Letter to American Apparel's Discredited Board of Directors

BIGGER CAPITAL DELIVERS LETTER TO AMERICAN APPAREL’S DISCREDITED BOARD OF DIRECTORS

States That All Current Directors Should Be Held Accountable For the Reckless Decisions of the Board

Demands the Resignations of Both Remaining Incumbents, David Danzinger And Allan Mayer

New York, NY – July 17, 2014 – Bigger Capital Fund, LP, Bachelier, LLC and the Bigger Family, significant shareholders of American Apparel, Inc. (NYSE: APP) (“American Apparel” or the “Company”), today announced that they have delivered a letter to American Apparel’s Board of Directors.  The full text of the letter is included below: 

July 17, 2014 

Board of Directors

American Apparel, Inc.

747 Warehouse Street

Los Angeles, California 90021 

Dear Members of the Board of American Apparel:

The Bigger Capital Fund, LP, Bachelier, LLC and the Bigger Family are significant shareholders of American Apparel, Inc. (NYSE: APP) (“American Apparel” or the “Company”).  We have followed the recent developments at American Apparel with a growing sense of puzzlement and concern.  We have become confident that American Apparel’s entire Board of Directors (the “Discredited Board”) -- all seven of its current members -- have caused serious damage to the value and reputation of the Company. American Apparel, a household institution with strong business fundamentals and great prospects has been brought to the brink of financial distress and all this, in our view, because of the reckless actions of the set of directors who were responsible for overseeing our business and protecting the value of our investment. 

We are extremely gratified to see that five of the current seven directors will be replaced with new members of the Board under the recently disclosed arrangement dated July 9, 2014 with Standard General L.P. and certain of its affiliates and Dov Charney, now former CEO of American Apparel (collectively, the “Standard General Group”).  However, there can be no justification for the two remaining discredited incumbents, David Danzinger and Allan Mayer, to stay on.  We firmly believe that Messrs. Danzinger and Mayer, who are supposed to remain as directors and Co-Chairmen of the Board, are directly responsible for the value erosion and reputational harm to the Company and as a result have lost the confidence and support of the shareholders and should immediately resign. 

The Discredited Board has taken a number of reckless actions that go directly against the best interest of shareholders.  Most shockingly, this Board engaged in an apparent coup stealthily and abruptly ousting American Apparel’s long-standing CEO and largest shareholder knowing that their actions will cause a near-imminent default under important contractual obligations of the Company and cause it to default on nearly $10 million in loans.  Worse, the Discredited Board kept shareholders entirely in the dark about its plans to change the effective control of our company.  The Discredited Board calculatedly waited until shareholders (including Mr. Charney with his then approximately 23% stake) had cast their votes to reelect them at the annual meeting on June 18 and then quickly reconvened just minutes after the closing of the polls and voted to oust Mr. Charney from his position as a CEO (and imminently under the terms of his employment agreement as a director of the Company, a position to which the shareholders of American Apparel had elected him on June 25, 2013).  Messrs. Danzinger and Mayer had fiduciary duties to do what is best for us, the owners of the Company.  Messrs. Danzinger and Mayer are bound not only by their responsibilities as our fiduciaries, but also by the proxy rules to inform shareholders of all information that shareholders may consider material to their voting decision prior to casting their vote.  It is mindboggling that Messrs. Danzinger and Mayer would not have thought that shareholders would want to know of their plans to uproot the senior leadership of our Company before voting on the election of directors.  In our view, Messrs. Danzinger and Mayer have breached their fiduciary duties to shareholders and withheld material information that should have been disclosed in the Company’s proxy materials for the annual meeting. 

To add injury to insult, on the heels of your unilateral decision to overhaul the Company’s leadership, this Board made another unilateral decision to adopt a shareholder-unfriendly rights plan a/k/a poison pill.  The effect of this shareholder rights plan was to stifle shareholder input by impeding the ability of shareholders to act together in engaging with the Company’s management and the Discredited Board on critical issues regarding the leadership of our business.  

