American Apparel

[ragnarisapirate]

http://money.cnn.com/2010/08/17/news/companies/american_apparel/index.htm?source=yahoo_quote

 

In light of the above article, I am curious if any of you guys see value, or lack thereof in this company.

 

Part of me doesn't get why they would continually open stores if they were in such dire waters.

 

One thing that I am really curious about is how much is the inventory worth in a liquidation. Furthermore, I am curious as to how much their PP&E is worth, given that someone could buy it, hire cheap labor (as they seem to want to pay people a decent wage) and start a shirt company.

 

There has to be something in worth for the brand too (mainly, due to their ad campaigns), though, that may be offset by Dov's pant's that can't be kept on when he is taking photos for said advertising. ;P

[ExpectedValue]

American Apparel has a great brand and the clothing they sell is pretty well regarded. Most young 20-somethings prefer AA t-shirts because they have a better fit and feel. Their t-shirts are traditionally the go-to choice for most designers which is why you see them printed on for band merchandise at concerts.

 

My issue is with the financials. The fact that their auditor dropped out and that they have had longstanding accounting issues makes me nervous about the equity. I bet this will be a good name for distressed debt guys, especially if the company defaults because like you said - they can use the debt to get control of the company, replace management, and run a really tight ship.

[Parsad]

You would be taking a significant risk investing in American Apparel.  The investments success would be predicated on a few crucial outcomes:

 

1) The financials aren't worse than just a restatement...no material deficiencies, fraud, etc.

2) Somebody is going to step in and inject capital

3) That the brand would retain its cache with consumers as the recovery progresses

 

- I suspect #2 will happen, but there is no guarantee. 

- #3 is a finicky aspect of fashion.  Brands come and go, and maybe AA has will soon wear out its desireability. 

- #1 is a serious concern if Deloittes completely bailed.

 

Cheers! 

[cayale]

Part of me doesn't get why they would continually open stores if they were in such dire waters.

 

Dov is CRAZY, really crazy.  Have heard some classic stories from folks that worked for him.

[motownsf]

The debt holders effectively own the company now...probably looking forward to taking control with crazy Dov out of the picture.

[rick_v]

I see a ton of value in APP and have been accumulating a position over the past few days. Great Eye...

 

This is not a vanilla value play but there is a clear discount to intrinsic value and even a margin of safety.

 

First - Ron Burkle the billionaire recently built a 6% position, at an avg cost of 1.38$. Now Mr. Burkle with a net worth of 3 billion has filed 13D on a total of 5 stocks in the last 5 years: WFMI, BKS, APP and two others which I can't remember.

 

WFMI Mr. Burkle bought at a market cap of 2b$ (10$ per share) he purchased 10m shares and sold 8m shares @ 30-40, leaving him with 2m free shares.

 

BKS Burkle has acquired about 20% at an avg cost of 13$, he doesnt like to lose and if you follow the history on bloomberg you can see he has done everything in his power to "unlock" the value.

 

Which leaves us with APP, which Burkle bought with about 6m$ of his personal funds. Burkle and Charney are both in LA and Burkle is known to be in the same circles as Charney so it is not out of the realm of possibility that Burkle will be cutting a deal. Either way I doubt Mr. Burkle would lose 6m$ in a few months when the company simply has a liquidity issue.

 

Lion Capital which holds the debentures (not Biglari) is also a great firm and I believe it is in their best interest to convert the debt into equity.

 

Assuming such scenario you would have a business which effectively generates 500m$ a year in sales with 51% gross margins trading at a market cap of about 150m$ (full debt converted, I would convert half).

 

Remember, sometimes when making value investments a lot of scenarios have to converge, and I definitely see that being the case with APP. There is way too much negativity with regards to the auditor change or the negative press Charney has received. The bottom line is, this is a brand with a durable competitive advantage, they sell good clothes at cheap prices and if you read the Bloomberg/Newsweek piece on APP Charney wants to go after the prep competitors (J.Crew/RL) and if he is even able to capture a small segment he will do very well.

 

He has vertical manufacturing in the US and a great distribution network of stores. All these cannot be discounted.

 

Finally a good test I use when measuring the value of a business is this: If I were to give you 150m$ tomorrow could you build an American Apparel? Could you open 300 stores around the world, a manufacturing facility, and a brand which has resonated pretty quickly with 20-40 year olds? I think not.

