Maidenform Brands: Near-Term Prospects Favorable

 |  About: Maidenform Brands, Inc. (MFB)
by: Vahan Janjigian, CFA

Maidenform Brands (NYSE:MFB) designs, sources, markets, and sells intimate apparel for women. The U.S. is its largest geographic market, responsible for 93.2% of first half sales. Products include bras, shapewear, and panties, which accounted for 65%, 29%, and 6% of first half sales, respectively. Brands include Maidenform, Flexees, Lilyette, Luleh, Control It!, Sweet Nothings, Inspirations, Rendezvous, Subtract, Bodymates, and Self Expressions.

Wholesale distribution channels were responsible for 89% of first half sales. They include department stores and national sales chains, mass merchandisers, and other wholesale venues such as specialty and off-price retailers. Macy’s, Belk, Kohl’s, JCPenney, Kmart, and Costco are customers. Retail operations generated the remaining 11% of sales. This includes sales generated through the company’s 75 stores and its website.

The recession and poor consumer spending trends have negatively impacted the company’s operations, yet results have beaten expectations thanks in part to a new program that emphasizes value.

Yet the main driver for the company’s relatively strong performance has been the successful introduction of several new products. For example, despite premium pricing, early results for the Decadence collection, launched in July, have been encouraging.

Similarly, the Custom Lift satin bra was one of the top new styles launched during the first half of 2009 according to market research firm NPD Group.

MFB also introduced new products in shapewear, the fastest growing category in the intimate apparel market. The Flexee Fat Free Dressing line is a functional collection of meant-to-be seen shapewear that provides hidden tummy control. Strong demand for this collection has required the company to increase supply.

Q2 net sales rose 5.6% year-over-year to $114.2 million. Sales to department stores, national chains, and mass merchandisers fell 3.6% and same-store sales at company-owned retail outlets fell 6.4%.

However, replenishment demand from a specialty retailer for products based on the company’s patent-pending Total Solution Technology and strong sales to off-priced retailers resulted in a 119% jump in the company’s other sales channel. The shift in sales mix toward lower margin distribution channels coupled with increased promotional activity resulted in a 268 basis point decline in the gross profit margin to 36.01%.

Thanks to better expense controls, the operating profit margin contracted by only 192 basis points to 11.52%. Net income fell 6.8% to $7.3 million or 31 cents per share, beating expectations by a wide margin.

Weak spending trends remain our primary investment concern. The company’s operations could be negatively impacted if the economic recession continues much longer. We are also worried about competitors cutting prices in order to maintain market share.

Nonetheless, we believe near-term prospects are favorable. First half sales were negatively affected by customer bankruptcies in the department store channel.

We expect Q3 and Q4 comparisons to be more favorable. Similarly, mass market sales, which were negatively impacted in Q2 by nonrecurring issues, are expected to grow by double-digits in the second half due to market share gains.

Management recently raised full-year sales and earnings guidance. Earnings per share could rise as much as 20% year-over-year for the second half, which compares to a 3.4% decline in the first half.