Stock Picks with Chicks: A Revealing Look at Lingerie

Please forgive the pun (and the dozens to follow, as well as the endless stream of gags in the accompanying video), but we've got a brazen stock pick this week for investors looking to boost their exposure to the apparel industry.

After ogling intimate apparel companies for some time -- lifting and separating the pros and cons of the major players -- we're ready to reveal our top bra-stock pick. But before we flash our favorite company in public, let's take a peek into consumers' drawers. Underwear drawers, that is.

Beyond brassieres
It may not be a topic of frequent conversation, but women spend billions on bras; word has it that the average female consumer buys five or six every year. But it's not just bras that we're cramming in our dresser drawers.

Today, what women's outfits aren't showing is just as important as what they are. Innovations in the undergarment industry -- everything from "shapewear" like the popular Spanx to sports bras made from futuristic fabrics -- have taken this sector well beyond simple, practical support or impractical prettiness.

The companies that make these items -- Hanesbrands (NYSE: HBI  ) , Maidenform (NYSE: MFB  ) , Warnaco (NYSE: WRC  ) , and Limited Brands (NYSE: LTD  ) -- are constantly searching for new ways to impress their female customers (and make their own products "must-have" items under every wardrobe). But don't be fooled: Despite Victoria's Secret's silky death grip on brassiere mindshare, it's not the company turning our heads this week. Just take a look at how the competition is racking... er... stacking up:

Before we reveal the details, here's a peek at how the intimate apparel competition measures up against one another:

Company

Revenue Growth (TTM)

EPS growth (TTM)

Gross Profit

Debt-to-capital ratio

P/E (TTM)

Maidenform

21.1%

45.6%

36.1%

27.7%

13

Hanesbrands

5.8%

153.3%

33.5%

79.3%

14

Limited

7.7%

541.3%

42.7%

55.6%

14

Warnaco

12.8%

75.1%

44.8%

6.6%

20

*All data from Capital IQ, a unit of Standard & Poor's.

Sagging sales and inventory spillover
Let's start with Maidenform -- an interesting case, since its recent quarterly results resulted in a plunging stock price. That tumble might tempt investors to buy it as a risky value play. But some stocks get "cheap" for a reason, and if Maidenform's problems continue, that price might end up being pretty dear in the long run.

Inventories that rise faster than sales are always a major red flag. (A massive inventory buildup helped to indicate that Crocs (Nasdaq: CROX  ) faced tough times several years ago.) Last quarter, Maidenform's inventories surged an eye-popping 70% versus a measly 13% sales increase. The company blamed department stores for making overly conservative orders for the holiday season.

Granted, Maidenform's sales in the last 12 months have booked an admirable and impressive increase, helped along by the popularity of its shapewear products. But if those products are losing allure, and the company has nothing compelling to replace them with, that strong revenue growth may well be completely unsustainable.

It'll probably take some time for Maidenform to work through that situation; for now, it's a risky stock. Investors who are interested in the value play element should consider adding it to My Watchlist, as opposed to a "buy now" list.

What's hiding under Hanesbrands
We really wanted to like Hanesbrands, a company that was spun off from old-guard textile company Sara Lee (NYSE: SLE  ) in 2006. Hanesbrands provides solid labels such as Playtex, Bali, Wonderbra, and Champion. That's right -- its product line includes underthings and outerwear.

However, its revenue growth is pretty anemic compared to its peers', and its gross profit margin's the lowest in this bunch. A debt-to-capital ratio of 79.3% looks downright dangerous, too. The company even flaunts its debt load in the "Risk Factors" section of its Form 10-K.

Vicky's not-so-hot secret
Limited's not really as exciting as it may seem, either. Although its Victoria's Secret unit can be credited with making sexy lingerie not-so-secret (it's probably the best-known undergarment brand around, given its high profile with ladies and gentlemen alike), it's not a pure play in the space.

In other words, we don't have a good melons-to-melons comparison to make, since Limited owns Bath & Body Works too. (Sorry, it's been at least a few paragraphs since we had a racy pun!) The company's overall revenue growth isn't that exciting, and its significant debt load isn't appealing, either.