It is unclear to us how the continuity of Messrs. Danzinger and Mayer on the Board is a positive for shareholders.  For example, during Mr. Danzinger’s tenure American Apparel’s stock price has fallen from $1.72 in 2011 to today’s $1.15. Similarly, during Mr. Mayer’s tenure which started in 2007, American Apparel’s shares have lost 92% of their value.  With such poor track record it is hard to see why directors Danzinger and Mayer should continue to act as stewards of the shareholders’ capital. Notably, leading proxy vote advisory firm, Institutional Shareholder Services (ISS) recommended a “withhold” vote last year with respect to the reelection of David Danziger as a result of his service on more than three public boards while serving as a CEO of an outside company.  Under ISS corporate governance guidelines there are serious concerns that Mr. Danziger may have too many board engagements to devote the proper amount of attention to American Apparel.  We share the concern. 

Furthermore, under its agreement with the Standard General Group, the Company has agreed to form a new committee of independent directors of the Board, the Suitability Committee, for the purpose of overseeing the continuing investigation into alleged misconduct by Dov Charney.  Mr. Danziger, one of the directors who made the decision to oust Mr. Charney in the first place, will serve as one of the three members of this committee.  We believe it is a clear disservice to shareholders and the integrity of the investigative process to place this decision partially in Mr. Danziger’s hands once again.  It is clear that Mr. Danziger’s decision has already been made and he never thought it necessary to see the results of a completed investigation before making it.  We firmly believe that any related investigation must be overseen solely by individuals who will have an open-minded, fresh perspective on the matter and will be able to render an impartial decision untainted by their prior involvement in Mr. Charney’s ouster. 

Directors Danzinger and Mayer and their fellow members of the Discredited Board should have informed shareholders of the investigation into Mr. Charney’s conduct from its outset. This is critical information that shareholders had the right to know.  Instead, the Board completely mismanaged the process by concealing the allegations and investigation from the investment public and then choosing to act unilaterally to oust Mr. Charney with no explanation to shareholders until after the fact, all mid-way through the ongoing investigation. 

It is also noteworthy, that this same Board that has felt compelled to oust Mr. Charney even if it means defaulting on close to $10 million in loans, chose to disregard the Company’s poor operating and financial results from 2007 through 2012 and reward Mr. Charney by extending the maturity of the Charney Anti-Dilution Provision which entitled him to up to approximately 20,416,000 shares of the Company’s common stock as anti-dilution protection (decision we criticized publicly at the time, see our letter to the Board available here, http://biggercapital.squarespace.com/biggercapital-investment/2013/10/10/american-apparel-memorandum.html  ).  

In short, Messrs. Danzinger and Mayer have made seemingly arbitrary decisions taking reckless risks with our capital and jeopardizing our business with little regard for shareholder interests or the future of our Company.  All seven current directors must be held accountable for this blatant disregard of shareholder rights and value.  Accordingly, we demand and expect that directors Danziger and Mayer immediately tender their resignations from the Board and all of its committees. 

We look forward to a new chapter for American Apparel under the oversight of a thoroughly new Board uncompromised by the current Board’s disastrous decisions of the recent and far past. 

Sincerely, 

Michael Bigger

Bigger Capital Fund, LP

Bachelier, LLC

New CEO Lights a Fire in the Ovens at COSI

On May 15, COSI Restaurants ($COSI) announced earnings for the first quarter, which ended on March 31.  In the earnings call, new CEO RJ Dourney enthusiastically described his strategy to improve discipline at the corporate level and return the company to profitability.  He plans to maximize the brand’s capacity, and he has the experience in the industry to do it.  He has worked to grow what he calls “best-in-class” companies Chilli’s from 16 to 890 restaurants domestically, and Applebees from 250 to 1300 restaurants domestically.  RJ was nice enough to give me 30 minutes of his time last Friday, and after speaking with him I am confident he is the right guy to turn around COSI’s fortunes.

RJ Dourney began his relationship with COSI as a franchisee in 2005.  At that time he chose COSI because he believed there is a unique brand essence, with fresh baked bread and healthy menu options.  He opened 5 stores in Boston and grew to 15 locations by 2014, all operating successfully and profitably.  In March of this year, Mr. Dourney became the new CEO of the company.

RJ has already started to deploy his successful franchise strategy at the corporate level.  He hired a new VP of HR, an operations expert, and an  IT manager.  He has imported the operating system from the Boston locations.  He has re-started the review of the culinary component and is happy with the results so far.  He moved the corporate office from a 27,000 sqft facility outside of Chicago to a 6,000 sqft facility near Boston.  He hired HILCO to help the company get out of some of it’s bad leases.

