Is Tefron Coming Apart at the Seems?

Aug. 9.07 | About: Tefron Ltd. (TFR)

Tefron (TFR) is a neat, little textile company that manufactures boutique-quality everyday seamless intimate apparel, active wear and swimwear sold throughout the world by such name-brand marketers like Victoria’s Secret, Nike (NYSE:NKE), Target (NYSE:TGT), The Gap (NYSE:GPS), and others.

The company makes some high-end seamless sports apparel that’s being adopted at the level of the MLB, NFL, NBA, NCAA, ATP, World Cup Soccer, as well as by local and international Rugby, Running, Rowing, Softball, and Tennis clubs.

Yet, not all is bliss at Tefron.

It reported today after issuing a profit warning about a month ago, and things don’t look great.

As we’ve written previously, Tefron has been having a rough time of it. In Tefron: Sexy Lingerie, Ugly Financials, we’ve explained that a part of Tefron’s woes stem from a Victoria’s Secret product line that we learned is ultimately being outsourced to India. Although the company says that this move won’t have a material impact on 2008, what’s going on here is a general product transition in the company.

The company is maturing its technology and sales towards servicing the high-end sports market. Companies like Under Armour (NYSE:UA), Columbia Sportswear (NASDAQ:COLM). Adidas (OTCQX:ADDYY) and Nike (NKE) are all positioning to service professional league-level equipment, and the much larger market behind it: sports fans. My son wears a Michael Vick (God help us) Nike Jersey to bed every night, and is infrequently seen without his David Beckham jersey, now of the Los Angeles Galaxy.

Yosef Shiran, the CEO of Tefron, has to say this about what’s going on:

However, given our expectations for improved active-wear sales in the fourth quarter mainly due to positive indications received from Nike for increased ‘next generation’ product orders, and a seasonally stronger quarter for swimwear sales, we expect a strong improvement in sales and margins in the fourth quarter compared to the second quarter of 2007.

Tefron is migrating its business from lower margins, declining sales to an upper-end product aimed at athletes. Nike has made a mint out of this market over the past 20 years, and Under Armour has seemingly come out of nowhere to become a $3 billion player.

I still own (and wear!), my Patagonia pullover I wore to beer parties at Dartmouth in my college days. Tefron needs to execute now on its product transition towards high-end sports apparel in order to lock in the athletic market to be able to sell to my kids when they enter school.

With the growing international worship of professional athletes, that’s the market I’d want to blow out.

Disclosure: The author’s fund is long TFR as of August 9, 2007, and doesn’t hold any of the other stocks mentioned in this article.

TFR 1-yr chart:

TFR 1-yr chart