Mothers Work Price Will Rebound as Fashion Trend Ends

Wednesday, August 15th, 2007 | FPF Value, Stock Research with 8 Comments

I had a Peter Lynch moment a few weeks ago at the mall. My wife and I noticed that many of the woman at the mall were wearing maternity style shirts.  My wife pointed out a few tops that looked just like a maternity shirt she owned when she was pregnant with my daughter. However, these women did not appear to be pregnant.  My wife even joked that she is now afraid to offer up her seat on the subway to women who appear to be in the early stages of pregnancy, because they might not actually be pregnant. They might instead just be wearing the latest styles.

This strange trend got me thinking.  What would the impact of this latest style trend be on actual maternity clothing retailers and manufacturers?  I quickly thought of Mothers Work (MWRK).  I discovered that Mothers Work produces many of the major brands of maternity clothes during my wife’s first pregnancy.  These leading brands include:

A Pea in the Pod Mimi Maternity

Motherhood Maternity Destination Maternity

Edamame Spa iMaternity

maternitymall.com Maternity Fashions

Stylish Maternity

While still at the mall, I guessed that Mothers Work was probably facing declining sales and sagging stock price.  A quick look at a stock quote for Mothers Work confirmed my hypothesis.  The only question that remained in my mind was how long would this maternity like mainstream style continue.  I asked my wife about it and she pointed me to a Washington Post article that she had just read.  The article directly addressed my question on what the author called the current “Empire-waist” look.

Q How long do you think the Empire waisted look will last? It seems that it only looks good on a size 0 or a pregnant woman (and I am neither!).

A The Empire-waist look has long had currency with fashion’s cognoscenti; personally, I love it, and I’m neither pregnant nor a size 0. But if it isn’t for you, fear not. The trend pendulum is already swinging in the other direction, and wasp-waisted styles will be everywhere come fall…

– Suzanne D’Amato
Source: The Look, Washington Post

According to this Washington Post fashion expert, this maternity looking style should be fading soon.  That sounded like great news for my theory that Mothers Work sales, profit growth, and then stock price would recover nicely over the next year.

As a value investor, my next move involved estimating the value of Mothers Work.  I first ran the Fat Pitch Finder Spreadsheet and found that based on free cash flow growth over the past ten years, it appears that the intrinsic value per share for Mothers Work is about $40 per share.  At the time, MWRK was trading for about $25 per share.  That potential margin of safety caught my interest. 

I also just discovered a new spreadsheet at the SMF Add-In Group simply called the Cash Flow Model by Turley Muller. This spreadsheet is a bit overwelming, but it is highly configurable and provides a pretty good way to explore a company’s fundamentals.  Even after playing around with this spreadsheet for a few hours, I still came up with an intrinsic value estimate of about $40 per share.

Even though some of the fundamentals were weak and debt is rather high, I decided to go with my thesis.  I added a full position in Mothers Work in the Fat Pitch Financials Portfolio on July 26, 2007 at an average price of $24.31. As is often typical with value investing, the price of MWRK plunged shortly after I made my purchase.  A waited a bit and then desided to pick up another half of a position in Mothers Work for $18.82 on August 6th. 

The stock continued to decline.  At first I wasn’t concerned but I must admit when shares of Mothers Work dropped below $15 last Friday, August 9th, I started to panic a bit. I started to wonder if others knew something I didn’t about Mothers Work.  The only news was that the company’s Chief Merchandising Officer had quit and sales were as poor as predicted for July, but that really shouldn’t have accounted for such a price decline. 

Well, Mr. Market was up to his old tricks.  I just discovered that troubled Bear Stearns (BSC) was a major holder of Mothers Work and probably was forced to sell a 6.2 percent stake in Mothers Work to raise cash to deal with their busted hedge funds. Now that bit of activity would account for the double digit percent decline.

