7th Floor at American Apparel Headquarters in LA. Mural: Habitat 67 MontrealAmerican Apparel just made two relatively big announcements this week.
First, they secured an additional $15mm commitment under their revolving credit facility, taking the facility from $35mm to $50mm with the addition of a new lender, Bank of Montreal. In our minds, this additional financing commitment is just further confirmation that liquidity issues are a thing of the past for the company.
Second, June and second quarter sales numbers were solid with retail up 5% for June, online up 22%, and wholesale up 16%. Growth continues to be solid, with notable growth in online and wholesale.
When we invested back in the spring / summer of 2011, the company was facing a liquidity crisis and had just received some rescue equity capital to avoid defaulting on loans. We looked at the situation, the low risk of default after the rescue capital, and the revenue growth and saw an opportunity. Since then, the stock has gone from about a dollar, to a low of just above $0.50, up to it's current price of $1.96. Since most of our buys were below $1, we have now doubled our investment. For some value investors, a 100% return would be an exit point, particularly since some of the issues around the balance sheet have been resolved. So the question arises, now what?
When we originally invested, the famous (or infamous) CEO, Dov Charney, had received anti-dillution provisions that would kick in if he got the stock up over specific price targets, the lowest set at $3.25. Clearly he is bullish on the stock and the company, but I can't think of many CEO's who aren't bullish on their stock. But the fact that he needs to get the stock to $3.25 clearly shows Dov has big plans for $APP. What exactly is involved in that, we don't know (and for a lot of reasons we don't need to know). Much like the Air Liquide investment in $PLUG, which you can read about here, Dov's plans are a black box. We know the output of the black box is a strike price of $3.25, and we act on that knowledge.
That being said, there are two other things we know. First, the new distribution center should help $APP reduce its inventory by about $30 million with the bulk of the reduction in 2013. Second, $APP will be in a position to open 15 to 25 stores a year starting in 2014 from a base of about 252 stores globally. That should add quite a bit of growth to the story since most of these stores will be opened in urban centers overseas where the brand is firing on all cylinders. The company has room to open at a minimum 250 stores globally. This catalyst will evolve over a multi-year time scale.
In our opinion, the main course hasn't been served yet so we are staying put. What do you think will happen next with $APP?
Written by Jennifer Galperin. Follow me on Twitter and StockTwits.
The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog.
Sunday, September 15, 2013 at 3:45PM