He plans to increase the percentage of franchises compared to company stores in the long-run by partnering with exceptional franchisees that can successfully own and operate multiple locations.  He cited the Applebees model, which consists of primarily franchises (about 80%).  

One of the biggest issues facing turnaround candidate companies is cash flow.  First quarter cash burn was $3.2mm, and cash on the balance sheet was $2.8mm at 3/31.  On May 20, the company placed a $2.5mm note with AB Opportunity Fund and AB Value Partners.  At the current cash burn rate, they have about 1-2 quarters before they will need to raise capital again.  RJ said on the earnings call that he plans to slow the bleed significantly in the second quarter, and he doesn’t believe there will be additional need for financing.  

In order to achieve a successful turnaround we believe the company should seek funding to allow it to execute its plan accordingly. A $5 million raise would give the company the much needed capital for achieving success. Our view on this subject differs from management’s perspective but successful turnarounds usually require more capital than expected. If the company decides to raise more capital, it is something we would be interested in looking at.

We have a very small position in the company but will build a meaningful position if we can convince ourselves that the success the company is achieving in the Boston area can be exported across the chain. We believe that the company will invest a material amount of effort and money in redesigning corporate policies to improve structure and discipline company-wide.  Management believes it can bring the overall performance of the company on par with Boston franchisee Hearthstone.  If they are right, COSI could join the ranks of best-in-class fast-casual companies like Chipotle ($CMG) or Panera ($PNRA).  COSI’s brand resonates with customers, and we think that if they can get it together at the corporate level with quality customer service and clean restaurants, the customers will return.  There is always execution risk, but we think RJ has the right mix of experience and attitude to get this done if the company is capitalized properly for success.

Do you think $COSI can survive and prosper?

Written by Jennifer Galperin and Michael Bigger.

Disclaimer: Bigger Capital owns a small trading position in COSI. COSI 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. 

The Sycamore Partners Insight

Sycamore Partners has announced that it has bought 9.9% of Express ($EXPR),  a specialty retailer brand of women’s and men’s apparel in the United States. It plans to proceed with due diligence to help it value the company for a buyout offer.

You can find out more about Sycamore’s investments here. These investments capture the essence of what Sycamore Partners is trying to accomplish. It is building a vertically integrated apparel company with many verticals. You can think about it being a system composed of multiple customers facing brands such as Express supported by MGF Sourcing, the manufacturing logistics arm of Sycamore.

In a world in which information is becoming near perfect and free, retailers gain a huge advantage from the ability to analyze and disseminate all customer and product information as quickly as possible.  Each customer purchase, social media mention, or interaction is valuable information for the company to make decisions along the value chain that will impact the product, marketing strategy, manufacturing processes, and so forth. Clayton Reed brought to our attention the importance of information speed in retailing in the context of $APP, $GIL, Zara, and Uniqlo.

A vertically integrated retail company has more control over the dissemination of information to its customer touch points.  This means better control over the brand and the image which is a key source of value for a retailer.  Zara is a great example of a company that has optimized its system for better flowing information, resulting in great benefits.

There are very few vertically integrated retailing assets and we believe that they will continue to benefit from advances in information technology for many years to come.

If you come across such a vertically integrated retailer trading at a cheap price you might want to build a position and ride it for a very long time. In addition, we believe that a retailer focused on selling into specific vertical markets might become an acquisition target for firms operating vertically integrated systems especially if its stock becomes cheap.

Written by Michael Bigger and Jennifer Galperin 

An Investor Asks about Plug Power and American Apparel

Hi, Michael,

 

What is your reading of 1Q results of App? The revenue seems slowing down especially sss. From your recent writing, they are active in social network such as instagram. It should stimulate online sales theoretically, but they report an obvious slowdown on online sales. Something interesting is that the wholesale sales rise of 7%.That means they are triying to expand their business by traditional distibution channels. I agree with you on the understanding that they are getting closer to customers which will eventually increase sales in the long run.

 

Michael responds: To be honest I expected worse for the first quarter given the weather on the east coast. They generated + EBITDA in a very difficult quarter with all the distractions related to the distribution center and the equity offering. All in all we are happy with Q1.

 

Reader asks: The good thing is that expenditures are under control and guidance for EBITDA remains unchanged. But, if we are expecting a good return, revenue is the key catalyst which is not clear at this time. What is your opinion?

