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Executives

Thomas J. Ward - Chairman of the Board

Maurice S. Reznik - President, Chief Executive Officer, Director

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

Felise Glantz Kissell - Vice President of Investor Relations and Corporate Development

Analysts

[Scott Prasik - CL King]

Jody Kevin Kane - Sidoti & Company LLC

Omar Saad - Credit Suisse Securities LLC

Eric Beder - Brean Murray, Carret & Co.

[Ben McEvak - Viner Capital]

Maidenform Brands, Inc. (MFB) Q2 2008 Earnings Call August 6, 2008 8:30 AM ET

Operator

Welcome to the Maidenform Brands second quarter 2008 earnings conference call and webcast. (Operator Instructions) I would now like to turn the call over to Felise Glantz Kissell, Vice President of Investor Relations and Corporate Development.

Felise Glantz Kissell

I am sure that you have read our second quarter press release issued early this morning. To provide additional insight into our second quarter and give an overall update on our business we have with us today our Chairman Tom Ward, our CEO Maurice Reznik, and COO & CFO Chris Vieth. Tom will first say a few comments, Maurice will then provide a strategic review of our business, and then Chris will conclude by reviewing our financial performance and expectations for the remainder of the year before taking your questions.

Before we begin I’d like to 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 Factors section in Maidenform’s most recent annual report on Form 10K filed with the Securities and Exchange Commission.

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

Thomas J. Ward

Before we review our second quarter results and the specific actions that we’re taking to position the company for future success, I would like to just touch upon the recently-announced leadership change at Maidenform as Maurice has become our new CEO while I resume my role as Chairman. We believe this transition is timely and seamless and will take the company to new levels of success.

A number of long-term strategic objectives have been achieved over the last year providing a solid operating platform for growth. This includes gaining the Donna Karan and DKNY women’s intimate apparel license, implementing our FOB cost-saving initiative, leasing a second distribution center to support our current and future sales growth plans, refinancing our debt which has reduced our annual interest expense and increased our financial flexibility to support our future growth, selecting a new advertising agency to support our ongoing commitment to build on our strong brand equity in the market place, moving our corporate headquarters from Bayone to Woodbridge, New Jersey that provides a cost-efficient space for enhanced teamwork.

With these key initiatives now firmly in place, I advised the Board that I would be leaving in January 09 and we then implemented our intended succession plan with Maurice. Additionally, Chris Vieth has recently joined us in the COO & CFO role and we are recruiting for a sales and marketing executive to take on some of Maurice’s responsibilities. I thank all of you for your support of our company. While we are currently navigating through a challenging economic environment, I am extremely confident in Maurice and our leadership team’s ability to provide strong long-term growth for Maidenform. Thank you.

Maurice S. Reznik

Thank you Tom for all your support and leadership. I am proud to be working with and directing a dedicated and talented team at Maidenform.

Good morning everyone. Before we begin, I would like to say that in my newly-appointed role as CEO I am dedicated to navigating us through this tough retail climate while still driving the company’s strategic growth initiatives that will greatly contribute to our long-term financial performance. This morning I will cover four key areas: A review of our wholesale and retail sales performance in the second quarter, our outlook for sales expectations in the second half of 2008 inclusive of specific incremental drivers and some of the strategic initiatives we’re pursuing for long-term growth, an update on our Donna Karan Internet business, and important new programs currently being shown to our customers in Market Week and targeted to shipping Q1 of 2009.

In the second quarter the overall retail environment was certainly challenging. Our consolidated net sales decreased 9.2% with more than half of the decline related to the timing of new pipeline shipments to department and chain stores, which have already been shipped in the third quarter. The balance of the decrease reflected lower sales as a result of inventory reductions at a number of our department and chain store customers as they retooled their total assortments in the face of a softening business in the quarter. These factors led to a 15.8% decrease in the department and chain stores to $57.4 million. We did experience share gain in shapewear within the channel in aggregate with our Control It and Flexees brands where we are the dominant market place resource. Additionally, Lilyette our full figure brand gained market share with solid retail sales in the quarter. We also began to rollout Luleh our bridge bra and panty and shapewear collection which is prominently placed in Macy’s domestically. Luleh will continue to roll out in selected international markets in Q3.

