Maidenform Brands is a marketer of women’s intimate apparel sold through primarily major department stores, national chain stores and mass retailers. I submitted this idea back in January 2006 when it was trading at around $11.50 shortly following its July 2005 IPO at $17 per share. After that initial write-up, disappointment almost immediately struck and MFB fell down to $8.50. This represented a huge buying opportunity. It soon found its way back up to about $17 where I sold it on valuation concerns. Of course, quickly after that sale, it went on to reach a high of $24.50 reached in April 2007. Its fundamentals improved greatly but with recent meltdown of many consumer spending driven stocks, Maidenform Brands is now off over 40% from that high reached only 6 months ago. MFB is one again a very cheap stock and represents a wonderful opportunity to make money over the next 18-to-24 months. A Brief History of Maidenform (re-phrased from my January 2006 submission) After declaring bankruptcy in 1997, Maidenform Brands emerged in 1999 under new management and they did the hard work of rationalizing its business model (such as completing the move from being a manufacturer to becoming marketer by steadily shifting to a foreign outsourcing model). In May 2004, Maidenform was fully acquired by a private equity fund, Ares Corporate Opportunities Fund LP. Only about one year after the Ares acquisition, Maidenform was taken public in July 2005 at $17 per share. While Ares has subsequently sold a good portion of its original position, it now retains a 16% stake and at these prices I don’t think they are motivated sellers as probably were $5 to $10 per share ago. About 85% of Maidenform’s revenue is done as a wholesaler. They sell into most of the major department and national chain stores. Its list of department store customers includes Bloomingdale's, Macy's, Lord & Taylor, Marshall Field's and the national chains include Kohl's and J.C. Penney. Also, they sell into the mass merchant retailers such as Target, Costco and Wal-mart. Finally, they sell private-label products to specialty retailers. In addition to their multi-channel strategy, Maidenform also follows a multi-branding approach by developing and segmenting its brands specifically one for channel such as:- “Maidenform”, “Flexees” & “Lilyette” brands are sold via its dept. store & national chain store customers.
- “Self Expressions” brand at Target and Zellers - “Sweet Nothings” brand for Wal-mart - “Bodymates” brand at Costco - “Rendezvous” and “Subtract” brands at Sears.
Not much has changed in terms of business mix since my write-up about two years ago. Approximately 70% of revenues still come from its bras segment, 20% in shapeware products and lastly about 10% of its sales are panties. Of its major Wholesale business, about 61% is sold to its department store and national chain store customers, 25% is sold via the mass merchant channel and finally 14% in private-label sales to specialty retailers, off-price retailers and its international distributors. 2007 Revenue Growth Skepticism From 2005 through 2007E, Maidenform will have likely increased its sales from about $380m to around $430m if it reaches it guidance for its Q4 2007. This is about 7% annualized growth over the past 2 years. As I stated way back in early 2006, management guided that it should be able to get 7% to 10% in revenue growth in 2007 and it achieved about 9% that year. For 2007, they started with the guidance of 6%-7% revenue growth and by mid-year ’07 they guided lower to a range of 5%-7% growth. The first half of 2007 has shown a disappointing 4% growth in sales, but management has stated that they think they can show second half revenue growth of 6.5% to 8.5%. The worry out there is that this guidance puts a heavy burden on their Q4 (traditionally a smaller quarter for them). Clearly, the market has expressed some skepticism about their ability to meet these expectations. This is short-term risk to the stock. While I of course care about the short-term stock performance it isn’t and cannot be my main focus and over the longer-term MFB’s stock is priced for much slower growth than they have expressed is reasonably possible/probable. For Maidenform Brands, achieving a top-line growth rate of 5%-7% or so creates a pretty good growth rate in operating income of around 9%-10% and this should translate into net income growth around 12%-14%. This is partly a function of their improving gross margins, operating leverage as well as continued debt reduction and stock buybacks over time. Since the IPO, Maidenform has reduced its debt outstanding by $70m and in 2006 alone bought back $7.5m in share repurchases at an average price of $11.30 per share. As of the 3rd Quarter of 2007, the board authorized a $25 million share repurchase program. I think they are happily buying shares at today’s levels. As an aside issue regarding capital allocation, management has recently stated that it would like to acquire its way into a “luxury” intimate apparel brand to help balance out its growing mass merchant channel that has lower gross margins. While it is always a concern that management will make a mistake here, the history has shown that this management team executes reasonably well and I don’t find that there is a compelling reason to assume that they will make an error here. Cheap Valuation:In the midst of a consumer stock meltdown, Maidenform should produce earnings in 2007 of something around $1.30 per share and it now sells for just over 10x this year’s earnings and less than 10x next year’s EPS. While financials and consumer discretionary stocks are getting pummeled in today’s short-term focused market, I feel now is the time to buy a 10% plus grower that is positioned in the apparel industry’s sweet spot with an ever improving balance sheet and a good management team. The 3rd Quarter report could disappoint investors, but based on my previous experience with Maidenform Brands, that actually may create yet another extremely wonderful buying opportunity for the next 18 months ahead.
Catalyst
Valuation is the only catalyst that I can see clearly.
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