Monday
May142012

American Apparel Thesis Blossoming

On May 6 2011, we wrote our initial post about American Apparel ($APP). It is hard to believe that we have worked on this situation for more than one year already. Investing in distressed situations requires a fair amount of patience. The process by which the original thesis is tested against actual results evolves over a few years time frame; the investment growing in size as the results back up the original thesis.

We have been following every single move of the largest investor that invested capital in the company back in April of 2011. The big elephant in this deal was not Serruya but GCIC through its Dynamic Power Hedge Fund. GCIC has owned more than the 13-G filing requirement since the deal was executed. 

GCIC owned 7,381,607 common shares (7.49% undiluted) as of June 30, 2011. In its latest 13G filing GCIC disclosed that it owned 20,005,216 common shares (18.38% undiluted) as of March 31, 2012.

In April 2011, Michael Serruya, representing the investor group, had this to say about the original deal:

"We believe in the American Apparel brand and we believe in Dov Charney," Mr. Serruya said. "We are convinced that with adequate resources, Dov and his experienced management team will lead American Apparel to new heights."

The actions of GCIC indicate that it continues to believe in the original thesis, and that the company might very well elevate to new heights. The first quarter of 2012 results indicate that this is becoming a higher probability situation.

Makes sense?

Written by Michael Bigger. Follow me on Twitter and StockTwits

P.S. Don't go out and buy the stock. This is a highly distressed situation and it is not suitable for the majority of investors. The purpose of the post is to write down how I think about this and share it with you.

Tuesday
May012012

American Apparel Wholesale Accelerating?

 Here is the sales growth data for American Apparel’s different line of businesses since October:

 

Do you notice the pickup in the wholesale business starting in December?

Here is a table with the quarterly results for 2011:

 

 

Why is the wholesale business suddenly firing on all cylinders?  What drove this turnaround in the wholesale net sales numbers?

To answer this question let’s look at what do they do at American Apparel ($APP)and let’s find out if anything significant has changed in this line of business. Source: 10-K.

American Apparel wholesale operations sell to over a dozen authorized distributors and approximately 10,000 screen printers and advertising specialty companies.

These screen printers and advertising specialty companies decorate our blank product with corporate logos, brands and other images. Our wholesale customers sell imprinted sportswear and accessories to a highly diversified range of end-consumers, including corporations, sporting venues, concert promoters, athletic leagues, and educational institutions, among others.

We recently came across this fascinating article about Manpacks.com (4/19/2012).  Here are some of the highlights of the interview:

American Apparel has an incredibly loyal following, and they do make some great t-shirts.

A couple of weeks ago my cell phone rings, and it’s a woman from the American Apparel office. She asks if we’d consider carrying some of their products. I told her the story of how we had been rejected in the past, and she admitted that it was a mistake. American Apparel [had] wanted to control all of their sales online, and thought that having other online retailers selling their products would hurt their business. American Apparel hasn’t been doing great with this strategy, so recently they began testing sales via niche online retailers.

$APP now allows online retailers such as Manpacks and Republic (UK-based retailer) to sell American Apparel product without screen printing it on their web platforms.  This represents a 180-degree shift in their strategy and a change that drives sales toward a premium luxury customer rather than a commoditized price-focused consumer.  Dov’s recent interview on CNBC pointed to higher gross margins than in previous quarters, and we think some of the gains in the area will come from this change in wholesale strategy.

So maybe that explains why the wholesale business is accelerating. We will soon find out.

The company gave a guidance of +1% in sales growth for the full year 2012. Don’t you think that the information contained in the tables indicates more like sales growth of 10%+ for 2012?  While this sounds like a lofty goal for any company, we think it is easily attainable given year-to-date numbers and strong momentum. 

What about the other sales channels, retail and online? We will answer this is another blog post at a later date.

What do you think? Will American Apparel turn for good?

Written by Michael Bigger. Follow me on Twitter and StockTwits

P.S. Don't go out and buy the stock. This is a highly distressed situation and it is not suitable for the majority of investors. The purpose of the post is to write down how I think about this and share it with you.

Thursday
Apr262012

What Does American Apparel Sell?

Yes, they do sell clothing but clothing is the steak. The sizzle in this life style brand ($APP) appears to be youthfullness and its discovery and enjoyment of sexuality ....Here is a short clip that captures what I am thinking about.

