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MFB > SEC Filings for MFB > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for MAIDENFORM BRANDS, INC.

Form 10-Q for MAIDENFORM BRANDS, INC.


8-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis in conjunction with our financial statements and related notes included elsewhere in this report. This report contains forward-looking statements relating to future events and our future performance within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including, without limitation, statements regarding our expectations, beliefs, intentions or future strategies that are signified by the words "anticipates," "believes," "estimates," "expects," "intends," "plans," "potential," "predicts," "projects" or similar words or phrases, although not all forward-looking statements contain such identifying words. All forward-looking statements included in this report are based on information available to us on the date hereof. It is routine for our internal projections and expectations to change as the year or each quarter in the year progress, and therefore it should be clearly understood that the internal projections and beliefs upon which we base our expectations may change prior to the end of each quarter or the year. Although these expectations may change, we assume no obligation to update or revise publicly any forward-looking statements whether as a result of new information, future events or otherwise. Actual events or results may differ materially from those contained in the projections or forward-looking statements. Factors that could cause or contribute to such differences include those discussed below and elsewhere in this report, particularly in the section captioned "PART II - OTHER INFORMATION, Item 1A - Risk Factors."

Management Overview

We are a global intimate apparel company with a portfolio of established, well-known brands, top-selling products and an iconic heritage. We design, source and market an extensive range of intimate apparel products, including bras, panties and shapewear. We sell our products through multiple distribution channels, including department stores and national chain stores (including third party distributors and independent stores), mass merchants (including warehouse clubs), other (including specialty retailers, off-price retailers and licensees), our company-operated outlet stores and our websites.

We sell our products under some of the most recognized brands in the intimate apparel industry. Our Maidenform, Control It!, Flexees, Lilyette and Maidenform's Charmed brands are sold in department stores and national chain stores. Our Bodymates, Inspirations, Self Expressions and Sweet Nothings brands are distributed through mass merchants. These mass merchant brands leverage our product technology, but are separate brands with distinctly different logos. In addition to our owned brands, we also supply private brands to certain retailers, including the Jennifer Lopez brand that launched at Kohl's during the third quarter of 2012. We also sell the Donna Karan and DKNY licensed brands in the department stores and national chain stores channel, domestically and internationally, as a result of our license agreement. This agreement grants us the rights to design, source and market a full collection of Donna Karan and DKNY women's intimate apparel products.

Trends in our business

We operate in two segments, wholesale and retail. Our wholesale segment includes both our domestic and international wholesale markets. Our retail segment includes our company-operated outlet stores and our websites.

We have identified near-term opportunities for growth and operational improvements, as well as challenges, including general macro-economic conditions and increased global competition that may affect our customers and our business. In particular, management believes that there are many factors influencing the intimate apparel industry, including but not limited to: consistent demand for foundation garments, consumer demand for innovative and leading brands, sourcing and supply chain efficiencies, continued growth of the mass merchant channel, pressure from retailers brought about by the consolidation in the retail industry, increases in the cost of the raw materials used in intimate apparel products and uncertainty surrounding import restrictions.

We believe we are well-positioned to capitalize on or address these trends by, among other things:

continuing to launch innovative products and new brands;

increasing our presence in department stores and national chain stores through the use of Maidenform, Control It!, Flexees, Lilyette and Maidenform's Charmed brands;

          expanding distribution of our Donna Karan and DKNY licensed brands;

          expanding shapewear awareness;

          increasing our presence in the mass merchant channel through the use
of Bodymates, Inspirations, Self Expressions and Sweet Nothings brands;


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          expanding our international presence;

          increasing consumer identification with our brands through further
marketing investments;

          marketing, rather than manufacturing our brands, including the

introduction of a new brand architecture that will redefine Maidenform as a women's bodywear company;

expanding our distribution network to include third party distribution facilities;

making selective acquisitions, entering into license agreements, and developing and marketing new products that will complement our existing products or distribution channels; and

merchandising, marketing and selling private brand products to selected retailers.