 

Michael: As you said costs are getting under control. In addition, inventory came down significantly and this trend should continue. We think there is about $25 million of incremental annual EBITDA that will be release because of the efficiencies of all the initiatives that were initiated since 2012 and are now complete. I agree with you that the main catalyst here is revenue growth. We are comfortable with management view that the company will generate $1 billion in revenues in 2018. You can read more about our revenue thesis here.

  

Reader: I am also curious that you spend quite a time on APP and Plug in recent months. It seems that you are unable to allocate enough money on these two companies. What is your other interest? I remember that you mentioned tons of money from Amazon, do you follow any other companies? One more thing, how do you define the special situation companies?

 

Michael: We have very large positions in both companies. We buy 1 or 2 stocks every 3 to 5 years in our long term investment portfolio. We are keeping pace with that. Yes, we made a lot of money on Amazon and we are still long Amazon. We look at about five to 10 companies every single day. In a bull market we yawn most days. It will change in a bear market. We invest in distressed companies. Some people label these as "turds". It is pretty obvious when you spot one. What is less obvious are companies that are labeled as such but have incredible business characteristics behind the facade.

 

Reader: I am a starter in the US market and hope you will give me a helping hand.

 

Michael: Good luck.

 

Disclaimer: Bigger Capital, LLC, Bigger Capital Fund, LP, Bachelier, LLC and the Bigger family own more than 3.27 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. None of the Bigger entities individually or in aggregate have an obligation to file its position with the SEC at the time this article was published.

Plug Power Notes

On Thursday May 29, I attended a panel about fuel cells at the Cowen Conference. Andy Marsh, Plug Power CEO, presented.  The other panelists represented Ballard, Fuel Cell Energy, and Hydrogenics.

Here are the main key points I noted from Andy's comments:

1. Total Global Market for PLUG is $30 billion annually.
2. The addressable market (now) is $10 billion annually.
3. PLUG expects revenues of $500 million in 2018.
4. It is working on accelerating the full ownership date of Hypulsion.
5. From what I could gather it appears the company is working with Honda in Europe. Honda could be a new forklift customer.
6. All of the panelists were extremely bullish on the overall Hydrogen market because it is such a small segment of the energy market currently with so many potential applications.

 Written by Michael Bigger.

Is American Apparel Reinventing Its Marketing Approach?

I have this hunch that American Apparel is reinventing how it sells clothing. It appears that the company is transitioning its marketing from a more traditional approach to an approach located at the intersection of:

• Visual Social Media (Instagram).
• Retail level, as close as possible to the customer.
• Employees' own photo shoots.
• Sell them a product they want to talk about and share images. Amplify the social media discussion.

This approach increases the engagement between American Apparel and its customers on platforms where the youth customers are highly active.  This visual social media, mobile and customer centric strategy is resonating with customers by judging from the company's success on Instagram. For employees, it makes the job at the store level much more creative and fulfilling and it builds on the company photographic heritage. 

No other company that I can think of has been so successful at empowering employees and customers to create free advertising on social media. And this is the key piece because social media is only meaningful if it comes from friends and connections, not from a company promoting a product. Because American Apparel is so open to customers and employees taking artistic license with their products, the social aspect of social media works in their favor.

(Images Source: Instagram).

What do you think?

Written by Michael Bigger.

Disclaimer: Bigger Capital, LLC, Bigger Capital Fund, LP, Bachelier, LLC and the Bigger family own more than 3.27 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. None of the Bigger entities individually or in aggregate have an obligation to file its position with the SEC at the time this article was published.

One Year Ago at Plug Power

One year ago, on 5/21/2013 we had the opportunity to visit Plug Power manufacturing facility. This day will stand out as one of the most vivid experience of my entire life as an investor.

It ranks way up there with the day in 1995, when Benoit Lavigne met me at my apartment in the Solow building on 66th St in Manhattan to raise money for his fledgling but capital starved Innovative Fibers.

In both situations I could feel that both entrepreneurs/managers were emotionally intense as if they were facing a massive space of potential but needed more capital to ignite the rocket. 

Here is a picture of two emails I sent Andy Marsh at that time. We wrote this Post about our investment thesis following our visit.

Michael Bigger <mbigger@biggercapital.com>	5/17/13
to Andy

I see you on Tuesday 10 am. My partner Jennifer Galperin might join us. Let me know if this is an issue. 

