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MFB > SEC Filings for MFB > Form 10-Q on 9-May-2013All Recent SEC Filings

Show all filings for MAIDENFORM BRANDS, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for MAIDENFORM BRANDS, INC.


9-May-2013

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 and Lilyette 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. We also sell the Donna Karan and DKNY licensed brands, 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, particularly in shapewear, that may adversely affect 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, increases in the cost of the raw materials used in intimate apparel products and uncertainty surrounding import restrictions.

Although we believe we are well positioned to address some of these trends, we believe the competitive and retail environment and our brand awareness require us to invest in the Maidenform brand. We will therefore be making significant investments in marketing and branding in 2013 and 2014 to add to our growth beginning in 2014.

During 2013, we are focusing on reducing styles and SKU's with an emphasis on reducing color and fashion in our product assortment. We believe this initiative will reduce markdowns and improve the quality of our inventory. We are also focused on exiting unproductive businesses, like we did with our Maidenform's Charmed business in 2012.

While we focus on these actions, we will continue to introduce new and innovative products. In 2013, we will expand upon our well received Comfort Devotion collection by offering an expanded shapewear assortment. In addition, we will be introducing a


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Maidenform full figure collection at department and chain stores in the fourth quarter of 2013, which will incorporate many of the signature elements of the Comfort Devotion collection. We have not previously competed in a meaningful way in the full figure category, which represents approximately 40% of the total intimate apparel market.

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 have historically sold the Maidenform, Control It!, Flexees and Lilyette brands. We plan to continue to significantly increase our branding and marketing investments which we believe will increase our net sales with department store and national chain store customers. As part of these branding and marketing investments, we will be consolidating our Flexees and Control It! shapewear lines under the Maidenform brand. 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 and Lilyette 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. 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 expect that the increased investments in the Maidenform brand will result in increased awareness of our Maidenform endorsed mass brands; Bodymates, Inspirations, Self Expressions and Sweet Nothings brands. While we have grown our sales in the past several years in this channel, we expect the rate of our future net sales growth to be moderate, both domestically and internationally. 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 channel that are located outside the United States are included in this channel.

Other. Net sales from this channel include sales to specialty retailers, off-price retailers and royalty income from licensees. We currently supply a specialty retailer with product 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. 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 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.


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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 69 retail outlet stores as of March 30, 2013 compared to 75 retail outlet stores as of March 31, 2012.

Results of Operations



                                                  Three Months Ended
                                               March 30,      March 31,
                                                  2013          2012
OPERATING DATA: (in millions)
Wholesale sales                                $    118.7    $     144.8
Retail sales                                         12.5           12.7
Net sales                                           131.2          157.5
Cost of sales                                       100.6          114.6
Gross profit                                         30.6           42.9
Selling, general and administrative expenses         32.5           33.1
Operating (loss) income                        $     (1.9 )  $       9.8




                                                 As a Percentage of Net Sales
                                                      Three Months Ended
                                                 March 30,         March 31,
                                                    2013              2012
OPERATING DATA:
Wholesale sales                                          90.5 %            91.9 %
Retail sales                                              9.5               8.1
Net sales                                               100.0             100.0
Cost of sales                                            76.7              72.8
Gross profit                                             23.3              27.2
Selling, general and administrative expenses             24.7              21.0
Operating (loss) income                                  -1.4 %             6.2 %

Our net sales performance by channel of distribution:

                                             Three Months Ended
                           March 30,       March 31,           $             %
                              2013            2012          change         change
                                                (in millions)
Department stores and
national chain stores     $       53.7    $       58.6    $      (4.9 )        (8.4 %)
Mass merchants                    43.5            59.0          (15.5 )       (26.3 )
Other                             21.5            27.2           (5.7 )       (21.0 )
Total wholesale                  118.7           144.8          (26.1 )       (18.0 )

Retail                            12.5            12.7           (0.2 )        (1.6 )

Total net sales           $      131.2    $      157.5    $     (26.3 )       (16.7 %)


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In addition, our mix of products sold worldwide between bras, shapewear and panties for the three-month periods ended March 30, 2013 and March 31, 2012, respectively, is summarized below:

Three Months Ended

            March 30,   March 31,
              2013        2012
Bras               60 %        55 %
Shapewear          31          38
Panties             9           7
                  100 %       100 %

Net sales

Consolidated net sales decreased $26.3 million, or 16.7%, from $157.5 million for the three months ended March 31, 2012 to $131.2 million for the three months ended March 30, 2013. Wholesale segment net sales decreased by $26.1 million, or 18.0%, from $144.8 million for the three months ended March 31, 2012 to $118.7 million for the three months ended March 30, 2013. Net sales in our retail segment remained relatively unchanged, decreasing by $0.2 million, or 1.6%, from $12.7 million for the three months ended March 31, 2012 to $12.5 million for the three months ended March 30, 2013.