Wholesale segment

The following trends are among the key variables that will affect our wholesale segment:

Department stores and national chain stores. The department stores and national chain stores are where we generally sell the Maidenform, Control It!, Flexees, Lilyette and Maidenform's Charmed brands. We plan to continue to invest in increasing our net sales with department store and national chain store customers, which we believe is important to our long-term positioning in the channel. While we have grown our sales in the past several years with department stores and national chain stores, we expect the rate of our future net sales growth to be moderate. We have customers located outside the United States that purchase our Maidenform, Control It!, Flexees, Lilyette and Maidenform's Charmed brands. The majority of these net sales are included in the department stores and national chain stores channel. In addition to our owned brands, we also supply private brands to certain retailers, including the Jennifer Lopez brand. We also sell the Donna Karan and DKNY brands in this channel, domestically and internationally, as a result of our license agreement. This agreement grants us the rights to design, source and market a full collection of Donna Karan and DKNY women's intimate apparel products.

Mass merchants. The mass merchant channel includes both mass merchants and warehouse clubs. We intend to improve our penetration with mass merchants through the use of our Bodymates, Inspirations, Self Expressions and Sweet Nothings brands. We have experienced meaningful growth in this channel over the past several years and expect to continue to achieve modest growth in the future as we are able to increase both the floor space and number of doors in which our products are sold, both domestically and internationally. We expect that both our net sales to this channel and our net sales to this channel as a percentage of our total net sales are likely to increase over time. The volume and mix of net sales of our brands in the mass merchant channel can vary from period to period based upon strategic changes that our customers may implement from time to time. Net sales to customers in the mass merchant channel that are located outside the United States are included in this channel.

Other. Net sales from the other channel, include sales to specialty retailers, off-price retailers and royalty income from licensees. We supply private brands to specialty retailers as opportunities present themselves and we continually evaluate this channel for new opportunities. The volume and mix of net sales of private label in the other channel can vary significantly from period to period based upon new product introductions. We expect net sales in this channel to decline in the near future. Net sales to customers in the other channel that are located outside the United States are included in this channel.

We selectively target strategic acquisitions, licensing opportunities or brand start-ups to grow our consumer base and would utilize any acquired companies and licenses to complement our current products, channels and geographic scope. We believe that acquisitions and licenses can enhance our product offerings to retailers and provide growth opportunities. We believe we can leverage our core competencies such as product development, brand management, logistics and marketing to create significant value from the acquired businesses and licenses as we did with the intimate apparel license agreement for the Donna Karan and DKNY brands.

We also generate net sales from licensing our brand names to qualified partners for natural line extensions in the intimate apparel market such as girls bras, swimwear and bra accessories. Licensing royalties account for less than 1% of our total net sales. Our licensed products are sold at department stores, at national chains and mass merchants, at our company-operated outlet stores and through our websites. We believe that we can potentially expand our licensing activities beyond our current offerings.

Retail segment

We believe our retail sales volume is driven by our ability to service our existing consumers and obtain new consumers, as well as overall general macro-economic conditions that can affect our consumers and ultimately their levels of overall spending and choice of retail channel for their purchases. Additionally, identifying optimal retail outlet locations, favorable leasing arrangements, and


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improving our store productivity are factors important to growing our retail segment's net sales. We also sell our products through our websites, www.maidenform.com and www.maidenform.co.uk. Although we currently do not generate a significant amount of net sales through these sites, we do expect it to continue to grow.

Our objectives in our retail segment are to continue to increase the productivity of our portfolio of stores through effective merchandising and focused advertising, as well as selectively closing less productive locations and potentially opening new stores in more productive locations. Even in those situations where we selectively close less productive outlet stores and do not open a new store in that region, we believe those consumers still purchase many of our Maidenform brands from our other outlet stores, our websites or our wholesale segment customers that carry these brands. Our company-operated outlet stores reduce our dependence on off-price retailers and increase brand awareness through direct-to-consumer sale of our products. We had 76 retail outlet stores as of September 29, 2012 compared to 75 retail outlet stores as of October 1, 2011.

Results of Operations

Included in this presentation are discussions and reconciliations of operating income and net income in accordance with generally accepted accounting principles ("GAAP") to operating income and net income excluding a litigation settlement. Each of these adjustments was selected because our management uses these non-GAAP measures in discussing and analyzing our results of operations and because we believe the non-GAAP measures provide investors with greater transparency by helping to illustrate the underlying financial and business trends relating to our results of operations, financial condition and comparability between current and prior periods.

