A few minutes before we begin the interview with Amit Meridor, Tefron Ltd. (Bulletin Board: TFRFF; TASE:TFR) CEO for the last two years, we get a glimpse of a small display of clothing produced by Tefron, which helps us understand what separates it from other Israeli textile companies, what destroyed it three years ago, and what helped it recover over this past year.
Tefron went through the greatest crisis in its history three years ago. Poor management, which was exacerbated by the credit crisis, nearly drove the company to the brink of insolvency. Revenue fell, losses piled up, and the bank debt remained the same. The large company shareholders at the time, First Israel Mezzanine Investors Fund (FIMI) and Mivtach Shamir Holdings Ltd. (TASE:MISH), as well as the financing banks, stood behind Tefron, and the results can now be seen on the ground: third quarter 2011 revenue brought up 2011 annual revenue to more than $115 million - annual growth of 34%, compared with 2010.
This is still far from the company's peak levels, but they were never relevant over the last three years. Teflon was focusing on survival, and only last year, after the recovery process began to bear fruit, did the company once again begin looking at the amount of revenue while simultaneously focusing on profits.
And profit did improve. After losing $22.7 million in 2010, and accumulating a total loss of $57.7 million over three years, Tefron is approaching balanced operations, at least on a quarterly basis. Net loss in 2011 was $529,000, compared with $3.1 million in 2010.
The company's balance sheet is still weak, and includes $29.3 million in bank loans, $31.9 million in equity, and $6.4 million in cash. Tefron's market cap is $19 million, and evidently is still being affected by the crisis and the unflattering data on the balance sheet.
"Tefron's main problem was execution, similar to many other Israel start-ups," Tefron CEO Meridor, 50, says, "Tefron developed and manufactured products, but crashed due to quality control and delivery problems. In 2009, for example, we paid $9 million in late fees for merchandise that failed to reach customers in the US on time. This was the company's sickness, a problem that has existed from the start. Last year, we only paid a few hundred thousand dollars in late fees, which is a significant change. Tefron is finally doing what it promised to do, and is very cautious in its commitments.
No stitches are unraveling
Tefron is considered the global leader in seamless clothing, including intimate apparel, sportswear, and swimwear with as few seams as possible. In other words, clothing with the least amount of threads that might suddenly stick out, forcing us to look for a pair of scissors, needle, and thread.
Seamless technology accounted for 81% of revenue in 2011, and Cut & Sew technology for 19%. Unlike seamless technology, Cut & Sew technology is designed to connect two different types of fabric, such as adding lace to t-shirt material.
Seamless and Cut & Sew garments, which are manufactured in the Tefron factory located in Misgav, near Carmiel, are much more stylish and shapely than standard clothes. "In the past, seamless was mainly a fad, but in the last few years, it has become more functional," Meridor says. Chains that sell Tefron clothing as a private label don't market them to consumer as seamless ("It's hard to explain to the end-user what seamless is,") but as a higher quality garment.
Until Tefron acquired Nouvelle Canada, most of Tefron's buyers were fashion chains that sell mainly intimate apparel and sportswear. For example, Tefron sells $10 million worth of lingerie to Victoria's Secret annually, which accounts for a quarter of Tefron's revenue.
Seamless technology is much more expensive. The cost of producing underwear is almost twice as expensive as using Cut & Sew technology. "Victoria's Secret, for example, buys underwear from me for $2.30, and average production costs for Cut & Sew are $1.20. And profit margins on underwear are much lower than for sportswear and other clothing. As a result, Tefron's goal is to begin manufacturing less underwear and more complex items, like shapers and sport tank tops."
Is there demand for these articles?
"I need to create this demand. The market for shapers is getting stronger, and slowly the giant sport companies, such as Nike and Adidas, are looking for new solutions."
On the other hand, Meridor does not intend to focus as much attention on swimwear as he does on shapers and sportswear. "Swimwear is not our core activity; however, it does positively contribute to Tefron's profitability."
The change in Tefron's product mix, according to Meridor, will be a great growth engine in the coming years. As almost everyone knows, quality sportswear is quite expensive, and Tefron wants to benefit from this. "The cost of manufacturing a regular tank top is $1.50, and if I can sell it for $10-12, that means that I can double or triple my profitability in sportswear."
What about penetrating other marketing or fashion chains?
"We currently have too many buyers as it is. It is enough for us to change the mix we sell to each chain."
Is that realistic?
"Yes, and it is already being implemented on the ground."
A successful acquisition
The emphasis that Tefron has put on expenditures over the past two years is already showing results in the company's financial reports. The company's future heavily depends on Nouvelle Canada, which Tefron acquired a little over a year ago - an acquisition that is turning out to be quite successful.
Tefron acquired Nouvelle's operations - a veteran textile company - for only a few million dollars, after the latter suffered heavy losses and preferred being sold over closing its doors. "Canada is more expensive than Israel, with regard to salaried workers," Meridor says. The acquisition was bought in shares, and was carried out simultaneously to an equity investment by the owning family, through the company, in Tefron itself.
Nouvelle fit Tefron like a glove for two main reasons: Firstly, its expertise in seamless technology (mostly women's undergarments), was similar to Tefron's. Secondly, Nouvelle had a customer base that included US mass market retail chains such as Walmart and T.J.Maxx. Tefron markets its products mainly to fashion chains, and the acquisition of Nouvelle widened its market share in the giant US retail industry.
Published by Globes [online], Israel business news - www.globes-online.com - on January 22, 2012
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