Turning to the mass channels, sales growth continued to be strong in the second quarter with an 11.8% increase over last year to $28.5 million. Our Sweet Nothings brand increased its footprint in the quarter with an expanded assortment in shapewear and in the full figure category. Also in the quarter we introduced a new pant program with a warehouse customer and began to rollout our new Inspirations brand at K-Mart in about 1,400 new doors. The other channels decreased 33% to $7.7 million primarily due to a non-recurring program to an off-price retailer and lower liquidation sales. However, we did successfully test a program with a well-known specialty retailer which will roll out in the second half. I will touch upon this again when we discuss second half growth drivers.

International sales grew 2.9% to $10.6 million due to favorable currency exchange along with modestly higher sales in Mexico, Germany, Benelux and Canada. These gains helped offset softer sales in the challenging retail environment in the UK and of a non-recurring unbranded program with a major retailer. Our mass brand Self Expressions is going out to an additional 310 doors in Europe with 192 doors in Germany soon having our bras and shapewear. Self Expressions tests with Carrefour will now include rolling out shapewear to an additional 50 doors. We recognize our brands as still significantly underpenetrated internationally. Over the next few months our team will be developing long-term better market strategy for international business and we will update you on our specific plans at the appropriate time.

Our direct-to-consumer sales increased 5.1% to $14.5 million. Outlet store comps were +1.9% and the Internet grew by 20%. Lilyette, Maidenform, Flexees and Control It all posted solid sales in the quarter. In select markets our retail stores also benefited from the foreign tourist trade. While our profitable Internet business is still relatively small, it continues to grow rapidly. We’ll be evaluating opportunities for targeted investment in technology and marketing to field growth in 2009 and beyond. We’re also excited about new product opportunities as we consider the reach of our brands and our stores by testing new categories such as yoga wear, controlled swimwear, and maternity.

I will now focus on key drivers that shape our outlook for the second half of this year. These major incremental drivers include: Significant growth in the mass channel from sizable assortment expansions in our Sweet Nothings brand in bras and shapewear, a new shapewear program with a warehouse customer, and replenishment of our new brand Inspirations into approximately 1,400 doors.

Growth in the department and chain store channel from a significantly high level of new product pipelines in Flexees, Lilyette and Maidenform primarily due to customer request delivery ships from Q2 to Q3. These shipments have already been executed in early July. Also in the department and chain channel we will be replenishing into the Luleh brand.

In the specialty channel: The launch of a specialty retail that is focused on the full figure consumer, launch of a new program with another well-known specialty retailer based on a positive testing in Q2, an incremental program with a major off-price retailer.

These actions provide us the vehicles to drive high single-digit to low double-digit net sales growth in the third and fourth quarters of this year. This guidance assumes that the macroeconomic conditions in the second half of this year will continue to be tough and that some of our customers will experience credit difficulties. Chris will provide more specifics on our outlook for the remainder of the year.

Coming to the next strategic leg of growth for our business, I’d like to frame the Donna Karan intimates opportunity including our initial sales expectations for 2009. Chris again will be taking you through our start-up costs previously announced for 2008. Since we acquired the license in May, we have been hard at work building the top, the product and production to ensure successful transition of the business when we begin shipping in January of 2009. We showcased our DKNY spring line in May markets and are currently unveiling our premium collection Donna Karan this week. In addition to the existing bras and panties categories we are expanding both brands in shapewear as we’re the category leaders and totally committed to its growth potential.