                                        Three Months Ended                  Nine Months Ended
                                  September 29,      October 1,       September 29,      October 1,
                                      2012              2011              2012              2011
OPERATING DATA: (in millions)
Wholesale sales                  $         131.5    $       130.2    $         417.7    $      436.0
Retail sales                                18.7             18.0               47.5            45.8
Net sales                                  150.2            148.2              465.2           481.8
Cost of sales                              101.5            100.8              320.0           319.6
Gross profit                                48.7             47.4              145.2           162.2
Selling, general and
administrative expenses                     30.9             31.5               98.6            98.0
Litigation settlement                          -                -                  -             6.8
Operating income                 $          17.8    $        15.9    $          46.6    $       57.4




                                                As a Percentage of Net Sales
                                     Three Months Ended              Nine Months Ended
                                 September 29,    October 1,    September 29,    October 1,
                                     2012            2011           2012            2011
OPERATING DATA:
Wholesale sales                           87.5 %        87.9 %           89.8 %        90.5 %
Retail sales                              12.5          12.1             10.2           9.5
Net sales                                100.0         100.0            100.0         100.0
Cost of sales                             67.6          68.0             68.8          66.3
Gross profit                              32.4          32.0             31.2          33.7
Selling, general and
administrative expenses                   20.5          21.3             21.2          20.4
Litigation settlement                        -             -                -           1.4
Operating income                          11.9 %        10.7 %           10.0 %        11.9 %

Our net sales are derived from two segments, wholesale and retail. Our net sales within the wholesale segment are grouped by channel, based upon the brands we sell and the customers to whom we sell, as follows: (1) department stores and national chain stores, (2) mass merchants and (3) other.

Our department stores and national chain stores channel (including third party distributors and independent stores) primarily consists of sales of our Maidenform, Control It!, Flexees, Lilyette and Maidenform's Charmed brands on a worldwide basis to customers within this category. Within the mass merchant channel (including warehouse clubs), we sell brands such as Bodymates, Inspirations,


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Self Expressions and Sweet Nothings that are primarily dedicated to specific customers. These brands are all sold on a worldwide basis to mass merchants and, to a lesser degree, warehouse clubs. Our remaining sales are grouped within a channel designated as other and include private brand products sold to specialty retailers and all brand sales to off-price retail stores on a worldwide basis. In addition, we include licensing income in our other channel.

                                     Three Months Ended                                     Nine Months Ended
                      September 29,     October 1,       $         %         September 29,     October 1,       $        %
                          2012             2011        change    change          2012             2011       change    change
                                       (in millions)                                          (in millions)
Department stores
and national chain
stores               $          64.2   $       59.9   $    4.3      7.2 %   $         193.2   $      193.3   $  (0.1 )   (0.1 )%
Mass merchants                  44.8           45.1       (0.3 )   (0.7 )             152.0          159.9      (7.9 )   (4.9 )
Other                           22.5           25.2       (2.7 )  (10.7 )              72.5           82.8     (10.3 )  (12.4 )
Total wholesale                131.5          130.2        1.3      1.0               417.7          436.0     (18.3 )   (4.2 )

Retail                          18.7           18.0        0.7      3.9                47.5           45.8       1.7      3.7

Total consolidated
net sales            $         150.2   $      148.2   $    2.0      1.3 %   $         465.2   $      481.8   $ (16.6 )   (3.4 )%

In addition, our mix of products sold worldwide between bras, shapewear and panties for the three and nine-month periods ended September 29, 2012 and October 1, 2011, respectively, is summarized below:

                Three Months Ended           Nine Months Ended
            September 29,   October 1,   September 29,   October 1,
                2012           2011          2012           2011
Bras                   56 %         56 %            57 %         56 %
Shapewear              33           37              35           37
Panties                11            7               8            7
                      100 %        100 %           100 %        100 %

Net sales

Consolidated net sales increased by $2.0 million, or 1.3%, from $148.2 million for the three months ended October 1, 2011 to $150.2 million for the three months ended September 29, 2012. Consolidated net sales decreased by $16.6 million, or 3.4%, from $481.8 million for the nine months ended October 1, 2011 to $465.2 million for the nine months ended September 29, 2012.