 

The caveats I see actually have to do with the economy but hopefully they can survive I think if they restructure their capital base everything should be fine.  There arent many situations when one can effectively buy a business like APP for free. Looking back a few years its a bit similar to CROX in early 2009 and TRLG during the same period.

 

 

 

[rick_v]

RE: CROX here is a link to an article written by the Washington Post forecasting their coming BK very similar to the APP Article. This is what happens when journalists with no investment knowledge write about the topic du jour.

 

http://www.washingtonpost.com/wp-dyn/content/article/2009/07/15/AR2009071503672.html

 

FYI CROX since this article is up about 500% and is one of the top perfomers in terms of percentage gain over the last 52 weeks.

[ExpectedValue]

A debt to equity swap might dilute the heck out of existing shareholders - making this a bad buy.

[rick_v]

I am not following? A debt to equity swap at these levels would mean the market cap would be what it was about two weeks ago... lol

[ExpectedValue]

I am not following? A debt to equity swap at these levels would mean the market cap would be what it was about two weeks ago... lol

 

But how can you be confident about any of the values recorded for the company when the auditor has resigned?

 

I briefly looked in APP but there just seems to be a lot of issues - related party transactions (for example contracting manufacturing work to a company controlled by the CEO and the Chief Manufacturing Officer), then you have his dad running the Canadian biz, when Endeavor filed the SPAC they noted 30 apartments being leased by the company in LA, Miami, NYC... the list kind of goes on and on.

 

I think they have a great brand and a great product but they are being run by sketchy people and the corporate structure really doesn't help.

[rick_v]

You can never be 100% confident about variables which are outside your control, thats why there is a large potential return here and why I said its not a vanilla value play. But I also believe that at 73m$ Market Cap this is worth an allocation. By the time the clouds clear up and we know what you want to know the shares will not be trading this low ala~ BP in June.

 

The great thing about the market is we will know soon enough! Again we must remember that this company ebitda's about 20-30m per year there is simply a liquidity issue mixed in with negative market sentiment.

[Carvel46]

Retail founders gives me the creeps...

Maybe it's the militaristic roll out model inherent to retail.

Retailers faces a lot of operating challenges in growing square footage.

 

Rick_V: Is EBITDA depressed? If so, what's normalized earnings look like?

 

What are your thoughts on Charney?

Wikipedia has some basic:

"In 2004, Claudine Ko of Jane magazine published an essay narrating multiple sexual exchanges that occurred while spending time with Charney. The article alleged that Charney consistently propositioned his employees. Charney admitted that he repeatedly referred to women as "sluts" and "cunts" in front of employees, in a deposition on another sexual harassment case, and denied that "slut" was a derogatory term. The article's publication brought extensive press to the company and Charney, who later responded that he believed that the acts had been done consensually, in private and outside the article's bounds."

http://en.wikipedia.org/wiki/Dov_Charney

 

 

 

 

[rick_v]

Guys I am new here but a little surprised, this is supposed to be a value investment board. Since when do you pay attention to every little detail out there in an emotional manner, we are supposed to cut through the static and focus on the meat. All the comments about Charney or his father or spac or apartment leases, all those didn't prevent the company from generating the following EBITDA numbers in 09,08,07 respectively:

 

Earnings Before Interest And Taxes   27,555  35,288  32,824 

 

You have an enterprise with bad capital management the owner btw who owns 53% is the one who lost the most he tried to keep the capital structure going with minimal dilution and kept raising more and more debt now he is going to have to pay by losing control. Lion Capital or Burkle will step in, convert the debt into equity and voila ! you have a "healthy" company again. I used "" because its healthy given the price it is being offered IMHO... Price is what you pay, value is what you get!!

 

I would like to see 75m$ of the debt converted into equity at these levels, Company would have about 150-160m$~ in equity trading at about 150-160m$ Value. But as a business you would get back to profitability. The ultimate LOSER here is Dov Charney he waited too long to restructure. As investors today in APP we are being given a great deal, to buy the equity at what debt holders would be given at a valuation that basically prices in 5~ Ebitda and at what I estimate to be roughly book.

 

Again many assumptions being made here and I am going to stop posting about APP I was merely surprised at the relatively unsophisticated level of rebuttals that really have nothing to do with past performance or the issues at hand.