In the first year we’re projecting that this business will add approximately 5% to our net sales growth in 2009 which will initially be predominantly from DKNY. There is significant and incremental upside potential for both the DKNY and Donna Karan franchises domestically and particularly internationally as we aggressively plan to expand our presence. Examples of some of the customers for Donna Karan include Neiman Marcus, Saks, and Harrods. For DKNY accounts comprised of such retailers as Nordstrom’s, Bloomingdales, Macy’s and Selfridges with some customers selling both brands.

This coming September we will be presenting both brands in Paris at the largest Internet apparel trade show in the world. We will continue to meet with many of our potential international customers.

On the margin side of this licensed business, we expect margins for 2009 to initially be comparable to our department and chain store business. Once the business develops more scale we expect to see additional margin contributions due to better sourcing efficiencies and reduced start-up costs.

Now for our key new programs that are currently being shown. We are unveiling major collections this market week targeted to deliver in the first quarter of 2009. As always these programs feature differentiated innovative products that Maidenform is known for. In Maidenform our latest introductions include a uniquely designed bra with a camisole style that was meant to peek out from underneath clothes. Also in Maidenform we’re launching the ultimate shaping collection referred to as Triple Play. The cups provide support and shape in three different places, from the side, the top and the bottom. In our full figure brand Lilyette we’re bringing customization to one of our categories of strength: Minimizers. The custom fit minimizer is engineered to provide each cup size the perfect amount of minimization. Lastly, in shapewear we’re continuing to bring to market innovative and every day essential pieces. In Flexees we’re introducing a new collection called Fat Free Dressing in which all the pieces are meant to be seen shapewear that secretly slims and shapes the body with a hidden liner at the midsection. In Control It we’re bringing to market unique silhouettes that offer maximum control but are every day wearable.

Before I turn the call over to Chris, I would like to leave you with the following. While we have been impacted by a difficult environment, particularly in the department and national chain channel, our team continues to aggressively identify, pursue and capitalize on sales enhancing opportunities in both the short term and for the long term that will provide value and build sales growth even in this market place. We will complement these top line sales efforts by continuing to employ a strong discipline around margin management, SG&A expense and cash utilization. Furthermore, we have initiated a significant strategic project that will assist us in framing our growth over the next three to five years with the Donna Karan and DKNY license as well as overall domestic and international expansion. With our strong cash generation, we expect to end the year with around $35 million in cash and we’ll be evaluating potential international and/or domestic investment opportunities. I have no doubt that the focus around these areas will help us drive our financial performance to new levels of long-term success.

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

Christopher W. Vieth

I’m really excited to be a part of the Maidenform team and to be joining you here on my first earnings call with the company. This morning I’ll cover the drivers of our financial performance and close with an update on our guidance for the second half, and then we’ll open up the phone lines to take your questions.

As Maurice mentioned, the business environment is pretty volatile right now. And while we can’t control things like the recent Mervyns and Boscov bankruptcies and pressure on our department stores and chains businesses, we posted respectable gains in our mass channel and at our retail outlets and we’re doing everything we can to profitably weather this weak retail economy while simultaneously investing for our future. Proof of that includes the healthy list of new product and customer initiatives we have lined up for the second half as Maurice just outlined as well as our commitment to controlling costs and strengthening our already strong balance sheet.

Turning to our financial results, reported EPS in the second quarter were $0.33 per share and $0.01 above street consensus including start-up expenses of $0.01 per share for our Donna Karan initiative. Donna Karan related start-up spending will total $2.5 million or roughly $0.06 per share in 2008 as we previously announced with about $0.03 per share in the third quarter and the remaining $0.02 per share in the fourth. EPS in the second quarter of 2007 totaled $0.39 per share and included $0.06 of deferred financing costs associated with refinancing the company’s credit facility. Year-to-date reported EPS totaled $0.59 versus $0.83 last year and included $0.09 per share related to the pension curtailment gain and deferred financing costs both in 2007.

