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Maidenform Brands, Inc. (NYSE:MFB)

Q1 2008 Earnings Call

May 7, 2008 8:30 am ET

Executives

Felise Glantz Kissell – VP Investor Relations

Tom Ward - CEO

Maurice Reznik - President

Analysts

Jody Kane – Sidotti & Company

Omar Saad - Credit Suisse - North America

[Ben Mackovic – Ravinia Capital Management]

Operator

Good morning and welcome to the Maidenform Brands first quarter 2008 earnings conference call and webcast. (Operator Instructions) I would now like to turn the call over to Ms. Felise Glantz Kissell, Vice President of Investor Relations; Ms. Kissell please go ahead.

Felise Glantz Kissell

Good morning everyone. Before we begin our earnings conference call and webcast I do want to bring to everyone’s attention the announcement that we had last night that Maidenform has entered into a global licensing agreement with Donna Karan international to design, source and market women’s intimate apparel, or innerwear, under the Donna Karan and DKNY brands. This is an important and exciting strategic announcement for us.

For this morning’s conference call we have Maidenform’s CEO, Tom Ward and our President, Maurice Reznik. Tom will first discuss the overall business in addition to reviewing our first quarter financial performance. Maurice will then provide our top line results, specifics on the Donna Karan licensing opportunities and then conclude by reviewing our financial performance expectations for the remainder of the year before taking your questions.

I would like to first review our Safe Harbor Statement. Statements made on this conference call and in the company’s press release other than those concerning historical information should be considered forward-looking statements and actual results may differ materially. For a detailed discussion of factors that could cause actual results to vary from those contained in the forward-looking statements, please refer to the Risk Factor section in Maindenform’s most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission.

With that I will turn the call over to Tom Ward.

Tom Ward

Thank you Felise; good morning everyone. Before we review our results for the first quarter in addition to highlighting the specific initiatives that the company is undertaking to drive solid financial performance in 2008, I would like to say that our team is extremely excited about the licensing agreement that we announced last night with Donna Karan to design, source and market women’s intimate apparel globally under the Donna Karan and DKNY brands. This action is an important strategic milestone for the organization as we continue to drive annual performance success in addition to ensuring that we position the company to maximize its long-term growth opportunities.

Besides adding another long-term growth driver the relationship with Donna Karan provides a two-fold benefit. First it allows us to target the luxury market as we add another distribution point to our portfolio. Second we expect this relationship will be a strong contributor to future global growth as we focus on our international opportunities as well. We are pleased to be able to partner with Mark Weber and his team at Donna Karan and look forward to long-term success that benefits both companies.

We also continue critically review potential acquisitions and/or licensing opportunities that compliment the business as we go forward. Now let’s review the first quarter.

As predicted sales were down driven by a non-recurring private label program in addition to a more challenging retail climate leading to a net sales decrease of 8.5%. With that overall branded sales were slightly down 3.5%. Our international business continued to have success with sales up 11.1%. Our retail team did an excellent job implementing the specific initiatives to drive store productivity and capturing additional consumers who visited outlets, especially foreign tourists. Overall net sales increased 12.7% with comp sale outlets at 9.4% and our internet sales up 33.3%.

We managed our gross profits exceptionally well with margins increasing 240 basis points to 38.7%. We drove these margins through both customer and product mix, our FOB initiative and seizing cost saving opportunities without compromising quality and presentation of products. EPS for the quarter was $0.26 a share, compared to $0.29 per share in the first quarter last year excluding the one-time pension curtailment gain in the prior year. When considering the macroeconomic pressures experienced in sales we had reasonable profit performance.

Looking at the balance of the year we continue to be focused on providing exciting branded product innovation. We are previewing DKNY product this week to potential customers for shipment in the first quarter of 2009. Maidenform, Lilyette, Flexees and Control It all have incremental product introductions that will be rolled out in the second half of 2008 along with the sales benefit from a new relationship with a large mass merchant that will begin to sell a Maidenform-endorsed brand in multiple categories.

For the balance of the year we do remain cautious about the environment particularly in the second quarter but we have a number of concrete program rollouts that give us confidence that the back half of our year will dramatically improve to a mid to upper teen net sales growth rate increase for those periods. Maurice will be providing additional insight into our outlook for the remainder of 2008.