 

Kind Regards,

 

Michael

Michael Bigger <mbigger@biggercapital.com>	5/22/13
to Andy, rick_mason, erik_hansen, dave_waldek, bcc: me

I want to say thank you for a wonderful visit. I also want to tell you that since my investment in Innovative Fibers in 1995, I don't think I have ever come across a company facing such a large opportunity given its market size. 

 

Keep the faith, you are almost there. "The obstacle is the Path".

 

Michael Bigger

 

Bigger Capital, CEO

 

 

 

Written by Michael Bigger 

American Apparel the Photographer

In this excellent article, Aaron Taube describes the secrets of American Apparel's ($APP) red-hot Instagram account. I would like to add my own comments to Taube's article.

 

Since I have been following the company, $APP has always promoted photography heavily on its site. When you lend on americanapparel.net the first thing you see is a slideshow of different images not all related to the promotion of clothing. The company has invested its own efforts to make its photographic endeavor part of its strategy. The amateurish look of the pictures promotes authenticity of the brand and allows any employee to contribute to the effort. Dov Charney, has himself led some of these photo shoots but most of $APP Instagram pictures come from employees working at different retail locations throughout the world. Most companies will not allow this to happen. They prefer having professional shots with management curing the content for branding identity.

 

American Apparel does not have these constraints and it makes the brand appear less corporate and more authentic, which is paramount to gaining trust in a social media centric society. In addition, employees, working at the retail level, are closer to the customers and are in a better position to seize the magic when it happens. As shopping becomes more visual, American Apparel, the photographer, will benefit.

 

 

 

 

$APP's activities on Instagram won't move the needle much in the near term but it supports our thesis that Dov Charney is obsessed about building a highly differentiated apparel company. This is one more piece to the puzzle that confirms that he may be closer to his objective than most people think. In addition, when you account for all the highly differentiated initiatives the company is pursuing, it becomes more obvious that the company is an asset that is grossly undervalued.

 

American Apparel is an asset you can't build for the value of its market capitalization. 

 

 

 

  

Written by Michael Bigger 

Disclaimer: Bigger Capital, LLC, Bigger Capital Fund, LP, Bachelier, LLC and the Bigger family own more than 3.27 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. None of the Bigger entities individually or in aggregate have an obligation to file its position with the SEC at the time this article was published.

American Apparel Inventory Levels

American Apparel ($APP) reduced inventory by $6 million from $169.3 million to $163.3 million during the first quarter of 2014. The company's objective is to reduce inventory by $25 million in 2014. The company should end 2014 with about $144 million in inventory for a 14.7% decrease. After visiting a few stores we believe that the company might be able to reduce inventory further. How much further? We believe after talking to a few analysts that $APP could match Delta Apparel ($DLA) inventory turn of 2.39. At a turn of 2.39 Americal Apparel could reduce inventory further by $32 million to $130 million. $32 million represents two coupon payments on the bond. 

VFC Corp. ($VFC) is a best of breed retailer that turns inventory at 4.2 times. It is possible that $APP could push the envelope further but don't count on it...For now unless management proves us wrong.

Here is a picture of what the inventory situation would look like under different inventory turn scenarios. 

 

Written by Michael Bigger. 

Disclaimer: Bigger Capital, LLC, Bigger Capital Fund, LP, Bachelier, LLC and the Bigger family own more than 3.27 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. None of the Bigger entities individually or in aggregate have an obligation to file its position with the SEC at the time this article was published.

Note to Self: American Apparel Amount of Cash

This is a rough calculation of the amount of cash we believe American Apparel will have on hand at year end 2014. Our Investment Thesis should be updated with these metrics. We assume the ABL usage constant for the rest of 2014.

3/31/2014 cash = $16.7 million

2014 EBITDA guidance = +$45 million

2014 EBITDA efficiency gain (Source: Internal calculation) =  +20 million

2 bond cash interest payments = -$31 million

Cash interest payment on ABL = -$1 million

Capital Expenditures for reminder of 2014 (Source: Amendment to credit line 3/25/2014) = -$4 million

Decrease in Inventory = +$19 million

Total Cash as of 12/31/2014 = +$65 million (Very rough estimate)

This does not account for incremental sales contribution above sales guidance.

Written by Michael Bigger. 

Disclaimer: Bigger Capital, LLC, Bigger Capital Fund, LP, Bachelier, LLC and the Bigger family own more than 3.27 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. None of the Bigger entities individually or in aggregate have an obligation to file its position with the SEC at the time this article was published.