Our consolidated gross margins declined 120 basis points to 38.7% in the second quarter primarily as a result of a change in our wholesale customer mix with an approximate 12% increase in sales to lower-margin mass customers and a roughly 16% decline in sales in the higher-margin department stores and chains channel. Year-to-date consolidated gross margins increased about 50 basis points to 38.7% reflecting reduced sales to low margin, off-priced and specialty retailers along with increased sales at our retail outlets and cost improvements from the company’s product cost re-engineering actions. These were partially offset by the impact of changes in our channel mix.

Given the environment and the pressure it has placed on our revenue this year-to-date, we’ll be aggressively managing costs in order to do what we can to protect our profitability in this economy. Those actions will include carefully managing personnel expenses, reducing costs through re-engineering of processes and tasks, along with other managed cost reductions across each of our operating departments. We’ll reinvest some of those savings back into the business to fund merit increases for staff and into areas such as product development and other sales generating functions while keeping our overall SG&A costs down to an increase in the low single digits in the full year 2008 versus 2007 excluding our investments for the Donna Karan initiative. Excluding investment in Donna Karan start-up expenses and the one-time curtailment gain in 2007, our SG&A was flat in the second quarter and up about 3% year to date with roughly half of the year-to-date increase attributed to costs associated with our added distribution center. Our headcount at the end of the quarter was roughly 1,100 employees and about flat to last year. Adding all of that up and after excluding the one-time curtailment gain in 2007, our operating margins were 13.4% for the second quarter compared to 17.2% last year and operating margins were 12.7% year to date versus 15.3% last year.

Our effective tax rate was 41.7% for the second quarter and year to date and was flat with last year in both periods. For the full year our 2008 rate is planned consistent with last year at about 42%. We expect to utilize approximately $10 million of net operating loss carry-forwards on our 2008 tax return and as a result of our NOLs our cash tax payable rate will be approximately 35% in 2008.

Turning next to the balance sheet and cash, our net debt at the end of the second quarter was $74 million versus $85 million last year. We expect total cash flow from operations to be in the $25 million to $35 million for the full year 2008 before the Donna Karan initial ramp-up expense consideration and will strengthen our cash position while we appropriately manage our balance sheet in this economic environment and evaluate the go-forward strategic imperatives that Maurice outlined earlier.

Our capital expenditures totaled $467,000 in the quarter and $808,000 year to date, and our total spend will be $3 million to $4 million in 2008 including second half infrastructure spending at our North Carolina and Ireland DCs and for our retail outlet stores and to construct our Donna Karan showroom. This is down from our $9.5 million original plan for this year as we deferred $5 million of technology capital for implementing a new ERP system to 2009.

We continue to focus efforts on managing the productivity of our overall inventory levels as well as our product cost initiatives to sustain our gross margins. Our inventory position at the end of the quarter was $66 million including in-transit inventories and was roughly $6 million higher than last year on a comparable basis with roughly half of that increase attributable to the $6 million sales shift from the second quarter into the third and the balance related to inventory build for new programs we’ll be delivering here in the third quarter. We expect inventory levels to increase over last year again in the third quarter to support our fourth quarter business and that we’ll end the year flat to down modestly from 2007 by the end of 2008.

Lastly, I also want to mention that we’ve been out in front of the inflationary pressures that energy, labor and raw materials are having on manufacturing costs and we’ve been able to largely stave off any significant increases so far here in 2008. We’re accomplishing that through an internal task force that has been able to source certain comparable materials at reduced costs and we’re using those savings to deflect product increases elsewhere. In other cases we’ve simply been successful in holding costs firm with our supplier partners for 2008. For the longer term we’re aggressively seeking additional sourcing alternatives to complement our core suppliers in Thailand, Indonesia and China and will continue to pursue all of these opportunities as well as increase prices for certain products where necessary and where we have the leverage to do so.