Finding comfort and support in Warnaco
Don't worry! We're not just here to bust on all bra stocks.

Warnaco is the distribution powerhouse behind brands like Calvin Klein, Speedo, and Olga. In a highly competitive and fickle sector, Warnaco may seem expensive compared to its skimpier-priced peers. Of the bunch, Warnaco trades at the highest multiple, with a P/E of 20.

But take a closer look at the company's financial results over several years' time, and you'll notice that this company retains its shape in the wash. Its growth in revenue and profit is strong and more importantly, consistent.

Furthermore, Warnaco's got a mere 6.6% debt-to-capital ratio, and it has a strong balance sheet overall, with $213.4 million or $4.80 per share in cash. Its PEG ratio of 0.98 also suggests a stock that's undervalued for the long haul.

Investors who want to see their cups runneth over with investing returns should consider Warnaco a bodacious pick in this undercover segment.

Previous revealing installments of Stock Picks with Chicks:

The Fool owns shares of Limited Brands. Try any of our Foolish newsletter services free for 30 days.

Alyce Lomax and Dayana Yochim do not own shares of any of the unmentionables companies mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (11) | Recommend This Article (32)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 15, 2010, at 5:07 PM, Corporality wrote:

    I now know more about women's underwear stocks than I imagined I ever would. Great, professional and highly amusing clip! You chicks are fantastic eye candy with a valuable message. It is refreshing to get a straight forward overview of industries I shy away from because I'm a man, from women who have empirical and esthetic, information and views on them. I am a fan, please keep them coming, always makes me smile.

  • Report this Comment On December 15, 2010, at 6:53 PM, TMFSchool wrote:

    Hi Corporality,

    <<I now know more about women's underwear stocks than I imagined I ever would. >>

    You and me, both! I was sure that Hanesbrands would end up being the pick in the sector -- great brands, the Champion "outerwear" hook. But after checking under the hood, it really fell flat. (Sorry, couldn't resist... when it comes to this topic, the puns just write themselves!)

  • Report this Comment On December 15, 2010, at 7:27 PM, rd80 wrote:

    Honest dear, the Victoria's Secret catalog is just investment research.

    Another DDime for Foolanthropy.

  • Report this Comment On December 15, 2010, at 8:13 PM, TMFTypeoh wrote:

    You guys are having too much fun with this series......... :)

  • Report this Comment On December 17, 2010, at 1:02 PM, cattywampus wrote:

    This is having fun while investing LOL. Done in the true spirit of MF. I would invest in you ladies anytime.

  • Report this Comment On December 17, 2010, at 2:40 PM, lemoneater wrote:

    With the weather we've been having, I'd have to say that I'm more interested in outerwear at the moment. Long Johns and snuggies might be the gift to replace lingerie this Christmas! Brrrr!

  • Report this Comment On December 17, 2010, at 2:49 PM, lemoneater wrote:

    I do like vassarette brand with inexpensive choices, but I don't think it is from a publicly owned company.

  • Report this Comment On December 17, 2010, at 11:06 PM, triciaburke wrote:

    LOLOLOL...(deep breath)...LOLOLOL...The most entertaining MF article and video EVER!

  • Report this Comment On December 18, 2010, at 12:02 PM, TMFSchool wrote:

    Heya Lemoneater,

    Vassarette is part of Vanity Fair Brands which was sold by the mother ship company VF in 2007 to Fruit of the Loom which in turn is owned by Berkshire Hathaway.

    Whew, that Vassarette sure gets around!

    So, if you follow that flow chart, you could actually invest in Vassarette, albeit not directly.

    Best,

    Dayana

  • Report this Comment On December 18, 2010, at 5:20 PM, nunnatheabove wrote:

    Loved it! LOL!

  • Report this Comment On December 20, 2010, at 9:24 AM, XMFHRFool wrote:

    Great video, Ladies! I'll definitely have to take a look at Warnaco. CK is one of my favorite brands...

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