Our department stores and national chain stores channel net sales decreased by $4.9 million, or 8.4%, from $58.6 million for the three months ended March 31, 2012 to $53.7 million for the three months ended March 30, 2013, primarily attributable to increased shapewear competition at a chain customer. Our mass merchant channel net sales decreased by $15.5 million, or 26.3%, from $59.0 million for the three months ended March 31, 2012 to $43.5 million for the three months ended March 30, 2013, resulting from decreased shipments in the bra and shapewear categories, including lower sales to a global warehouse club as a shapewear event in the first quarter of 2012 did not repeat in the first quarter of 2013. Other channel net sales, which includes sales to specialty retailers, off-price retailers and licensing income, decreased by $5.7 million, or 21.0%, from $27.2 million for the three months ended March 31, 2012 to $21.5 million for the three months ended March 30, 2013. This decrease was due to sales declines to a specialty retailer and from decreased program sales to off-price retailers, which were somewhat offset by higher liquidation sales. Total international net sales, which are included in the wholesale segment, decreased $1.0 million, or 6.1%, from $16.5 million for the three months ended March 31, 2012 to $15.5 million for the three months ended March 30, 2013. This sales decline was driven by the elimination of the aforementioned warehouse club program and a decline in the United Kingdom, which were partially offset by the sales increases in Mexico and South Korea.

Retail segment net sales decreased $0.2 million, or 1.6%, from $12.7 million for the three months ended March 31, 2012 to $12.5 million for the three months ended March 30, 2013. Same store sales, defined as stores that have been open for more than one year, increased 4.3%. Our internet sales decreased $0.2 million, or 8.7%, from $2.3 million for the three months ended March 31, 2012 to $2.1 million for the three months ended March 30, 2013, resulting from lower promotional activity when compared to the prior year.

Gross profit

Consolidated gross profit decreased by $12.3 million, or 28.7%, from $42.9 million for the three months ended March 31, 2012 to $30.6 million for the three months ended March 30, 2013. As a percentage of net sales, gross profit decreased by 3.9 percentage points from 27.2% for the three months ended March 31, 2012 to 23.3% for the three months ended March 30, 2013.

Gross profit from our wholesale segment decreased by $12.2 million, or 34.6%, from $35.3 million for the three months ended March 31, 2012 to $23.1 million for the three months ended March 30, 2013. As a percentage of net sales, gross profit from our wholesale segment decreased by 4.9 percentage points from 24.4% for the three months ended March 31, 2012 to 19.5% for the three months ended March 30, 2013, driven by higher liquidation sales and negative product mix on higher sales in the panties category with declines in the higher margin shapewear and bras categories.

Gross profit from our retail segment decreased by $0.1 million, or 1.3%, from $7.6 million for the three months ended March 31, 2012 to $7.5 million for the three months ended March 30, 2013. As a percentage of net sales, gross profit from our retail segment increased


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by 0.2 percentage points from 59.8% for the three months ended March 31, 2012 to 60.0% for the three months ended March 30, 2013.

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

Our consolidated SG&A decreased by $0.6 million, or 1.8%, from $33.1 million for the three months ended March 31, 2012 to $32.5 million for the three months ended March 30, 2013. As a percentage of net sales, SG&A increased by 3.7 percentage points from 21.0% for the three months ended March 31, 2012 to 24.7% for the three months ended March 30, 2013.

Wholesale segment SG&A, which includes corporate-related expenses, decreased by $0.5 million, or 2.0%, from $24.5 million for the three months ended March 31, 2012 to $24.0 million for the three months ended March 30, 2013. This decrease is a result of managing our expenses along with decreased payroll and related benefits, including lower incentive compensation, which was partially offset by a lower benefit from foreign currency exchange when compared to the first quarter in 2012, which partially offset these expense decreases.

Retail segment SG&A decreased by $0.1 million, or 1.2%, from $8.6 million for the three months ended March 31, 2012 to $8.5 million for the three months ended March 30, 2013. As a percentage of net sales, retail segment SG&A increased from 67.7% for the three months ended March 31, 2012 to 68.0% for the three months ended March 30, 2013. The decrease of $0.1 million is primarily the result of a reduction in variable store operating expenses as we executed the planned store closings in the first quarter of 2013.

Operating (loss) income

Our consolidated operating income decreased by $11.7 million, or 119.4%, from income of $9.8 million for the three months ended March 31, 2012 to a loss of $1.9 million for the three months ended March 30, 2013.

For the foregoing reasons, operating income for the wholesale segment decreased by $11.7 million, or 108.3%, from $10.8 million for the three months ended March 31, 2012 to a loss of $0.9 million for the three months ended March 30, 2013. Also, for the reasons discussed above, operating loss for the retail segment remained unchanged at $1.0 million when compared to the same period in 2012.

Interest expense, net

Interest expense, net, remained unchanged at $0.3 million for the three months ended March 30, 2013 when compared to the same period in 2012.

Income tax (benefit) expense

Income tax (benefit) expense decreased $4.7 million, or 127.0%, from an expense of $3.7 million for the three months ended March 31, 2012 to a benefit of $1.0 million for the three months ended March 30, 2013. Our effective tax rate increased from 39.0% for the three months ended March 31, 2012 to 43.0% for the three months ended March 30, 2013.