 

If you want to hear what I think can go wrong I will outline it here:

 

1) Negative momentum in core businesses / store closings/ economy (but again with proper capital structure they could handle such a scenario)

 

2) Lion get too sweet of a deal on the conversion (IE: many warrants at conversion price which would mean too much pressure for a major gain to be realized) But this is where I think Burkle is a good counter.

 

Thats it for me on APP! unless I am right in a few months and then I will toot my horn a bit ;) It was just awesome to see a post about it on the board given that I have built a position these past few days.

 

 

 

[rick_v]

One last post!

 

 

  Year Ended December 31,

  2009   2008   2007   2006 2005

  (In Thousands Except Per Share Data)

Selected Statement of Operations Data:

 

       

Net sales

 

  $ 558,775   $ 545,050   $ 387,044   $ 284,966   $ 201,450

Gross profit (5)

 

  $ 319,912   $ 294,421   $ 213,368   $ 145,636   $ 101,688

Income from Operations

 

  $ 24,415   $ 36,064   $ 31,122   $ 10,572   $ 10,782

 

 

 

This is a beautiful business! lets not forget how terrible the last few years have been, its just had a bad capital manager at the helm. Btw avg. return on equity deployed is ridiculous its over 30% avg.

 

In my view this demonstrates the strength of the brand.

[ExpectedValue]

Guys I am new here but a little surprised, this is supposed to be a value investment board. Since when do you pay attention to every little detail out there in an emotional manner, we are supposed to cut through the static and focus on the meat. All the comments about Charney or his father or spac or apartment leases, all those didn't prevent the company from generating the following EBITDA numbers in 09,08,07 respectively:

 

 

Rick, when I see a company that has had its last two auditors resign I get pretty cautious about what the reported financials are and start to look at the management team to determine whether or not I can trust them. The fact is, AAP is run by a pretty sketchy guy. He's got all sorts of lawsuits, related party transactions, and just poor judgement to make me queasy.

 

How can you get any level of comfort in the company?

 

It's great that you can quote positive EBITDA figures, here are some positive EBITDA figures from another company:

 

http://highway6.com/images/181e28f90eaaeccbe23196c941fc80d0.png

 

Those are from Enron. So it goes to show you that reported financials aren't everything - especially when you can't trust the management team and their accounting.

[Parsad]

Hi Rick,

 

Not to scare you off the investment, but I would be careful.  

 

Again many assumptions being made here and I am going to stop posting about APP I was merely surprised at the relatively unsophisticated level of rebuttals that really have nothing to do with past performance or the issues at hand.

 

I would strongly disagree with you here.  I think it's probably more of function of opportunity cost.  What benefit is there in responding to a post where they may not have interest in the stock.  This board on a percentage basis, probably has better ideas than any other value investing board out there I know of.  I would say we probably have a better batting average than even the Value Investor's Club.

 

Tariq, I went and took a look at this after watching the posts and I have all the same issues as you.

 

- They will be in default of their covenants by September 30th.  

- They have only about $22M available under their revolving line of credit and they blew through $29M in the 2nd Q.  

- They've yet to file their 2nd Q 10-Q, and they've struggled numerous times in the past three years to get their reporting right.

- Deloitte's resigned, while AAP rehired the same auditors they fired a year and a half ago.

- The related party transactions are a bit of "oh-oh" notation in the financials...especially having his father in it.

- Burkle's investment is miniscule when compared to his total assets under management.  A few months ago, D3 walked away from 33% ownership of Mexican Restaurants (CASA) and took a huge loss on their investment.  It too was a small portion of their total assets under management, and they are also known for being somewhat active with some of their positions.

 

BOA & Lion Capital are in the driver's seat.  They may let these guys default, forcing them into Chapter 11, and then restructure the whole thing with them getting the controlling equity stake...most likely scenario here.  Charney's 53% stake would probably be reduced to something like 5% of the new recapitalized company, so that would at least keep him working, while shareholders would have to fight to retain any portion of the company.  