I’d also like to update you on our CFO search. We are working with a national search firm and have been making progress in filling that role. In the interim we have a strong finance team in place that makes this transition seamless. Before we turn the discussion over to Maurice, I’ll cover some additional key finance results in the first quarter for you.

As I mentioned previously gross margins in the first quarter were 38.7% on a consolidated basis, up 240 basis points from 36.3% in the prior year. Aside from the favorable sales mix of products and customers and our continued supply chain initiatives our retail segment net sales represented a slightly higher percentage of our total net sales during the quarter while our other channel net sales represented a smaller percentage. The combination of these factors helps improve our gross margins.

Our SG&A expenses as a percentage of net sales and excluding the one-time pension curtailment gain in the prior year of $6.1 million were 5.7% of net sales, increased to 26.9% for the first quarter from 23.1% in the prior quarter. This increase was driven by higher occupancy-related costs associated with our corporate headquarters and our second distribution center, both of which we began occupying during the fall of 2007 and higher payroll and related benefits. After excluding the one-time gain in 2007 our operating margins were 11.8% for the first quarter compared to 13.2% in the prior year.

Our interest expense decreased to $1.2 million for the first quarter from $2 million in the prior year. This decrease is a result of lower debt outstanding and a lower average interest rate. Our effective tax rate for the first quarter was 41.8% as compare to 41.7% in the prior year. We expect to utilize approximately $10 million of NOLs on our 2008 tax return. As a result of our net operating losses our cash tax payable rate will be approximately 35% for 2008.

Let me make a couple of comments regarding our balance sheet. We ended the quarter with $10.7 million of cash. Our working capital position was $98.1 million at the end of the quarter compared to $92 million at the end of the same period for 2007. Our accounts receivable balance was $54.8 million at the end of the quarter compared to $58.1 million at the same time last year and $45.8 million at the end of 2007. Key drivers of the change since the end of 2007 were higher wholesale net sales in the most recent quarter and the timing of cash collections. Our DSOs remain in the mid 50s.

As a result of our inbound freight initiative our inventory position at the end of the quarter was $62.9 million compared to $55.8 million at the same time one year ago and $69 million at year-end 2007. Our first quarter inventories include approximately $10 million of in-transit inventories. On a comparative basis if we had importing our inventories on an FOB basis in first quarter 2007 our inventory levels would have been approximately flat year-over-year.

Our long-term debt outstanding was $89.5 million at the end of the quarter and our current interest rate is at LIBOR plus one and one-eighth percent with a debt to EBITDA ratio of 1.37:1. At the end of the first quarter of 2007 our long-term debt outstanding was $110 million. Our cash flows used in operations for the quarter was $5 million compared to the use of $7.4 million for the first quarter of 2007, a change in cash flow from operations of $2.4 million resulting from a net favorable change in working capital.

The company continues to be a strong generator of cash and expects total cash flow from operations to be approximately $30 million to $35 million before the Donna Karan initial ramp up expense consideration. Additionally we currently have our Bayonne facility on the market for sale.

With that I will now turn the call over to Maurice.

Maurice Reznik

Thank you Tom and good morning. I will focus my discussion on three key areas. One sales review by channel for the first quarter, two Donna Karan intimates and our sizeable growth opportunities and three business outlook for the balance and full year of 2008.

As Tom mentioned our overall sales declined 8.5% for the first quarter as we were affected by overall softness of retail particularly among the department and chain store channel as well as a non-recurring program with a specialty retailer. This led to our wholesale division experiencing a sales decrease of 10.7% with branded sales decreasing 3.5%.

Though we will be navigating through another challenging retail environment in the second quarter we look forward to a very strong second half of the year due to tangible incremental drivers that I will outline shortly. Sales from the department and chain store channel were down 9.5% to $48.4 million. This performance was a function of reduced in-store traffic and retail focused generally on tighter inventory controls. It is important to highlight that despite this inventory management consumers responded favorably to new products across all of our brands in the quarter.

Lilyette our full figure brand continued its momentum posting solid growth. The Air Push-Up launch in the first quarter is already becoming a top selling style in the department store national chain channel. In Maidenform our Gel Push-Up also introduced in the quarter is another best seller. In Flexees Shape or Chic Camisoles are meant to be seen and provide sleek shaping posted strong sales. Our new contemporary shaper brand Control It also was rolled out to an additional 500 doors with one of our major customers.