Net (loss) income

For the foregoing reasons, our net (loss) income decreased by $7.0 million, or 120.7%, from income of $5.8 million for the three months ended March 31, 2012 to a loss of $1.2 million for the three months ended March 30, 2013.

Liquidity and Capital Resources

Operating activities. Cash flows used in operating activities were $33.5 million for the three months ended March 30, 2013 compared to cash flows used in operating activities of $35.6 million for the three months ended March 31, 2012. Working capital changes for the first quarter of 2013 included cash outflows of $18.9 million related to accounts receivable resulting from sales declines in the first quarter of 2013 compared to the same period in 2012 in addition to the timing of cash collections, $11.2 million related to inventory to support new product launches and $3.7 million related to accounts payable primarily due to the timing of cash payments.


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Investing activities. Cash flows used in investing activities were $1.3 million for the three months ended March 30, 2013 compared to $0.8 million for the three months ended March 31, 2012. Cash flows used in investing activities for the three months ended March 30, 2013 primarily related to store remodeling and information technology upgrades, and for the three months ended March 31, 2012 related to information technology upgrades.

Financing activities. Cash flows used in financing activities were $1.6 million for the three months ended March 30, 2013 compared to cash flows used in financing activities of $1.2 million for the three months ended March 31, 2012.

Our stock repurchase program allows us to repurchase our shares from time to time pursuant to existing rules and regulations and other parameters approved by the board of directors. At March 30, 2013, we had $9.1 million remaining available under our stock repurchase program. We did not repurchase any of our common stock during the three-month periods ended March 30, 2013 and March 31, 2012.

In March 2012, we entered into an amendment and modification agreement to our credit facility pursuant to which among other things, we extended the maturity of our revolving loan by two years to June 2014.

At March 30, 2013 we had $67.7 million outstanding under our term loan, and $0 outstanding under our revolving loan with approximately $49.3 million available for borrowings, after giving effect to $0.7 million of outstanding letters of credit. Principal payments on the term loan are payable in quarterly installments of $0.3 million with all remaining amounts due in 2014. We are permitted to voluntarily prepay all or part of the principal balance of the term loan with such prepayments applied to scheduled principal payments in inverse order of their maturity. We were in compliance with all debt covenants at March 30, 2013.

Based on our current outlook, we believe that cash generated from operations and available cash, together with amounts available under our revolving loan, will be adequate to meet our working capital needs and capital expenditure requirements for the foreseeable future, although no assurance can be given in this regard.

Below is a summary of our actual performance under these financial covenants:

                                           March 30, 2013   December 29,
                                              Covenant      2012 Covenant

Actual fixed charge coverage ratio (1)      1.51 : 1.00      1.94 : 1.00
Minimum ratio required                      1.25 : 1.00      1.25 : 1.00

Actual leverage ratio (2)                   0.43 : 1.00     (0.24) : 1.00
Maximum ratio permitted                     3.25 : 1.00      3.25 : 1.00

Actual leverage ratio (3)                   1.36 : 1.00      1.11 : 1.00
Maximum ratio permitted                     3.25 : 1.00      3.25 : 1.00

Actual consolidated capital expenditures       $1,322          $7,307
Maximum permitted                             $12,693          $11,415



(1) Coverage ratio is computed as the ratio of earnings available for fixed charges to fixed charges. Earnings available for fixed charges consist of consolidated earnings before interest, taxes, depreciation and amortization ("EBITDA") and certain non-cash charges less capital expenditures. Fixed charges consist of consolidated interest expense, scheduled principal payments on our long-term debt, cash taxes paid and permitted restricted junior payments including certain adjustments allowed under our credit facility.

(2) Leverage ratio is computed as the ratio of total net debt to consolidated EBITDA and certain non-cash charges. Total net debt is defined as total debt (long-term debt and outstanding letters of credit) less total cash and cash equivalents.

(3) Leverage ratio is computed as the ratio of total debt to consolidated EBITDA and certain non-cash charges.


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Contractual Obligations, Commitments and Off-Balance Sheet Arrangements

We have various contractual obligations which are recorded as liabilities in our condensed consolidated financial statements. Other items, such as certain purchase commitments and other executory contracts, are not recognized as liabilities in our condensed consolidated financial statements but are required to be disclosed. For example, we are contractually committed to make certain minimum lease payments for the use of property under operating lease agreements.

The following table summarizes our significant contractual obligations and commercial commitments at March 30, 2013 and the future periods in which such obligations are expected to be settled in cash. In addition, the table below reflects the timing of principal and interest payments on outstanding borrowings.

                           Balance of
                             fiscal       In fiscal     In fiscal     In fiscal     In fiscal
(in millions)                 2013          2014          2015          2016          2017       Thereafter     Total
Long-term debt            $        0.6   $      67.1   $         -   $         -   $         -   $         -   $   67.7
Interest on long-term
debt (1)                           0.4           0.6             -             -             -             -        1.0
Obligations under
capital lease (2)                  0.2             -             -             -             -             -        0.2
Operating leases (3)               6.7           7.0           5.6           4.4           3.4          11.7       38.8
. . .
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