Stock of the Day - March 16, 2009 - APP

American Apparel, Inc. (APP)

American Apparel (APP) is a vertically integrated manufacturer, distributor, and retailer of basic apparel products.  The company, which also operates a wholesale business that sells T-shirts to distributors, employs around 10,000 people and has more than 260 retail stores in 19 countries.

American Apparel’s stock has been massacred this year.  The company’s share price, which is currently trading at $2.40, is down over 75% from its 52-week high of $10.25.  In the past year, the company has flirted with bankruptcy, dealt with a very tough retail market, and has seen its CEO be charged for sexual harassment.  These three factors have pulled the stock down, but looking at the future for American Apparel is very interesting.

The company has been in the news a lot recently.  Before last week, American Apparel was seriously considering filing for bankruptcy, as the company has taken on over $111.6 million in debt to help expands its operations over the past five years.  With the recession causing a lower-than-expected revenue stream, the company was having trouble paying back its loans.  But, American Apparel announced last Friday that private-equity firm Lion Capital was providing it with $80 million in exchange for an 18% stake in the company.  American Apparel will use this money to repay much of its debt, and this cash infusion will likely resolve the company’s debt concern for the next five years.  Investors loved this news, as the threat of bankruptcy is no longer looming, and the company’s shares shot up 68% on Friday.  I also think this cash infusion is great for the company, as American Apparel can take its mind off money problems and back onto the unique designs and efficient operations that make it such an interesting brand.

American Apparel’s sales have actually held up relatively well throughout this recession compared to other retail companies.  The company’s 2008 fourth quarter same-store sales were up 10% compared to a year ago.  December same-store sales were higher 3%, January same-store sales were up 2%, and February same-store sales were down 9% compared to one year ago.  So, while the growth rate of same-store sales has fallen dramatically compared to years past, it is still very impressive that a retail company in such poor economic times has been able to post positive changes in same-store sales numbers until February. These numbers are extremely impressive for American Apparel, and it proves to me that the company has a very devoted and solid consumer base, and that its products are worth buying, even in a recession.

The problem with American Apparel that keeps me from buying its stock is the company’s CEO, Dov Charney.  Charney, who is the face of American Apparel, is infamous for doing things his own way and acting very strange, and his peculiar ways have gotten him into trouble.  A former employee is suing Charney for allegedly walking around the workplace in his underwear, attending staff meeting completely nude, and padding inventory numbers to entice potential investors.  While these allegations may or may not be true, Charney’s reputation and the fact that he seems to always be in the news for the wrong things makes me uneasy about the whole situation.  Walking around nude at work is one thing, but to pad numbers to entice potential investors is unacceptable. The factor that magnifies the issue is that American Apparel is a vertically integrated company, meaning that Charney plays a major role in all aspects of the company, and has more control over the overall business operations than the average CEO.  The fact that a loose cannon like Charney has so much power in American Apparel raises a huge caution flag for any potential investor.  Anytime he makes a mistake or gets in the news for the wrong reasons (which is often), American Apparel’s stock price takes a drastic hit. 

So, while I do think American Apparel is a great brand with room to grow, I still have my doubts about the company’s management team, and specifically about Dov Charney.  I do think that the company’s share price will increase in the future, but the bumpy road to profits that investors will have to deal with as a result of the CEO’s behavioral problems will not be worth it.  If you want to buy retail companies that will be safer, less volatile, and much more certain bets to increase in share price, go with either Wal-Mart (WMT) or Best Buy (BBY).  Both of these companies were previous Stocks of the Day on College Trillionaires, so make sure to read those articles as well.

 

Niki Pezeshki

College Trillionaire

 

CT Note:  Max Siskin, a good friend of mine, owns a lot of shares in American Apparel and thinks very highly of the company’s future prospects.  He will post his response to this article in the near future, so make sure you check out what he has to say about American Apparel on College Trillionaires!