Players in the intimate apparel space, like Hanesbrands (NYSE: HBI) and Warnaco (NYSE: WRC), warned earlier this month that the market was not so strong, and data from retailers like J.C. Penney (NYSE: JCP) and Kohl's (NYSE: KSS) was likewise not encouraging. Even with that backdrop, though, Maidenform Brands (NYSE: MFB) surprised the Street with a very disappointing third quarter and some self-inflicted wounds only made matters worse.
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A Poor Q3
There's no value in sugar-coating what was a lousy report from Maidenform. Sales rose less than 2%, while sell side analysts had been expecting 11% growth, versus last year's quarter. Wholesale sales, the bulk of MFB's revenue base, rose just barely more than 1%, but the results were curiously mixed. Sales to mass merchants like Wal-mart (NYSE: WMT) and Target (NYSE: TGT) jumped 15%, but sales to department stores were down almost 1%. (To know more about buy side and sell side analysts, read: Buy Side Vs. Sell Side Analysts.)

Profitability was similarly disappointing. Gross margin skidded four points on increased promotional spending, which apparently did no good, and liquidations fueled by excess inventory. Operating income dropped 25%, with most of the damage done at the gross profit line.

Inventory Problems Will Linger
As said above, there were warning signs that sales of intimates were going to be weak, overall, and especially tough in the department store category. Apparently Maidenform was caught unawares, however, as inventory levels are now a problem, and the company will be working through this for next couple of quarters, likely stifling any hopes that the holiday season would boost results.

Some Positives Amid the Bad News
There were some bright spots in this tough quarter. Shapewear sales rose 16% and continue to grow, as a percentage of the company's sales base. For the longer term, Maidenform needs to work on diversifying its sales base. Intimates are a stable long-term business, but companies like Hanesbrands, Warnaco and Berkshire Hathaway's (NYSE: BRK.A) Fruit of the Loom, have all benefited from a more diverse product lineup.

Maidenform is also certainly seeing some progress in its mass merchant sales efforts. It is hard to imagine that all of that 15% growth could have come just from Wal-mart, so it seems reasonable to assert that sales to others like Target, Costco (NASDAQ: COST) and Sears Holdings (NASDAQ: SHLD) have picked up. That's relevant as Maidenform has not always done as well at these other retailers; Target in particular has been a challenge in terms of getting a full array of products on the shelves and store racks.

The Bottom Line
With this disappointment, I have revised my own model numbers down by a fairly hefty degree. Even with these lower expectations, Maidenform stock looks too cheap. The inventory issue is certainly a problem and it will sap momentum from the next couple of quarters, but value investors typically don't worry about a stagnant quarter or two. (To know more about value investing, read: 5 Must-Have Metrics For Value Investors.)

The bigger issue is the company's forward revenue and free cash flow margin outlook. I'm modeling mid-single-digit revenue growth for the next five years, and a free cash flow margin that starts at about half of the company's long-term average and slowly climbs back up to the average, over the next five years. On that basis, the stock looks significantly undervalued and worthy of serious consideration. Cautious investors may want to hold off for another quarter though; odds are that the stock is not going to run away in that time and it may be prudent to see that management is addressing the inventory issues, before taking the plunge.

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At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

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