Time to Sell American Apparel?

I got a few direct messages asking if I was selling American Apparel ($APP) after its huge run up over the last few weeks. That is not the game I play. I like talking about my ideas with like minded investors but don't lean on me to make buying and selling decisions. You must do your homework. This is a distressed situation and it is not suitable for the majority of investors. Define the game you want to play and play it.

  

There is much more value in learning about processes than specific situations. In a nutshell here is the game I play.

  

I buy one distressed situation once about every 3 to 5 years. I can sit still for 5 years until I find something that suits my fancy. I am looking for distressed companies (brands) that are unique and have texture. Brands that are polarizing. Brands that people talk about for better or worse. I like them cheap and the further they fall from their apex the more excited I get. It is truly hard to keep a kick ass company on its ass for a long time.  The long-run earning power of the company by my own estimate should justify a 10 to 20 times recovery from depressed levels.

 

Sometimes the idea fails and the stock falls to zero. For that reason, I want to get paid in aggregate for taking distressed securities' risk.

 

When I am invested in a successful situation, I am patient.  I can and will wait years if I have to.  $APP is up a few percent, but that is peanuts compared to what I am looking to earn.  If anything, now is time to buy more, since each new data point that we get from the company seems to confirm our original bullish thesis.  This type of investment is about making the right decision based on the data, and it is not about making a few percent on momentum.

  

When I bought $CROX in 2008 and early 2009,  it was trading at about $1.  It was a risky situation, similar to $APP, but I had faith in the brand.  The stock rose 10%, then 20%, then 100%, to $2.  Did I sell?  No.  Now, nearly 4 years later it is trading at $17 and I am still long.  That is a 1700% return, and I am not ready to sell.

  

Below is a reprint (with permission) of @microfundy blog post that elaborates.

 

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

P.S. Please do your research before you trade the stock.  This is a highly risky 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.  I am currently long APP.

  

Make sure you GET PAID!

Back in 2008, I contemplated investing in a liquor store. I discovered I would have needed to purchase a substantial amount of quantity in order to get the lowest prices on each kind of alcohol, resulting in a sizable initial investment to purchase the inventory. With such a large initial investment requirement (I estimated it at about half of a million dollars), one would think that margins on the business going forward would be relatively high. What I found was that the average gross margin (just revenues minus COGS) not even counting overhead)) was around 5-10%. I did not make the investment.

Thinking about it years later, it makes total sense. A grocery store’s food can spoil. A restaurant has so many moving parts (wait staff, chefs, tons of ingredients to purchase). etc. The risks to those businesses are so much higher. How much can go wrong in a liquor business? Products don’t (typically) spoil. There aren’t so many SKUs. It’s an extremely “clean” business model, easy to mange = not as many risks. The profits “needed” to make it worthwhile – to compensate for the risks taken – do not need to be so high.

I learnt a valuable lesson from this, which I apply to my investments all the time. For every risk an investment has, the investment should have the ability to earn you a higher return when compared to an equivalent investment ex that risk.

You need to be compensated for the risks that you are taking.

So while I focused on the “after the fact” in last week’s post titled Hindsight is always 20/20, the same holds true when initiating an investment.

Look at APP… @biggercapital has been talking about it a lot recently on his blog. Their CEO is a risk. The company’s balance sheet is a tremendous risk. Even with their recent capital infusion, their ability to finance future operations will be a challenge. For these risk, (and many more that I’m sure they have) you should be awarded a higher return.

Is it a wise investment at this stage? I don’t know. One thing I am sure of however, is that if you are buying it to make a 10% or 20% return, you are making a huge mistake. You should a have much higher hurdle rate – a required minimum return – to invest in a situation like that. (Michael Bigger has mentioned many times in the past that he’s looking for well over a 100% return on it (& he has had a good record with other apparel companies in similar situations. See CROX))

So whether you own or plan on buying APP or a similar company, make sure you’re properly playing the odds.

Make sure you GET PAID!

- MicroFundy

My Wife Said Either Dov Charney is Nuts or...

I showed my wife two videos about American Apparel.

The first one is about "Rick Klotz and Dov Charney recently afforded Highsnobiety TV the exclusive opportunity to sit down and discuss the full background story behind the Warriors of Radness and American Apparel partnership."

The second one is about Matilda dancing at American Apparel's brand new distribution center in Los Angeles, California.

After watching both videos my wife said: strange since most companies in distressed situations focus on cash management and not growth initiatives. Either Dov Charney is nuts, or your are 100% correct on your thesis. Or maybe both of you are nuts.