 

You can never recapture the time. Live your youth fully on your own terms. Right?

Written by Michael Bigger. Follow me on Twitter and StockTwits

Wednesday
Apr182012

Why Do Customers Go Bananas For American Apparel?

A few weeks ago, I met a friend at Jones Beach Parking Lot 6 (P6) for a kiteboarding session. We decided to do a downwinder; leave a car at P6 and drive to Robert Moses parking lot 5 (P5) for a 15 miles kiteboarding session (I sometimes sneak away from the trading desk to pursue these kinds of activities).

While on our way to P5, he told me that he had just returned from Puerto Rico.  He saw a Crocs store in San Juan and thought it was a very good looking store. He asked me how I figured out the business would change in such a dramatical way when it hit bottom in 2008. I repeated to him what I wrote about Crocs ($CROX) in the book The StockTwits Edge. To learn more about the $CROX thesis you will have to read the book because this post is not about $CROX. It is about something that could have a similar spectacular run.

I told him that I was now buying American Apparel ($APP). He interjected,"Holy cow this is awesome. I think you will do well with that. I love the brand. I love the fact that the clothing fits people nicely and that it carries no brand label on the clothing." The American Apparel brand resonates with young urbanites.

I was pleasantly surprised by his reaction because he is a professional designer. He designed my favorite wine bottle opener (OXO by Helen of Troy HELE). I use the opener frequently!

His comments help me understand how the customers think about the brand. Discovering the things that get the customers to go bananas for the product is integral to understand the top of mind positioning of the American Apparel Brand.

I am still discovering new facets about $CROX and I have been invested in the stock for 5 years. Here are some tidbits about $APP that I have collected to help me form my opinion of the company. This is a work in progress.

  • The slim fit of the clothes. It is not baggy like The Gap.  It appeals to a young, sexy group of customers.
  • There are no labels on the clothing. Who wants to be a billboard for a company? Brands like Hollister, Nike, Oakley, Abercrombie and Fitch (ANF), etc. have their following, but American Apparel appeals to a very different, more free-spirited demographic. 
  • Dov Charney, the CEO, is a character.  His personality is definitely controversial.  His passion resonates with me in this CNBC interview.  I would not be surprised to see him on the air more often. It moved the stock quite a bit after this interview.
  • Charney is not afraid to do something different.  The concept of American manufacturing could be considered a relic of the past, yet he sees it as the future of the industry.  He understands the business and the benefits of local manufacturing to the economics of his business.  
  • Charney has built a $600mm business from selling t-shirts. Here is a challenge: Could you do the same? Pretty smart isn't he? At a minimum, he must be doing something right. It's a great story.
  • Teenagers are rebellious. Dov resonates with them. 
  • Sex sells and although some people think American Apparel's advertising goes over the edge, I find it edgy and I don't get intimated with a little bit of skin being exposed. 
  • In a world of free and perfect information, gaining attention is next to impossible. American Apparel has no problem gaining attention. Branding like this is hard to build and it is worth a lot.
  • Very good integration of blogging into the Americanapparel.net property. Check it out for yourself, it is brilliant. The bloggers featured on the site have quite the following.
  • American Apparel website is art. It seems to me that the web business is not being pitched aggressively. With a little focus and attention, its growth which is good could become phenomenal.
  • Weird is good and American Apparel is weird. Seth Godin wrote a book about this: We Are All Weird

Now I need to investigate why some changes made to the 125th Street store in Harlem produced a sales increased of 70%. I will report on this and other discoveries within the next few months.

If you are interested in learning more about APP you might want to read this post.

What say you? Anything else?

Written by Michael Bigger. Follow me on Twitter and StockTwits

P.S. Don't go out and buy the stock. This is a highly distressed situation and it is not suitable for the majority of investors. The purpose of the post is to write down how I think about this and share it with you.

Tuesday
Apr172012

Amazon Showrooms are Everywhere

We have heard recently about Best Buy's ($BBY) poor performance due to the fact that consumers use $BBY retail stores as showrooms for ordering on Amazon.com ($AMZN).

That is true and it affects many more companies than Best Buy.  Not just brick-and-mortar retail chains, but online retail is also a virtual showroom for Amazon.com.

When I buy Crocs ($CROX) shoes, I always check the shoes on its site but I order on $AMZN because Amazon.com offers free shipping and it is fast; crocs.com shipping is much slower and you pay for it.

