

And then I guess the question is, I think in Q1 you talked about how department stores were taking down their safety stocks and getting more aggressive in cutting back on the inventories, what are you seeing in Q2 and Q3 in terms of department stores and what they are doing in terms of their inventory practices?

Maurice S. Reznik

Well, inventory levels are the same pressure as far as the focus on inventory turns and gross margins. Inventory levels are level, based on what happened in the fourth quarter and first quarter that — retailers just replacing their sales. I mean there are some exceptions where, for example, in the shapewear category where the business has really been relatively explosive where they're funding based on getting even more additional sales — positive sales plans.

Eric Beder - Brean Murray

Thank you.

Operator

And our next question comes from the line of Gary Giblen from Goldsmith & Harris. Gary, you may proceed.

Gary Giblen - Goldsmith & Harris

Good morning, Maurice and Chris. Good results. It looks like the SG&A reductions that are across the board started in the first quarter, at least judging from the language in the press releases, so the question is are they continuing in the sense of more SG&A reductions or did you make those reductions in the first half and those will stick?

Christopher W. Vieth

Yeah. We actually started really about early second half of last year and had them in place by the end of the year. We benefited from it obviously in the first quarter and second quarter. We're up here in the third quarter, which is really just an anomaly with some timing and some of the things that we've got going on in our business and the cadence of our spending, but if you triangulate our guidance you'll see that we're back to fourth quarter SG&A increases in the kind of low-single digits.

But importantly, what we've been able to do, or perhaps more importantly what we've been able to do, is use those cost savings to invest back into the business to drive the things that we're trying to drive. We're investing in product development people, particularly in the shapewear area and in average-figure bras. We're investing internationally to grow that business. We've got significant incremental spending for Donna Karan that we've been able to nearly offset, plus replenishment for incentive plans and other things. So net, net, net, we feel like we're controlling our own destiny and investing some of those dollars back into the business to help drive the top line.

Gary Giblen - Goldsmith & Harris

Okay. I see. Did the reinvesting occur in the first half of '09 or is that something that you're talking about more going forward?

Christopher W. Vieth

First half of '09.

Gary Giblen - Goldsmith & Harris

Okay. So that's impressive, you had SG&A reductions even after reinvesting. Okay, that's great.

Christopher W. Vieth

Thank you.

Gary Giblen - Goldsmith & Harris

And on the retail stores, good to see somewhat improved performance there. Is there any thought to taking advantage of the weak real estate market to pick up some additional sites for retail?

Maurice S. Reznik

I'll give you sort of a two or threefold answer. One is it is an opportunity for us to renegotiate some of our leases, and as always, we're always pruning our retail stores, opening a couple, closing a couple, and we are looking at also — which hopefully we can update you on the next call.

We're looking at some interesting retail plays, but nothing material yet, but just stay tuned.

Gary Giblen - Goldsmith & Harris

Okay. I will stay tuned. Thank you.

Maurice S. Reznik

You're welcome.

Christopher W. Vieth

Okay. Thanks, Gary.

Operator

And we appear to have no further questions. I will now turn the call back over to Mr. Reznik. You may proceed.

Maurice S. Reznik

Thanks a lot for listening and have a great day.

John A. Nelson

Thanks, everybody. Thanks, Jeff.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.

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