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Coverage Initiation: Maidenform Brands and Perry Ellis International
In continuing efforts to constantly refresh the portfolio of stocks in its universe, The Value Line Investment Survey has recently picked up coverage of two medium-sized apparel companies, Maidenform Brands (MFB) and Perry Ellis International (PERY). Both had stellar performances last year and have good, well-defined growth prospects.
Besides their namesake labels, both of these clothing purveyors have a closet full of well-established brand names. Maidenform’s line-up includes Flexees and Lilyette, while Perry Ellis owns Mungsingwear (and Original Penguin by Mungsingwear) and Jantzen. Both also have star-power licensing rights; Donna Karan and DKYN for Maidenform and Nike (swimwear), Callaway Golf, and Pierre Cardin for Perry Ellis.
Each company sells apparel through a diverse range of distribution channels, which is a good thing. Though about 42% of Maindenform’s sales are derived through department stores, which is somewhat unnerving considering that the channel is in a long-term price war with specialty retailers. But that figure includes national apparel chains, and Maidenform has strong relationships with all of its retail partners. (The company does not break the two out.) Perry Ellis’ exposure to department stores is less than 25%. Too, the couple has opportunities in owned retail venues, though neither appears all that aggressive on that front. Maidenform owned 73 stores at the end of 2010, contributing 10% of total sales, while Perry Ellis derives 15% of its sales through 49 owned stores. And both have relatively limited international operations, providing an opportunity for expansion.
The major difference between the two is that Maindenform caters to women, primarily with bras and panties, while Perry Ellis is best known for men’s shirts, pants, and golfwear. Women tend to turn their wardrobes over faster than men, so Maidenform is in a good place. However, its growth is limited to that space, at least under its namesake label. Perry Ellis, on the other hand, is not so constrained, and it has recently made a big jump into the female market, with the purchase of Rafaella Apparel Group. Rafaella is a designer and marketer of women’s better sportswear and is best known for superior-fitting pants. In 2008, Perry Ellis entered the women’s market with the dual purchase of Laundry by Shelli Segal and C&C California, but women’s clothing (excluding swimwear) still only accounted for 3% of total sales. Rafaella takes that percentage up to 16%, and is expected to be highly accretive to earnings right away.
Perry Ellis also aims at the fast-growing Hispanic market. The company’s founder and CEO is Cuban, and he migrated to Miami in 1967 and soon began selling guayabera shirts (four pocket tops worn over the belt) in the local market and Puerto Rico, well before purchasing the Perry Ellis brand in 1999. Today, the company owns the Cubavera, Havanera, Centro, and Solero brands that specifically target the Hispanic market, the fastest-growing ethnic group in America.
Not to be outdone, Maidenform has a few growth tricks up its sleeve. Late last year, it began selling Donna Karan shapewear products. And the company has recently introduced a juniors’ line called Charmed. The label is currently having an exclusive rollout at Macy’s (M) and will go international, if all goes according to plan, next year. Maidenform also relies on product innovation to fuel growth. The new No Pressure bra eliminates poking and pinching, and a one-size-fits-all bra will come out this fall.
Both companies have the financial means to fund growth projects, as well, though on this one the edge goes to Maidenform. Its debt-to-total capital ratio is only 27%, and the balance sheet recently boasted more cash than debt. On January 30, 2011, Perry Ellis’ debt to total capitalization was 43%. In March, however, the company closed on an offering of two million shares of common stock and $150 million of 7.875% senior subordinated notes due 2019. Most of the proceeds will be used to repurchase 8.875% notes due 2013, but the combined transactions will be dilutive to earnings this year. The recapitalization, though, provides a solid foundation for long-term growth, including the drive into women’s apparel.
Now for the negatives. Both companies are focused on developing and marketing brands, and have no direct ownership or control over manufacturing. That can be a real positive when apparel markets are weakening and capacity goes underutilized. However, the market is now on an upswing and capacity is tight. Sourcing, especially in China, has become difficult, and labor costs are soaring. In addition, fiber and fabric prices are getting out of hand. The advantage here goes to Maidenform, as it has virtually no exposure to cotton, which has seen prices skyrocket in recent months. But its major raw material is nylon, which is also experiencing an inflationary bout. And while cotton prices are expected to fall next year, thanks to increased plantings, there are no assurances that synthetic fiber costs will come down. All apparel companies are implementing product price hikes to help alleviate the margin pressure, but at some point consumers, already hard hit by high fuel and food prices, are going to rein in spending on discretionary items, including clothing.
All in all, though, both Maidenform and Perry Ellis should have strong performances this year, assuming product price/cost ratios remain at current levels, and the long-term outlook is favorable. Readers should refer to the individual stock reports in The Value Line Investment Survey for further details.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.