It seems these days that retailers need to work with Amazon to make sales.  I just bought some hockey gloves from Amazon.com after doing research on the gloves at totalhockey.com. I paid with some points I had on my Amazon.com credit card. But remember, Amazon does not warehouse and sell all of it's products, most of the time you are actually buying from a third party seller using Amazon like a virtual mall.  The hockey gloves were sold by Total Hockey operating as a third party seller on Amazon.com, for the same price as they sell them directly.  Cool, isn't it?

 

 

 

 

The Amazon.com showroom is omnipresent and it is not only affecting BBY. If you think about the market share $AMZN has in online retailing, it is staggaring.  And there is much more to come according to Josh Tarasoff. Tarasoff wrote in Greenlea Lane Capital Partners' write up about Amazon.com's Lollapalooza:

One company that may jump to mind as a lollapalooza retailer is Walmart. Indeed, it is the largest retailer in the world, and one of the greatest wealth generators in history, with over $400 billion in revenue and an enterprise value of approximately $250 billion. The company has admirably executed a virtuous circle strategy of leveraging its scale to drive down prices, which attracts more customers, which adds yet more scale, and so on. Conveniently, Walmart is nearly ubiquitous: there is one within 15 miles of 90% of Americans.

I believe that there is another lollapalooza in the early stages of unfolding in the retail industry, and that this one will create more wealth than even Walmart. This lollapalooza is Amazon.com. The fundamental difference between AMZN’s business model and that of traditional retailing is that by selling over the internet, AMZN replaces labor and real estate with technology. This tradeoff presents at least six large benefits to AMZN:...

Tarasoff's piece is a must read. It is the best research piece I have read about $AMZN.

Michael Bigger. Follow me on Twitter and StockTwits 

Friday
Apr132012

No Ordinary Joe - Followup

On March 20 we wrote a blog post about $JOEZ and the recent runup in the stock price. Yesterday the company reported another blowout quarter, with top line numbers up 23% q/q.   We continue to be bullish on the company's long-term prospects, with a 2-3 year price target around $3.  

The sales increase is encouraging because it shows the product is resonating with customers.  The direct retail business is growing dramatically, and wholesale business has stabilized at the end of F2011, with an increase in this Q1 number relative to the prior year Q.  Margins were slightly better (both gross and net).

If the company can achieve 10% sales growth y/y on a consistent basis and keep costs reasonable, the stock would be worth about $3.  The current price of just below $1.50 is fair assuming 5% growth for the near-term.  If 20+% growth were sustainable (unlikely), the stock could be worth $6 or more.

From a risk perspective, the company has little long-term debt.  The recent expansion into the direct retail business means they have taken on operating lease obligations which would be costly to terminate if they are unsuccessful in retail.  Also, if sales growth turns negative the stock could go back to below $1.

Based on this, JOEZ represents a reasonable risk/reward.  I am long the stock (since before the earnings announcement) and I would consider buying more on a dip.

Written by:  Jennifer Galperin. Follow me on Twitter and StockTwits.

Monday
Apr092012

American Apparel +21% Gave Us the Green Light

American Apparel just reported fantastic sales numbers for the quarter ended March 31.  Total sales were up 14% Q/Q and comparable store sales for March were up +21% and 15% for the quarter.  They reiterated EBITDA guidance for 2012, with a commitment to reducing high-cost debt within 12 months.  This affirms our view that the probability a favorable outcome here is high.  

The company provided EBITDA guidance in March for $32mm to $40mm based on a very small sales growth (less than 1%).  Given the first quarter growth of 15%, we think this number is extremely conservative.  

If the company successfully cuts SG&A costs to $300mm, which is a 4.5% reduction from 2011's costs, the numbers speak for themselves.  Here is a scenario analysis for our estimate of EBITDA based on different levels of sales growth:

Sales Growth (% Y/Y) -> Our Estimated 2012 EBITDA

5% -> $35mm

10%-> $50mm

15%-> $60mm

As you can see, with sales growth strong there is significant cash available for debt reduction.  Inventory reductions to generate cash are icing on the debt reducing cake in this scenario. We believe the company will reduce inventory by $40mm in 2012.

