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Michael Bigger is an investor and a trader who has been involved with trading technologies for more than twenty years. In 1992, Michael joined Citibank as head trader of U.S. single-stock derivatives, where he managed a $5 billion portfolio of equity derivatives. In 1998, he joined D.E. Shaw & Co., L.P. to trade the U.S. equity derivatives portfolio. (More)

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Tuesday
Apr012014

Note to Self: American Apparel Sales

There seems to be quite a bit of confidence from some senior executives at American Apparel, that annual sales could reach $1 billion within 4 years (Milestone could be reached in 2018). That is about $350 million of incremental revenues over 2013 sales. That is a big number and given the recent management execution issues, one should be very skeptical about the ability of management to deliver on this.

Nonetheless, it is a good exercise to figure out how the company intends to get there. Using the information released by the company over the past year, let's see if the numbers jibes with this expectation.

Baseline Anuual Sales (2012)

Retail $389mm

Wholesale $173mm

Internet $55mm

Total Sales 2012 $617mm

Retail

Management indicated in early 2013 that they could open 65 new stores over the next 3 to 5 yrs. The store base is expeted to grow 26.31%. In addition, management has said current stores could improve productivity by 25%.

So in total, retail sales could increase by 58% by the end of 2018. We are assuming no comp sales growth to counterbalance the fact that new stores are not fully productive right from the get-go.

2018 Retail Sales = $588mm

Wholesale

Growing wholesale sales by 25% over that period.

2018 Wholesale Sales = $207mm

Internet

Internet to double.

2018 Internet Sales = $110mm

New Business

To build a $100mm third party business (Example: Selling hoodies at Costco)

2018 Sales = $100mm

Total 2018 Sales = $1005mm

The company's goal is to increase EBITDA margin to 15% over that period. Using a 200 million shares count, the company could generate $.75 per share in 2018. Using a 10% EBITDA margin, the company could generate $.50 of EBITDA per share in 2018. Even if we assume that the company generates $800 million of revenues in 2018 at a 10% EBITDA margin ($.4 of EBITDA per share).

On the debt side, currently APP has approximately $200mm in debt outstanding at 15% interest (We are excluding ABL), total annual interest payments of about $30mm.  If they reach their goal of $1Bn Revenues in 2018 and 15% EBITDA margin, that means $120 in pre-tax earnings ($0.60 / share).  Even at $800mm Revenues and 10% margin, there is still $50mm in pre-tax earnings or $0.25 / share.  That is without repaying a dime of debt.  We think it is likely they will start to pay down debt gradually beginning as early as 2015 and refinance as early as 2017. (Rough Calculation)

Written by Michael Bigger  

Disclaimer: Bigger Capital, LLC, Bigger Capital Fund, LP, Bachelier, LLC and the Bigger family own more than 3.17 million shares of American Apparel. American Apparel is a highly distressed situation and it is not suitable for the majority of investors. The likely outcome of an investment is a loss of principal. In other words, the probability of losing all your investment in this situation is very high. We have been purchasing American Apparel since May of 2011 and we have nothing to show for it. Take our opinions with a grain of salt and do your homework. 


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