Looking out to the remainder of the year, we’re confident in the business driving initiatives that Maurice outlined for you earlier and in our ability to control our costs. However, our guidance is also tempered to reflect the realities of the current economic environment and the effect it’s having on our customers and on our business. Based on that outlook, we are projecting net sales growth of 8% to 12% in each of the third and fourth quarters of 2008 that will yield full-year revenue in a range of -1% to +1%. The bottom end of our range includes expected softness at Mervyns and Boscov’s whose combined business with us would normally comprise about 3% of our consolidated sales in the second half. Given the continuation of strong sale gains in the mass channel, we’re expecting gross margins to be 140 to 190 basis points lower than last year in each quarter and full-year consolidated gross margins to settle in a range of 38.5% to 39% versus 39.3% in 2007 for the full year. SG&A expenses will increase in the low single digits over last year excluding the Donna Karan investment with low- to mid-single digit increases in Q3 including an increase in bad debt for credit-related issues at Mervyns and Boscov’s and flat to low single digit increases in Q4. We expect full-year EPS to be in a range of $1.28 to $1.36 which excludes start-up costs of approximately $2.5 million or $0.06 per share associated with the Donna Karan license. Our up front investments for this business are largely concentrated in pre-launch research and marketing along with costs for dedicated personnel and management, sales, product development, and marketing administration.

Before we open up the call for questions, I’d like to reiterate that while we are prudently planning our business cautiously for 2008, we continue to demonstrate our core strengths that will drive long-term shareholder value which are: Identifying and capitalizing on sales growth opportunities, continuously seeking methods to expand our gross margins, employing strict expense management, and having strong cash flow that provides us with the financial flexibility to help fuel our future growth.

We’ll now open the phone lines and take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from [Scott Prasik - CL King].

[Scott Prasik - CL King]

The first question is on the international because it seems like there’s a nice opportunity there. Is this a situation where now that you’re branching out beyond Wal-Mart that this could really begin to accelerate over the next few quarters or couple of years?

Maurice S. Reznik

International is a key focus for us going forward. Part of the strategic direction of the company is focused on international. Obviously Donna Karan and DKNY will open up distribution for us where some of our brands can’t take us but we’re looking also at other alternative uses of cash and looking at certain markets where we’re going to double down and invest in that business. We have really untapped opportunities internationally.

[Scott Prasik - CL King]

Could Carrefour become a significant customer if this keeps going?

Maurice S. Reznik

They can be. We view the international business as a multi-channel opportunity as we view the American market.

[Scott Prasik - CL King]

Moving back to the US, reading different articles in the trade publications it sounded like coming out of May your customers were pretty conservative and very conservative about reorders. Maybe talk about what you’re hearing from your customers this week as well, and is it going to be even more difficult to get reorders this fall? What’s the sense out there?

Maurice S. Reznik

Our expectations are that spring economic conditions will continue into the fall. Retailers are clearly cautious; however, there are segments of the business that are working well and those businesses are being funded and certain channels are doing better than others: The mass business. And particularly if you look at our business in the first half has been very strong. We anticipate that to continue. So again we’re very cautious and the customers continue to be very cautious, but a great product always wins.

[Scott Prasik - CL King]

Is it still business as usual though or even if you have some product that sells out or they’re not filling it the way they would have in the past?

Maurice S. Reznik

When product is successful or it’s retailed, those businesses are being replenished. There just seems to be less tolerance for moderate performance today.

Operator

Our next question comes from Jody Kevin Kane - Sidoti & Company, LLC.

Jody Kevin Kane - Sidoti & Company, LLC

I was just wondering why some of the new product introductions and some of the expansions in new doors didn’t make up for the softer orders of your existing customers or why that won’t happen over the next two quarters.

Maurice S. Reznik

I’m sorry. Could you rephrase that again?

Jody Kevin Kane - Sidoti & Company, LLC

I’m trying to figure out why the new door expansion and new product introductions that are coming for the next two quarters wouldn’t make up for the softer retail environment at your current existing customers.