Wholesale segment net sales increased by $1.3 million, or 1.0%, from $130.2 million for the three months ended October 1, 2011 to $131.5 million for the three months ended September 29, 2012. Total international net sales, which are included in our wholesale segment, increased by $2.5 million, or 17.7%, from $14.1 million for the three months ended October 1, 2011 to $16.6 million for the three months ended September 29, 2012. We benefited from higher sales in Canada and Mexico that more than offset lower sales in most European countries. Our department stores and national chain stores channel net sales increased by $4.3 million, or 7.2%, from $59.9 million for the three months ended October 1, 2011 to $64.2 million for the three months ended September 29, 2012. This increase was led by growth in the bra and pant categories, resulting from replenishment orders and new product launches. Our mass merchant channel net sales decreased by $0.3 million, or 0.7%, from $45.1 million for the three months ended October 1, 2011 to $44.8 million for the three months ended September 29, 2012, resulting from a decline in shipments to a mass customer that was nearly offset by program shipments to a warehouse club. Other channel net sales, which include sales to specialty retailers, off-price retailers and licensing income, decreased by $2.7 million, or 10.7%, from $25.2 million for the three months ended October 1, 2011 to $22.5 million for the three months ended September 29, 2012. This decrease was due primarily from lower sales to a specialty retailer that was partially offset by increased sales to off-price retailers.

Wholesale segment net sales decreased by $18.3 million, or 4.2%, from $436.0 million for the nine months ended October 1, 2011 to $417.7 million for the nine months ended September 29, 2012. Total international net sales increased by $3.8 million, or 8.6%, from $44.1 million for the nine months ended October 1, 2011 to $47.9 million for the nine months ended September 29, 2012, resulting


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from increased sales to major markets, such as Canada, the United Kingdom and Mexico. Partially offsetting these increases were sales decreases in other major markets, such as the Benelux countries and Sweden. Our department stores and national chain stores channel net sales ended relatively unchanged at $193.2 million for the nine months ended September 29, 2012, a reduction of $0.1 million or 0.1% when compared to the same period in 2011. In addition to the reasons mentioned above for the third quarter, we experienced an assortment expansion in 2011 at one of our chain store customers that did not repeat in 2012, and sales declines at a mid-tier department store as it transitions to a new pricing and merchandising strategy. These decreases were partially offset by sales of the Jennifer Lopez brand that shipped for the first time to a chain store customer in the second quarter of 2012. Our mass merchant channel net sales decreased by $7.9 million, or 4.9%, from $159.9 million for the nine months ended October 1, 2011 to $152.0 million for the nine months ended September 29, 2012 resulting from the changes mentioned in the third quarter, along with mixed results with other mass merchant customers. Other channel net sales decreased by $10.3 million, or 12.4%, from $82.8 million for the nine months ended October 1, 2011 to $72.5 million for the nine months ended September 29, 2012 resulting from the reasons mentioned above, along with fewer program sales with off-price retailers.

Net sales in our retail segment increased by $0.7 million, or 3.9%, from $18.0 million for the three months ended October 1, 2011 to $18.7 million for the three months ended September 29, 2012 and increased by $1.7 million, or 3.7%, from $45.8 million for the nine months ended October 1, 2011 to $47.5 million for the nine months ended September 29, 2012. These increases in net sales for the third quarter and nine months ended September 29, 2012 are largely driven by our e-commerce growth. This growth was attributable to increases in the majority of our product categories, most notably the bra category as a result of promotional activities. Same store sales, defined as sales from stores open more than one year, for the three and nine-month periods ended September 29, 2012 increased 0.7% and 0.3%, respectively. Our internet sales increased by $0.6 million, or 35.3%, from $1.7 million for the three months ended October 1, 2011 to $2.3 million for the three months ended September 29, 2012 and increased by $1.9 million, or 38.0%, from $5.0 million for the nine months ended October 1, 2011 to $6.9 million for the nine months ended September 29, 2012.