In the mass merchants channel sales grew by 5.9% to $30.3 million. Sales were favorably driven by expanded assortments and doors in the full-figure category and shape wear with a major customer. We also benefited with the introduction of a new program with a major warehouse customer. Sales gain in this channel was partially offset by a reduction of private label sales.

As we last communicated on the previous earnings press release and call we expected other channel sales to be down due to a non-recurring private label program with a specialty retailer. Additionally we experienced reduced order flow from a discount customer resulting in net sales down $7 million to a total of $7.9 million.

International sales grew 11.1% to $8 million in the quarter. We have solid sales growth in Germany, Russia, and the Scandinavian countries. We are particularly excited with the overall performance of Flexees and Control It Shaper across all markets. Additionally we continue to be successful in extending our mass brand SelfExpressions. The SelfExpressions brand that was established in [Carrefour], Belgium will be expanding there with the addition of our Seamless Shapewear.

As Tom mentioned in our direct to consumer segment net sales grew by 12.7% to $11.5 million. Comp door sales in our retail segment grew by 9.4%. This performance was favorably affected by impactful in-store and direct marketing initiatives in addition to strong sales of Maidenform, Flexees, Control It and Lilyette. Our on-line sales grew in the quarter by 33.3%. Sales growth was driven across core brands and significantly aided by the launch of the Breakthrough Backless Bra. Maidenform sponsored Elaine Cato and her groundbreaking design as seen on ABC’s American Inventor.

Maidenform continues to focus on product innovation and leadership. We are very excited with our new product offerings being showcased at this week’s markets. These collections are scheduled for delivery in the fourth quarter of this year and the first quarter of 2009. In Maidenform we are showcasing Custom Lift which targets the small to average figured consumer with a lift feature in the pad that is customized for each cup size. In Lilyette we are presenting Custom Fit, a collection of full-figured bras that offer cup-specific support through engineering for personalized lift and shaping. Flexees is also featuring an expansion of our highly successful Shape of Chic everyday control [story].

Now let’s review the Donna Karan relationship. Domestically the Donna Karan and DKNY brands will provide incremental growth with some of our current customers where appropriate, and expand our consumer base with high-end department and specialty stores. Internationally Donna Karan will provide us with a powerful growth engine across numerous markets around the world. We fully expect Donna Karan intimates to drive significant top line sales and to deliver high margins. As we assume responsibility for the brand in our product categories on January 1 of 2009, we will have initial start-up costs in 2008 associated with this strategic undertaking as we appropriately invest in design, merchandising and sales talent as well as brand-building initiatives.

This effort includes having a strong presence this September at a significant industry expo taking place in Paris that is visited by most of the major retailers worldwide. We also plan to engage in important market research to effectively seize our growth opportunities. We estimate these investments to be approximately $2.5 million which will be distributed equally among the remaining three quarters of this year. We expect it to pay meaningful sales and margin dividends in 2009 and beyond.

Lastly I would like to review our outlook for the balance of 2008 and full-year. We reiterate our net sales projection from our core business of approximately 4% for the year, consolidated gross margins of approximately 39%, and EPS growth of 10%. Additionally we anticipate our new expenses of approximately $2.5 million equaling to $0.06 per share associated with the Donna Karan and DKNY opportunities to position ourselves for strong success. For the second quarter specifically we do anticipate a continuation of a soft retail environment which will result in net sales to be modestly lower particularly from the timing of certain shipments to department store and national chain stores channel of approximately $6 million that will now occurring in the third quarter of 2008.

However because of new brand launches, incremental programs in current doors and door expansions of some of our core businesses, we project to mid to upper teen consolidated net sales growth in the third and fourth quarter over the prior periods. On the gross margin side, as I mentioned before we expect the full year to be approximately 39% with margins of approximately 37% in the second quarter due to customer and product mix which includes strong performance in our mass business. Margins should then gain momentum due to customer and product mix as well as recognizing further benefits from our ongoing sourcing initiatives.

