American Apparel 4th Quarter 2011 Conference Call

American Apparel's CFO, John Lutrell made some very interesting comments during the company's 2011 4th quarter conference call. You can listen to the call right here.

This is what I found interesting in this call:

1. The products resonate with customers and this is responsible for most of the gain in same store sales.
2. Although management guided to a less than one percent increase in sale in 2012, it also expects comp sales gain (currently running at +10%) to be sustainable in 2012. With no plan to increase the number of stores, revenues should increase by about the same amount.
3. Management is focused on shortening its cash conversion cycle. This should allow the company to reduce inventory by $20 million (my conservative estimate).  The resulting excess cash could be used to reduce debt.
4. The priority is to replace the Lion credit facility which comes at an 18 percent interest rate cost. We think the company will soon be able to start paying down this facility. Current interest expense is about $37mm per year, and the company forecasts 2012 EBITDA at $32mm to $40mm (which we think is conservative, based on the sales estimates we point out above.  Reducing interest expense will boost the bottom line tremendously.

We will monitor the March sales figure very carefully. They are due to be coming our in early April. We are long the stock. This is a highly speculative position as the outcome is somewhat binary. Either the company is able to generate a sustainable profit, in which case it is worth several dollars per share, or it declares bankruptcy and is worthless.  We think it is a good risk/reward tradeoff at the current price. 

Written by Michael Bigger. Follow me on Twitter and StockTwits.