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

P.S. Please do your research before you trade the stock.  This is a highly risky 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.  I am currently long APP.

American Apparel Surfing a Growth Wave

Source: American Apparel Website.On March 14, 2012 American Apparel released the following guidance for fiscal 2012 results:

 

Initial 2012 Outlook

For 2012, the Company is initially projecting adjusted EBITDA to be in the range of $32 million to $40 million. The outlook assumes net sales between $552 million and $559 million and a gross profit rate between 54.5% and 55.8%.  Raw material costs are estimated at current prices and foreign currency exchange rates are estimated to remain at current levels. Capital expenditures are estimated at $15.9 million for the year with a modest number of new store openings.

The company's outlook assumes a sales growth rate of about 2%. 

 

Management Upgrades EBITDA forecast in August 2012.

 

The Company is raising its adjusted EBITDA guidance for 2012 to between $36 to $44 million from the prior estimate of $32 to $40 million.

 

For the month of August, the Company expects that comparable store sales will increase in the upper teen to low twenty percent range.

   

Twenty percent, you heard that right! And that is not all...

 

The process to build a new distribution center infrastructure is underway and will improve the speed and accuracy of shipments to stores and will also significantly reduce operating expenses. Completion of this project is expected by early 2013.

This information combined with the fact that the company is starting to open stores aggressively tells me that management is confident that growth will persist and that operation must be improved and expanded in order to increase capacity to meet demand.  The company must also be confident that it can refinance its Lion loan at a lower interest rate in the near future, as they have discussed. 

Here are the results to date in 2012. We are including a normalized growth rate (last line) which account for stores closure.

 

 

With comp sales accelerating to about 20%,  store counts growing at about 4% per annum and accelerating,  we're thinking that American Apparel could generate revenues closer to $625mm in 2012 and beat its EBITDA forecast by +10 million.

  

We believe the company could be operating at full capacity on a forward looking 12 months basis in June of 2013 with EBITDA power of about $120mm (15% of sales).

  

American Apparel is currently riding a massive growth wave. It either rides it and its stock responds to the massive growth in EBITDA or it wipes out (sales slow down for some unexpected reasons) and the company declares bankruptcy. This is do or die for American Apparel.

 

What do you think?

 

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

P.S. Please do your research before you trade the stock.  This is a highly risky 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.  I am currently long APP.

No Ordinary Joe's: Q2 Earnings

Last night Joe's Jeans reported a great quarter, with 16% top-line growth Q/Q.  Numbers look great, with improvements in gross margins and further improvements in net margins resulting in great EPS numbers of $0.02 for the Q.  In addition, further improvements are expected due to moving some production to Mexico and other lower-cost areas next spring.   

The stock is currently at $1.17, after trading as high as $1.33 in the pre-market this morning.

If revenues can continue to increase at 15% Y/Y, a valuation of $2.25 to $3 or higher could make sense based on 15x 2014 estimated EPS of $0.15 to $0.20.  That assumes no improvements in margins or SG&A.  However, if revenues only increase 5% Y/Y then the valuation looks more like $1.50 to $2.   

So what is the right price for $JOEZ?   Do you think they can grow top line by 15% Y/Y to be a $3 stock, or do you think they will grow more slowly, in which case the current price is fair?

Written by Jennifer Galperin.  Follow me on twitter and StockTwits 

How Is American Apparel Performing Against Original 2012 Guidance?

On March 14, 2012 American Apparel released the following guidance for fiscal 2012 results:

 

Initial 2012 Outlook

For 2012, the Company is initially projecting adjusted EBITDA to be in the range of $32 million to $40 million. The outlook assumes net sales between $552 million and $559 million and a gross profit rate between 54.5% and 55.8%.  Raw material costs are estimated at current prices and foreign currency exchange rates are estimated to remain at current levels. Capital expenditures are estimated at $15.9 million for the year with a modest number of new store openings.

The company's outlook assumes a sales growth rate of about 2%. Here are the results to date in 2012. We are including a normalized growth rate (last line) which account for stores closure.

 

With sales growth rates closer to +15% on an adjusted basis and with the impact of store closures waning in August, we're thinking that American Apparel could beat its EBITDA forecast by a wide margin.

 

What do you think?

 

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

P.S. Please do your research before you trade the stock.  This is a highly risky 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.  I am currently long APP.

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.

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.

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. 

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.

Update on Saturday, April 28, 2012 at 5:22PM by Michael Bigger

Nightline Interview of Dov Charney on 4/27/2012

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.