Second half double-digit growth will be specifically driven by:

Sizeable assortment extensions with a current mass retailer including the extension of our Seamless Shapewear;

A new program with a current warehouse customer;

A sales benefit from a new brand created with an existing department store customer;

A sales gain from rolling out a new brand with a new mass customer;

The launch of our Flexees brand with a specialty retailer particularly serving the full-figure category;

The launch of a new program with another well-known specialty retailer; and

Higher level of new product pipelines in our department and chain store business primarily due to certain customer requested delivery shifts from Q2 to Q3.

In closing, while we’re well aware of the current dynamics in the marketplace our team continues to shape our future and position this company for long-term success that will build and drive value.

Thank you and we’re happy to take questions now.

Question-and-Answer Session

Operator

(Operator Instructions)

Your first question comes from the line of Jody Kane – Sidotti & Company

Jody Kane – Sidotti & Company

Can you just reiterate the tax rate you projected for the end of the year?

Tom Ward

We’re looking at approximately 41.8% tax rate exclusive of the NOLs.

Jody Kane – Sidotti & Company

That includes the NOLs?

Tom Ward

No on a cash basis it would be about approximately 35% including about $10 million of NOLs but the regular tax rate would be 41.8%.

Jody Kane – Sidotti & Company

The internet growth that you spoke about, you said that was driven by the backless bra right?

Maurice Reznik

It was partially driven by the backless bra. It’s actually become a very key item in our site. It was also driven by our sales across our core brands too.

Jody Kane – Sidotti & Company

And how does that bode for the launch of the backless bra in the retail, it sounds like its pretty well -- it’s been taken to pretty well.

Maurice Reznik

We’ve gotten great publicity, the product is just getting on to the stores now and we’re optimistic about the results.

Jody Kane – Sidotti & Company

Can you talk a little bit about the size and scope of the DKNY business for ’09?

Maurice Reznik

At the appropriate time we will give that information and most likely in our next earnings call.

Operator

Your next question comes from the line of Omar Saad - Credit Suisse - North America

Omar Saad - Credit Suisse - North America

A follow-up on the DKNY question, does DKNY currently have an intimate business or has it ever had an intimate business?

Maurice Reznik

Yes they do and they have distribution in most of the key retailers that we’re targeting.

Omar Saad - Credit Suisse - North America

Are they doing it themselves currently or is there --?

Maurice Reznik

No it’s being done through the balance of the year through one of our competitors, Wacko.

Omar Saad - Credit Suisse - North America

So you are kind of taking over that license.

Maurice Reznik

Correct.

Omar Saad - Credit Suisse - North America

And you’ll give more information around that in the next call in terms of your expectations?

Maurice Reznik

Yes.

Omar Saad - Credit Suisse - North America

Can you talk a little bit about the second half revenue guidance, I know you kind of walked through some of the drivers, the new brand within existing department store, new brand with a mass customer, additional product introductions in department stores in national chains, new program with a warehouse customer, new specialty retailer – how do we get comfortable with – your revenue numbers have kind of jumped around, your revenue growth numbers have kind of jumped around, minus 12 in 3Q, plus 13 in 4Q, minus nine in 1Q, help us get comfortable with that kind of the big back half weighting of your revenue guidance.

Maurice Reznik

The seven items or action points that I outlined are very, very tangible and incremental programs. One of the impacts on second half which really impacts our second quarter is that $6 million shift of new product pipelines, and we always have new product pipelines. Historically we shipped them the last week in June, this time they’re going to ship the first week in July. So that is a $6 million swing.

Omar Saad - Credit Suisse - North America

Was there any reason for that shift?

Maurice Reznik

Just in general retailers are more cautious with their ending-month inventories and so the July receipt versus the June receipt for them.

Omar Saad - Credit Suisse - North America

Specialty retail, are those private brands, there’s a couple of – are those more private brand programs or branded programs?

Maurice Reznik

One of those programs is a branded program and the other one is a private program.

Omar Saad - Credit Suisse - North America

So what’s your current mix, brand versus private?

Maurice Reznik

We don’t disclose that, most of our business is branded and our initiatives for the most are branded. Whenever there is a private brand opportunity that we feel we can add value to we will take advantage of it. We plan them opportunistically.

Omar Saad - Credit Suisse - North America

And then the product launches, you have historically done a very good job I think with new product introductions into your channels – it sounds like you have a couple of new brands with a mass customer and existing department store customer, can you elaborate on that?