On April 2012, the Board awarded 7,500,000 shares to Dov Charney, CEO of the company, vesting over the next three years as long as the company meets or exceeds the following annual EBITDA targets (one third of the award vesting annually):

2012: If EBITDA is greater than $32,253,000 he gets 2.5mm shares

2013: If EBITDA is greater than $53,251,000 he gets 2.5mm shares

2014: If EBITDA is greater than $68,212,000 he gets 2.5mm shares

Charney also owns 22.5mm warrants struck at increasing levels starting with the first struck at $3.50 maturing in March of 2014. There is a big incentive for the CEO to do everything in his power to achieve the EBITDA targets and to move the stock to above $3.50.

Charney discusses APP's business model in this video. He believes there is about $100mm to $140mm of EBITDA capacity in the current business without adding new stores.  

But.....

There are a few hurdles to overcome here.  First, if sales growth is slower than forecast, debt reduction will be slowed significantly.  With the current high-interest debt burden, it will be difficult for APP to achieve profitability.  Second, in order to secure financing over the last 3 years, the company has issued 21.6mm warrants to a creditor, Lion Capital, with a strike price of $1.00 expiring 2/18/2022.  These warrants are subject to a $0.25 strike price reduction if the company fails to meet aggressive EBITDA targets, the first of which is $37.5mm for the 12 months ending March 31, 2012.  EBITDA for 2011 was $20mm.  Based on that it is likely Lion will have 21.6mm warrants struck at $0.75.  This represents 20% of the 105.5mm shares outstanding as of 12/31/2011.  

Overall, we reiterate our view that the situation here is 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.  After monitoring the company for more than one year, we have determined for ourselves that APP is a good risk/reward tradeoff at the current price, and we think the Q1 sales numbers give us more conviction that the outcome will be favorable. We increased our long position significantly last week after the March sales were reported.

Written by:

Jennifer Galperin. Follow me on Twitter and StockTwits.

Michael Bigger. Follow me on Twitter and StockTwits.

 

Tuesday
Mar202012

No Ordinary Joe

We are researching a new opportunity in Joe’s Jeans ($JOEZ).  The stock has run up this year from around $0.50 per share to the current level of $1.30.  Following the extremely favorable earnings report from February 28, the stock has been on a huge run-up, nearly doubling in price.  Here is a recent chart:

 

We think the company may be worth a look.  First, the company has very little debt.  The company has been profitable since 2007.  In 2011 inventory reductions resulted in a significant ($5mm) increase in cash.  This indicated an ability to move product off the shelves and into the hands of customers. 

With the share price trading above $1, the stock is no longer at risk of being delisted from the Nasdaq. 

We will keep monitoring the company.  We think there may be a pull-back in the stock which could be seen as a buying opportunity, closer to the $1 level.  

Written by Jennifer Galperin. Follow me on Twitter and StockTwits.

Monday
Mar192012

Is Ebay on its Way to an All Time High?

 

Last week while reading the Wall Street Journal, I came across an interesting statement and I tweeted this:

Multiple catalysts on name... WSJ: 11-year-old Xander Gansman, who sold his iPad 2 on eBay $EBAY +2.85% to raise money for the new device 

It got me thinking. There will be more than 100,000,000 Ipads in circulation in 2013. That is many devices and I believe that the trading in these devices is about to explode on $EBAY and $AMZN as Ipad fanatics trade their old devices for the new new shiny. There is money in these devices and Ipad users will monetize it.

This weekend I decided to sell my son's DSi and my own Galaxy Tab (7 inches, original version) on Amazon.com to figure out how liquid the market is for these devices. We have four Kindle Fires in the family and the DSi and the Galaxy were gathering dust. We sold them in less than 24 hours.

The liquidity in the iPads must be significantly better. This will be big business for the marketplaces.

And now back to $EBAY, here is what I think will push the company towards an all time high within the next 2 years.

  • iPad (and other devices) trading. Read what $EBAY has to say on the subject.
  • Interest rates won't stay at zero forever. PayPal benefits from higher interest rates.
  • Marketplace gaining traction with a better offering. Scot Wingo has this to say about $EBAY comp sales. Look at how nicely they are trending up.
  • Motors is on fire and that should continue.
  • I have never found $EBAY management to be inspiring but lately they seem to have become more focused on innovation than ever before.
  • Paypal's entry in the card reading business.

Anything else that can move $EBAY in 2012?

Written by Michael Bigger. Follow me on Twitter and StockTwits

Friday
Mar162012

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