This Entrepreneur Is Changing Underwear
By Bethany McLean

(FORTUNE Magazine) – Sigi Rabinowicz is getting strange looks. The large Orthodox Jewish man is in the women's lingerie section of a Banana Republic in New York City, stretching a silky pair of pastel panties; he is demonstrating how the teensy garment will stretch to fit over a not-so-teensy body. A concerned-looking sales clerk approaches warily. "Do you...ummm...need help?" "Are these selling?" Rabinowicz asks. "Oh, we can't keep them in stock," the clerk responds. Rabinowicz beams.

Rabinowicz, the 51-year-old CEO of Tefron, an Israeli firm that makes those panties, is not a leader who leaves the details to others. He frequently cruises lingerie departments to study the competition, and he rarely leaves home without a supply of ladies' underwear. With the aid of those props, he can expound for hours (he prefaces discussions of particularly intimate details with "I do apologize, but...") on the reason for Tefron's superiority: Its undergarments are nearly seamless. "The less seams you have, the less problems you have," Rabinowicz says.

Rabinowicz's obsession with seams, or the lack thereof, is making Tefron into a major force in lingerie. Comfort and quality are big factors. Seams, especially protruding ones, can poke into skin; they often lose their shape or even break over repeated washings. A smooth, seamless garment reduces the risk of the dreaded underwear line, a problem with today's clingy, stretchy fashions. Gruntal analyst John Rouleau says that seamless garments, although only recently introduced, are the fastest-growing part of the intimate-apparel business. He estimates that they could eventually account for 50% of the industry's $12 billion in total sales over the next five years.

Like its underwear, Tefron is tiny, but its sales are growing fast. Revenues in the first half of 2000 hit $124 million, almost equal to all of 1999. Tefron has more than 35 customers, including Victoria's Secret (which accounts for some 50% of its business), Calvin Klein, Ralph Lauren, and Gap, and it just received a $6 million order from Target. (For more on Target, see next story.) Seams may soon be history in outerwear too. In February, Nike contracted with Tefron to produce $700,000 of seamless sports tops and tennis separates.

Gruntal's Rouleau says that Tefron's strength lies in its technology; that may come as a surprise to those who have never thought of underwear as particularly high tech. The company has spent almost a decade adapting the circular hosiery knitting machine to making women's panties, eliminating almost all cutting and sewing from what was previously a labor-intensive process. The product that comes out of the machine is a piece of cylindrical fabric that requires only one tiny seam to close up the front and the back. Even the waistband is knitted in. "Strings go in, and undergarments pop out," marvels Ed Lugo, a portfolio manager at Templeton who owns Tefron stock and has visited the company's facilities. "The products are great!" says money manager Bob Warzecha of Hartford Financial Services, another Tefron owner, who hastens to add that he relies on his female colleagues' testimonials.

Warzecha remembers Rabinowicz pulling out a bag of underwear and passing it around the table to bemused portfolio managers on Tefron's marketing trip in preparation for its IPO three years ago. But despite Rabinowicz's dedication (and props), the stock has sagged; it now trades at around $14, 18% below its offering price. Earnings have suffered because of investment in equipment; Lugo also points out that Tefron, a small, foreign non-dot-com, hasn't exactly been the height of fashion among investors.

The stock's lackluster performance doesn't faze Rabinowicz, who is focused on Tefron's next product. In June the company applied for a patent on what it calls a "revolutionary" seamless bra (it will support up to a D cup), which it expects to deliver to customers in early 2001. It's all very hush-hush, but this reporter can confirm that advance copies represent a quantum leap in bra technology.