Maurice Reznik

Not until they’re actually on the floor other than one brand will be launching with – both of these brands will actually be, the initial pipeline will actually shift late second quarter but during the balance of the second half we will get the benefit of the replenishment.

Tom Ward

We had talked about those on our last call so when they’re on the floor we’ll be able to talk in more detail about it.

Omar Saad - Credit Suisse - North America

But is it along the lines – you’ve done SelfExpressions by Maidenform and some of the other sub-brands.

Tom Ward

I think one of them in the mass area is an endorsed brand by Maidenform. The second one is more of a step-up bridge line in a department store.

Omar Saad - Credit Suisse - North America

I want to make sure I’m not missing something here, you kind of keep saying that your continuing to reiterate your guidance but it looks like your revenue and EPS guidance of 4% and 10% respectively versus the last guidance you gave was more of a range 4% to 7% and 10% to 15% revenue and EPS respectively, am I reading that right? Did you kind of just move it down to the low end of previous guidance?

Tom Ward

We had guided in our last call, our original guidance from November of ’07 was the 4% to 7% sales. On the last call we guided down to the lower end of that range and on the EPS in November we had said 10% to 15% and on the last call we guided down to the 10% so we’re keeping at that low end.

Operator

Your next question comes from the line of [Ben Mackovic – Ravinia Capital Management]

[Ben Mackovic – Ravinia Capital Management]

Last quarter I think you said you had $12.5 million left under the buyback; did any of that get done in Q1?

Tom Ward

No it didn’t and the Board continues to review all our alternatives as far as debt repayment or share repurchase but we didn’t repurchase any in the first quarter.

[Ben Mackovic – Ravinia Capital Management]

Can I get a current share count?

Tom Ward

I think its 23,422.

[Ben Mackovic – Ravinia Capital Management]

As far as CapEx for ’08, what can we look for?

Tom Ward

We were approximately $7 million last year and we were looking at $7 million to $9 million with some technology investment and we’re still reviewing if we’re going to spend that. If we didn’t do the technology we’d probably be in the $4 million to $5 million range.

[Ben Mackovic – Ravinia Capital Management]

So its $4 million to $5 million more of a maintenance, kind of normalized level?

Tom Ward

That’s correct.

Operator

Your next question is a follow-up from the line of Jody Kane – Sidotti & Company

Jody Kane – Sidotti & Company

Are you going to be able to leverage your expertise in sort of the plus size business, the shapewear business into the Donna Karan line?

Maurice Reznik

We are evaluating what is – as I mentioned earlier we’re launching DKNY in May, we’re launching the Donna Karan brand more upscale in August and right now we’re building the brand and it’s going to be across intimate categories and we’re evaluating sizes etc. but shapewear will definitely be a key component of the product mix.

Jody Kane – Sidotti & Company

Do you think that you would continue to explore the license segment of the industry, add new licenses to that platform going forward?

Maurice Reznik

Yes we would if the right one comes along that’s non-conflicting and it would, if we feel we can add value and we can particularly leverage internationally which is a key strategic initiative for us.

Jody Kane – Sidotti & Company

As far as the growth opportunity that you’ve outlined, which one would you say is the most promising or has the best chance or the most potential?

Maurice Reznik

We can’t quantify that for you other than we love all these opportunities. The only tangible one that I can highlight for you is the one that we talked about earlier, about the $6 million shift. But all these initiatives have a potential for continuity beyond just second half.

Jody Kane – Sidotti & Company

And when you talk about a new mass customer, that’s actually new business that you’ve never done with this customer before?

Maurice Reznik

That’s correct.

Jody Kane – Sidotti & Company

Is there any particular reason why you don’t breakout who these customers are and what the new names of the products are or anything like that?

Maurice Reznik

Because until the product gets shipped we just feel it wouldn’t be appropriate to do so.

Tom Ward

Our customers don’t want us to be talking about it; basically they’re trying to differentiate them from their competition so they really want to keep it confidential until it’s out on the floor.

Operator

We appear to have no further questions; I will now turn the call back over to Mr. Ward.

Tom Ward

Thank you very much. On behalf of our team I would like to thank all of you for your time today and we look forward to the continued dialogue and have a good morning. Thank you.

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Source: Maidenform Brands, Inc. F1Q08 (Qtr End 03/29/08) Earnings Call Transcript
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