Maurice S. Reznik

They are actually. The guidance that we’re providing, if you’re referring to what happened in the first half versus our anticipation in the second half, we are anticipating pretty strong revenues. And the revenue growth actually in the second half really underlies our market share gain because there’s a lot of pressure in reducing inventory at point of sale. So in reality though at retail our business will actually be better than the shipment. But we are offsetting the first half softness in the second half; it’s just coming from different places. Department and chain store channel which we referred to, there’s that $6 million that shifted from Q2 to Q3, which we already shipped, and by the way July was a really good month for us which gives us even more confidence about the second half.

Christopher W. Vieth

And Jody, if I could just add to Maurice’s comment. Our projection for the second half is a revenue increase of 8% to 12%. That is down from previous expectations. What’s driving that increase is the newness and the new initiatives that we’ve had outlined and that Maurice talked about today. The overall economic climate particularly in department stores and chains however remains depressed as it occurred in the first half and as Maurice mentioned we’re planning on that to continue here through the second half, with the newness really driving the growth.

Jody Kevin Kane - Sidoti & Company, LLC

Mervyns news and the other retailers holding back inventories, are they doing it more so now than they were a couple of months ago or has it just been the same?

Maurice S. Reznik

It’s been pretty constant. The focus is on improved inventory turns but that’s been pretty consistent.

Jody Kevin Kane - Sidoti & Company, LLC

On the DKNY business, do you have how much you expect EPS in 09?

Christopher W. Vieth

We haven’t disclosed that Jody. You should look for margins and EBITDA margins in 2009 at least consistent with the broader company margins that we have for planning it.

Operator

Our next question comes from Omar Saad - Credit Suisse Securities LLC.

Omar Saad - Credit Suisse Securities LLC

Before I ask a question, I just wanted to offer Maurice congratulations on your new role, Tom best of luck and congratulations on the next chapter in your life, and Chris welcome aboard.

There’s a lot of chatter in the market place about inflation and the price of oil and I know that’s a component for you plus the transportation. This inflation is really kind of pressuring a lot of the companies out there in the kind of inner wear space and a lot of ensuing talk around price increases. We’ve seen inflation hit some of these big retailers like Costco and I think the retailers have become a lot more receptive to it and consumers have become a little bit more used to an environment where prices are going up versus going down. How do you think about price? Is it a tool you feel like you can use in this environment given kind of your innovation in your products and your ongoing continual stream of new product launches? Strategically, how do you think about that tool?

Christopher W. Vieth

It’s multi-pronged. It’s not just price; it’s also cost and inventory and manufacturing. But we definitely in certain products like shapewear where we have a strategic advantage, we definitely feel like we’ve got pricing elasticity and we will increase prices wherever possible and where it makes sense. On the cost side, as I mentioned, we’ve been doing a lot both in terms of working with our existing suppliers; sourcing new materials with comparable quality where we’ve been able to actually source comparable materials at less cost, bring that into our manufacturers, and help offset some of these price increases; we have a team of folks who are out looking for new sources of manufacturing to supplement our existing partners in areas like Vietnam and Thailand and in areas where we feel strongly that they can meet the standards that we have for quality and labor and all the other things.

Oil is going to continue to put pressure on us next year. We’re seeing it this year particularly in things for fuel surcharges on freight on the way in and have been able to offset almost all of that in 2008. In 2009 we’re going to have to work harder. We’ll definitely use price just to circle back from where we started to help offset that, but we’re going to continue to pursue all the other ends as well on the cost front to try and protect our margins.

Omar Saad - Credit Suisse Securities LLC

And if we are kind of entering a long-term inflationary environment following a long-term deflationary environment in the apparel space, outside of shapewear where you have that edge, when do you start talking about price increases with retailers or have you started that and is there a general receptivity in the market for that kind of direction?