I wish I had thought of this situation when Mother Works stock price dropped. I must admit I was watching the MWRK ticker last Friday when the stock dropped below $14.50 briefly.  I almost pulled the trigger to buy more but I chickened out because I didn’t know why the stock price was going down.  If I had looked at the major institutional holders, I would have noticed that Bear Stearns was on the list and I might have made the connection. 

The lesson here is that it pays to look up which imploding hedge funds might own large stakes in your favorite stocks.  You might just get a bargain in a fire sale.

Disclosure: I or my family own shares in Mothers Work.  I made add to this position again within the next week.  Neither I nor my family own shares in Bear Stearns.

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Comments

  • I can’t comment on the valuation aspects of this post, but as far as the fashion, you’ve overlooked the diffusion timeline: the window between runway and retail.

    Fast-fashion retailers like H&M and Forever 21 are working overtime to close the window between runway and retail, but by and large a silhouette trend (as opposed to, say, a color or piece trend) like the one you found – empire waists – takes several *years* to fully diffuse *into* the marketplace, and that means that it will take years for the next trend to diffuse in and replace it.

    For example, the generally accepted harbinger of the empire waist trend was the dior gown that gisele bundchen wore to the 2005 oscars 30 months ago.

    Falling out of fashion will take even longer. The Washington Post may say that wasp-waists are going to be all over the spring 08 runways (confusingly presented in fall 07), and they likely will be (along with a herald of the “return of the suit” or something equally inane), but not only will a corseted look take its own appropriate 30 or so months to fully diffuse, BUT it won’t go over as well with consumers, because we are a fat country and empire waists and swing dresses hide a multitude of sins (or at least recontextualize them as gestation). :) I would say that the empire-waist trend has at least 3 more years of steam, and then an additional 3-5 of gradual petering out. In ALL that time, pregnant women will be able to buy maternity-suitable non-maternity wear.

    Diego Gomez August 17th, 2007 at 10:57 am
  • Great insights Diego. I appreciate your comments on the fashion industry and in particular the empire-waist trend. I hope it doesn’t take three more years for this trend to work itself out.

    Since Mothers Work’s valuation is pretty reasonable, I should still be okay with this one. What Mothers Work really needs to do is expand into the Asian and European markets. Even better, I’d like to see them export their high end store brand, A Pea in the Pod, to a high growth developing country like Brazil.

    Finally, it would be interesting to see if Mothers Work could develop another brand to bring fashion to the increasingly overweight U.S. market. I hear rumors that some women fall in love with their comfortable pregnancy pants and continue to wear them well past their pregnancy.

    Hopefully, Mothers Work will be able to hold it together until this fashion trend changes. In the mean time, I should also look at H&M more closely. A local value investor I know bought share in that company a few years ago and I noticed an H&M open up at a local mall. Forever 21 is a completely new name to me. It might also be worth a look, but I tend to stay away from pure run of the mill fashion retailers when investing. Maybe they too have some unique competitive advantage?

    George August 17th, 2007 at 11:27 am
  • Interesting post. Maybe I just read it too quickly but I didn’t follow you reasoning for why a) Mother’s Works sales are currently declining and b) you expect them to rebound.

    Again, I am sure this is purely my own confusion just trying to sort things out. If maternity styles are coming into vogue then shouldn’t that be increasing Mother’s sales?

    john August 23rd, 2007 at 9:25 pm
  • Hi John,
    Mothers Work’s sales are declining because ordinary clothing stores are selling non-maternity clothing that can basically be used by women in the first trimester of their pregnancies because the current fashion trend includes oversized and high waisted shirts and dresses. Before this fashion trend, pregnant women had to buy maternity clothes at Mothers Work stores, since mainstream clothing would not fit pregnant women. I expect that like most fashion trends, this current forgivingly large fashion trend will end soon. The Washington Post article I cited above indicates that this trend might be ending soon and tighter styles might be coming into vogue. I believe Mothers Work sales will return to their past growth trend within a year or two.

    George August 24th, 2007 at 12:06 am

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