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.  

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. 

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. 

My Issue with Startups

My issue with startups is this idea that an Entrepreneur can use angel money today and set the valuation of this investment when the VCs come in at a later date. The initial capital is critical to bringing the company to the stage at which VCs are willing to invest.  Without this angel capital, the entrepreneur's ideas and hard work are just not enough. 

Shouldn't the angel investors get a return on that first round of capital? Entrepreneurs are quick to defend the behaviour by saying "well that is the way it's being done in the industry". 

I am not a fan of investing under these conditions. I have done it though with small amounts but I have never made much money following the prevailing wisdom of industries.

This post is a call to myself to wake up.

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

Every Single Day

I am reminded to repeat the following mantra for a few minutes:

Avoid the Mediocres

Today, the beat goes on with Barnes and Noble (BKS), and of course Eastman Kodak (EK).

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

Metrics for a Good Business: Current Earnings or Platform for Future Earnings?

Legendary investor Bill Ruane said this about good businesses:

The single most important indicator of a good business is its return on capital. In almost every case in which a company earns a superior return on capital over a long period of time it is because it enjoys a unique proprietary position in its industry and/or has outstanding management. The ability to earn a high return on capital means that the earnings which are not paid out as dividends but rather retained in the business are likely to be re-invested at a high rate of return to provide for good future earnings and equity growth with low capital requirement.

Based on his description, Amazon.com ($AMZN) is a good business. It has high returns on capital. Look at the stock price trajectory since its IPO. It is up about 200 times. In addition, $AMZN is drowning in reinvestment opportunities.   Yet, when the company puts capital towards these investment opportunities, GAAP requires that they be classified as “operating expenses”.  As a result, earnings are negatively impacted and the bears come out to sell.

$AMZN confuses the heck out of investors. How should we classify the investments it makes in its own platform? Are they capital expenditures or operating expenses? Jeff Bezos’ 2010 annual letter to shareholders shed some light on the subject. Here is what he had to say:

All the effort we put into technology might not matter that much if we kept technology off to the side in some sort of R&D department, but we don’t take that approach. Technology infuses all of our teams, all of our processes, our decision-making, and our approach to innovation in each of our businesses. It is deeply integrated into everything we do.

At $AMZN technology is an integral part of operations, current and future.. Current earnings are depressed because some of its operating expense are investments that will generate payoffs 3 to 5 years down the road. Current earnings suffer but the platform value compounds nicely over time.

Cash, earnings and the business platform are all economic assets. In the case of $AMZN, Jeff Bezos is clearly investing in the platform for the long term. Bezos is doing the right thing.

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

Taming a Wild Croc

 

I got kicked very hard in my investment portfolio after $CROX pre announced earnings that fell short of expectation. It is hard to escape when an investment drops 40 percent in a matter of second.

The company’s announcement about 3rd quarter result was not so bad but the 4th quarter expectation is nothing to write home about. CROX’s management is encountering some resistance in its effort to turn the company into a 4 seasons shoe provider.

The stock is currently trading at about 10 times earnings and until growth returns, I doubt very much the stock will be moving much from these levels (mid teens).

I could easily give up on the company and move on to greener pasture. That is easier said than done. I find it hard to find great companies worthy of my money and trading at reasonable valuations. Yes, there are many cheap companies out there. Cheap only is not good enough for me. I crave greatness.

In the light of this earning revision, I must revisit the thesis that CROX is a great company with strong growth potential.

In order to answer this question, I focus on the success factors that will not change in the future. I focus on the constants. In a changing environment you must focus on the things that do not change. That is a trick I learned from Jeff Bezos.

Here is how I think about CROX’s greatness and its potential future:

• Comfort. Customers buy Crocs shoes for their comfort.
• Crocs are still the best-sellers shoes on Amazon.com. The product resonates.
• Deep internet product genetic (rating, reviews, etc.).
• Retail space expansion at 20% clip for many years to come as Amazon.com bulldozes retailers around the globe, freeing prime retail space for the retailer winners (Apple, Crocs, etc).
• No debt.
• Well managed.
• Inventory under control (that is the biggest risk).
• Pace of innovation unabated (Chameleon, Translucent, new retail concept, etc.).
• Persistently strong backlog outside of 4th quarter.
• Design capabilities.
• Weight of the product. Shipping advantage.
• High return on capital.

For these reasons, I bought more shares on the selloff and I have no intention of selling my shares. CROX is an exceptional company. It rarely pays to sell an exceptional company until it loses this characteristic.

What do you think?

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