Maurice S. Reznik

We’ve had some directional discussions with retailers. The whole company is really based on problem solution products. As Chris mentioned, there’s more elasticity in shapewear but there is some price elasticity also in some of our other categories, like full figure for example. From a pricing perspective we clearly want to be competitive with the market place also, but we will really focus on where particularly the products that are sort of decommoditized which is really what we focus on as we introduce new products. We offer more value and can command higher pricing. I think in general though we see modest price increases across the board.

Omar Saad - Credit Suisse Securities LLC

Are you watching what the competition is doing? If everybody’s raising prices, is it something where you would follow or would you use that opportunity to maybe try to take some share if you kept prices lower?

Maurice S. Reznik

Every situation’s going to be different as long as the products and the brands meet the margin thresholds that we have. So it depends on what the environment is around us.

Omar Saad - Credit Suisse Securities LLC

You’ve had a lot of moving parts in your numbers on a quarterly basis the last several quarters, but still I think your revenues have been down in three of the last four quarters and I know you’re forecasting a big jump in the back half this year, but why don’t you just step back and talk a little more philosophically about what’s happening in the category. If we are entering kind of what’s potentially going to be a very terrible consumer recession, is this category recession proof, recession resistant? Do women continue to buy these products or do they slow down their purchases and say, “Do I really need to spend $20 or $30 on a new bra?” How do you think about this? How are retailers thinking about it? Or do you think maybe there’s a short-term dip and then it comes racing back as people realize they need to replenish their underwear drawer?

Maurice S. Reznik

People need underwear and hopefully they need our underwear, but in general when we look at consumer data the female apparel non-intimate is actually declining more than intimates. Intimates is actually gaining share of drawer in a declining market. So there’s less traffic in the stores so clearly it’s not an intimates problem; it’s really a store traffic issue. But within that though, intimates is faring not as badly. And then within the channels, some channels are doing better than others. So as we look at that and we look, as I mentioned earlier, at some categories or some channels like the mass channel which is directionally doing better, our brands are doing better in that channel, I do - and again this is a hypothetical philosophical question I should say - but in past inflationary times and where demand is also down, intimate apparels actually fared much better than other categories because it’s a very affordable luxury. So we’re relatively bullish on the category an then you also have categories that are particularly good, like the shapewear category that really offer solutions that really provide a need to buy. It’s not a whimsical purchase; it’s a need to purchase. Does that kind of answer your question?

Operator

Our next question comes from Eric Beder - Brean Murray, Carret & Co.

Eric Beder - Brean Murray, Carret & Co.

Let me offer my congratulations to both Tom and Maurice, too. Could you talk a little bit about the DC? You said this year it added cost. What are the advantages of having additional DCs and other pieces in terms of the infrastructure going forward?

Christopher W. Vieth

We’re just about anniversaried with those costs here through the first half. It was roughly $900,000 higher in 2008 than 2007. We’ve got two distribution centers in Fayetteville, North Carolina and we’ve got another small one in Ireland for largely throughput to Europe. We added 150,000 square feet in an annex in Fayetteville last year and it’s really to service our mass customers and our Internet business, shapewear, brands like Luleh and Inspirations and expanding Sweet Nothings. We need to have dedicated space to support each of those product lines and can’t commingle the products, so naturally you need more space. The good news is that those businesses are growing nicely and the Internet included. So it was really a necessary growth to service those businesses and it’s got a lot of headroom. It will service us with the space we have there for several if not more than several years before we’d need to make any additional changes.

Eric Beder - Brean Murray, Carret & Co.

In terms of the Donna Karan rollout, you’ve basically taken this from another player. What do you think you add to the Donna Karan piece that wasn’t there that you can leverage in terms of you guys doing Donna Karan now?

Maurice S. Reznik

Number one, we feel very strongly that we have a very talented innovative team here that will be able to leverage our core strengths. Obviously shapewear is just one of them but we’re really good at this and we also have relationships and a dedicated team that has experience in the category, too. But clearly we’re known in the market as being highly innovative and also commercially innovative. And then the international piece, which really is a small part of the current business today, we will add significant value there which really hasn’t been exploited up until now.