Gross profit

Consolidated gross profit increased by $1.3 million, or 2.7%, from $47.4 million for the three months ended October 1, 2011 to $48.7 million for the three months ended September 29, 2012. As a percentage of net sales, consolidated gross margins increased by 40 basis points from 32.0% for the three months ended October 1, 2011 to 32.4% for the three months ended September 29, 2012. Consolidated gross profit decreased by $17.0 million, or 10.5%, from $162.2 million for the nine months ended October 1, 2011 to $145.2 million for the nine months ended September 29, 2012. As a percentage of net sales, gross profit decreased by 250 basis points from 33.7% for the nine months ended October 1, 2011 to 31.2% for the nine months ended September 29, 2012.

Gross profit as a percentage of net sales for our wholesale segment increased by 110 basis points from 27.7% for the three months ended October 1, 2011 to 28.8% for the three months ended September 29, 2012. The increase in gross margin was primarily a result of favorable product mix during the quarter. Partially offsetting this increase was the result of a higher mix of sales to off-price retailers. Gross profit as a percentage of net sales for our wholesale segment was 28.0% for the nine months ended September 29, 2012 as compared to 30.8% for the nine months ended October 1, 2011. This decrease of 280 basis points is mainly a result of increased off-price retailer activity to drive inventory productivity and inventory related clearing costs.

Gross profit as a percentage of net sales for our retail segment decreased by 500 basis points from 62.8% for the three months ended October 1, 2011 to 57.8% for the three months ended September 29, 2012, and decreased 150 basis points from 61.1% for the nine months ended October 1, 2011 to 59.6% for the nine months ended September 29, 2012. These decreases in gross profit as a percentage of sales are a result of product mix and promotional activities.

Selling, general and administrative expenses ("SG&A")

Consolidated SG&A decreased by $0.6 million, or 1.9%, from $31.5 million for the three months ended October 1, 2011 to $30.9 million for the three months ended September 29, 2012. As a percentage of net sales, SG&A decreased from 21.3% for the three months ended October 1, 2011 to 20.5% for the three months ended September 29, 2012. Consolidated SG&A increased by $0.6 million, or 0.6%, from $98.0 million for the nine months ended October 1, 2011 to $98.6 million for the nine months ended September 29, 2012. As a percentage of net sales, SG&A increased from 20.4% for the nine months ended October 1, 2011 to 21.2% for the nine months ended September 29, 2012.

SG&A for our wholesale segment, which includes corporate-related expenses, decreased by $1.3 million, or 5.7%, from $22.9 million for the three months ended October 1, 2011 to $21.6 million for the three months ended September 29, 2012. As a percentage of net


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sales, wholesale segment SG&A decreased from 17.6% for the three months ended October 1, 2011 to 16.4% for the three months ended September 29, 2012. The lower SG&A was primarily due to favorable currency exchange rates particularly in Mexico, the reduction in incentive compensation, and lower professional fees of $3.0 million. Partially offsetting these decreases were startup costs associated with third party distribution on the West Coast and increased payroll and related benefits.

SG&A for our wholesale segment decreased by $1.1 million, or 1.5%, from $72.9 million for the nine months ended October 1, 2011 to $71.8 million for the nine months ended September 29, 2012. The decrease of $1.1 million was a result of the reasons mentioned above. As a percentage of net sales, wholesale segment SG&A increased from 16.7% for the nine months ended October 1, 2011 to 17.2% for the nine months ended September 29, 2012.

Retail SG&A increased by $0.7 million, or 8.1%, from $8.6 million for the three months ended October 1, 2011 to $9.3 million for the three months ended September 29, 2012. Retail SG&A increased by $1.7 million, or 6.8%, from $25.1 million for the nine months ended October 1, 2011 to $26.8 million for the nine months ended September 29, 2012. These increases were primarily the result of increased operating expenses, including costs associated with e-commerce sales promotion activities.

Litigation settlement

We entered into a litigation settlement agreement in August 2011. In connection with the settlement, we paid $6.8 million ($4.1 million after tax).

Operating income

Our consolidated operating income, increased by $1.9 million, or 11.9%, from $15.9 million for the three months ended October 1, 2011 to $17.8 million for the three months ended September 29, 2012 and decreased by $10.8 million, or 18.8%, from $57.4 million for the nine months ended October 1, 2011 to $46.6 million for the nine months ended September 29, 2012.

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