Eric Beder - Brean Murray, Carret & Co.

How difficult or easy has it been to start going to a number of resources that you have not used for Donna Karan and reintroduce yourselves to the Saks of the world and see if you can do something maybe beyond Donna Karan or has that been pretty seamless to move into that?

Maurice S. Reznik

We’ve already started. In May market we work with DKNY. We’re presenting Donna Karan as we speak and we’ve interfaced with some of these customers. It’s not a true start-up in that there is an existing business with these retailers. So again nothing is a slam dunk but the initial response has been very, very, very good and we start delivering the product January of 2009. And we’ve also had some interface already with some of the international customers. The initial view of that looks like we’re getting commitments to exceed the current international distribution already. And if I may add one last thing, in September where we will be in earnest unveiling the international Donna Karan and DKNY business, we’ll be at the biggest fair in the world and we’ll be exhibiting for the first time. So we’re putting a lot of resources and energy behind this business. We really view Donna Karan and DKNY as a strong vehicle for our international growth on top of our core brands.

Eric Beder - Brean Murray, Carret & Co.

I guess this is an accounting question. What was the exposure you had to Boscov’s and Mervyns when they went in Chapter 11?

Christopher W. Vieth

It’s going to cost us roughly $1 million in bad debt. $750,000 of that we’ll experience here in Q3 and $250,000 of it is behind us in Q2. The bigger more equally potential risk is really as I outlined in my comments the second half revenue that those two accounts make up roughly 3% of our total consolidated net sales under normal conditions in the second half and there’s still some question as to what we’re going to be able to do there.

Operator

Our next question comes from Ben McEvak - Viner Capital.

Ben McEvak - Viner Capital

The 8% to 12% growth in Q3, does that include the $6 million shift from Q2?

Maurice S. Reznik

Yes, it does.

Ben McEvak - Viner Capital

Can you just give me a little more color on the accounts payable line? Q1 there was a big change from 07; Q2 a little smaller but still a pretty big change. Any more detail you can give us on that?

Christopher W. Vieth

It was $32 million at the end of June and I think at year end it was $36 million. It’s really just the timing of the flow of payments and inventory payments and the timing of our FOB initiative. In this year we still haven’t fully anniversaried the change of going to FOB shipping point in Asia for our inventory purchases. We used to buy them FOB destination in Fayetteville, North Carolina. So that’s really the driver of the change.

Ben McEvak - Viner Capital

And we can expect that to reverse by the end of the year?

Christopher W. Vieth

We will have anniversaried it by the beginning of the fourth quarter in full.

Operator

Our final question comes from [Scott Prasik - CL King].

[Scott Prasik - CL King]

Just a couple follow ups. This $0.06 for DKNY this year and the comment about being margin comparable for next year. Are you taking into account all the necessary adjustments that need to be made given that there’s already product out on the floor that might need to be cleaned up, etc.?

Christopher W. Vieth

Yes, that includes that.

[Scott Prasik - CL King]

Just in terms of further retail bankruptcies, hopefully there aren’t any, but there’s certainly speculation in the trade about other regional department store and chain stores. How are you approaching Bon-Ton, [Gaucha, Steinmart perhaps differently than you were selling them in the past?

Christopher W. Vieth

I can’t comment specifically on individual names but the list of usual suspects that you have are on our list as well and we’re getting smarter and tighter with our credit terms. Again I can’t specifically talk about by account. We did that with Mervyns as well heading into this and we’re able to offset some of those things, but we’re tightening it down and watching it the best we can.

Operator

We have no further questions. I would now like to turn the call back over to Mr. Reznik for closing remarks.

Maurice S. Reznik

Thank you very much. I appreciate your time and look forward to our next call and meeting with some of you individually. Have a good day.

Christopher W. Vieth

Thanks everybody.

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Source: Maidenform Brands, Inc. Q2 2008 Earnings Call Transcript
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