 

Now getting back to the point I made in an earlier post regarding the reason for Deloitte's resignation.  You can have a minor disagreement about how to treat something on the accounting statement, and that would force the auditor to resign if the company does not agree with the auditor's assessment.  But according to the MD&A in the 1st Q 10-Q and today's press release, there seems to be several issues with the controls implemented by AAP.  These include the treatment of inventory costing, deferred tax assets and leasehold improvements.  What else this entails, I'm not sure.  But their previous accounting firm, the one they just rehired after Deloitte's resignation, also stated that the company had various internal control issues.  So we still have no idea the depth of the problem, except that they've been subpoenaed and the company keeps saying that they think their unaudited financial reports are accurate!  Yeah, ok!   ;D

 

If you are investing in this company, it's a speculative bet, since you don't know if the numbers are legitimate.  You could end up being ok and make a killing, or you could get wiped out...I don't know.  But I'm in the business of not losing capital, so it's not something I would buy.  Best of luck.  Cheers!

[rick_v]

Tariq and Parsad,

 

I believe the comparison to Enron is the comparison of Apples to Oranges.

 

Let us not forget that the numbers I showed were from 2005,2006,2007,2008, and 2009. Annual Statements which the great Deloitte had signed off on. If there was any fraud involved or shenanigans they would have been discovered by Deloitte then or by Lion when doing the DD on their debt issue, (also look at the debt terms very sophisticated). The issue at hand is simply one of corporate governance, and with a firm like Deloitte if you don't have your numbers in on time it makes them look bad and they drop you just like that.

 

 

That being said I also agree with you Parsad thats this is a more speculative investment and for that reason I said its not a vanilla value play but I also am of the belief that in 2010 to be a value investor and generate the top tier returns you have to look at a convergence of factors. Since information is so readily available you must look for situations where the information actually affected Mr. Market in the most drastic way. If you look at APP today it is now valued at 53m$. If you were to take over the company through the debt as you propose there would be about 100m$ left over and this is not the type of inventory you sell at a "garage sale". This stuff is in great demand just look at the growth in their internet sales.

 

Now in a portfolio like mine especially on a year when I am up double digits (thank you XJT) there is room to allocate 1-5% of the portfolio in such a position. The downside is not permanent loss of capital its permanent loss of a portion of the alpha for that year. Its a capital allocation decision. But I do believe there is a value for everything and in APP's case it is getting more attractive by the day.

 

Also the two investigations in my view or totally late and irrelevant as always. I can just imagine the AG prosecutor who got a copy of the WSJ or Business week articles last week and decided to open an investigation. I remind you that APP has missed not filed ANY financials since their 09 10k!! So opening an investigation today is really laughable.

 

The path of least resistance takes you to this type of a scenario :Dov Charney needs to go as a CEO as his weak internal controls and corporate governance led to the company missing two quarterlies, Deloitte which tried to work to complete the quarterlies got fed up and resigned, at the same time declining operating figures and Mr. Charneys implicit stubbornness to stay in control led him to over-leverage instead of raising equity and then everything converged and we have what we have today. The SEC and AG are just not relevant in my view, Deloitte resigning is sad, but has no bearing on past performance and the intrinsic value of the enterprise, and Lion Capital as a P/E Fund is not interested in dealing with class actions and angry equity holders, when they can just as easily convert their debt to equity and have a liquid position in their NAV. I bet they have been trying for 6 months but Charney was not open to any negotiations.

 

Finally I want to say that I do agree that this is the best board I have seen and that is why I am happy to be part of it. I just also believe that while the basic framework of value investing is the same as it ever was, in today's world to generate the really fantastic returns you have to look at a convergence of factors.

 

 

[rick_v]

Great point VG and this plays back into what I have been saying which is that this is purely a capital structure issue. And because you had a stubborn controlling shareholder he chose to take on more and more debt at ridiculous rates while not diluting his stake. He was the number one believer in the company as he probably still is. Now he has to face the music and it will definitely be interesting to see what type of deal is cut. I can promise you that the AG and SEC investigations will only keep everyone more honest than they otherwise would have been so we may see a sweet conversion deal announced any day.

 

At this valuation there are two things that could happen which would make the company worth fundamentally less than what it is being offered for:

 

1) Chapter 11 (and even this is debatable at an equity value of 53m)

2) Their numbers are complete BS including 06,07,08, and 09.

 

 

[rick_v]

Added to APP Position today, very difficult to get filled... Looking forward to some type of update in the coming weeks.

 

 

[rick_v]

American Apparel Announces NYSE Amex Acceptance of Plan of Compliance

Business Wire

 

LOS ANGELES -- September 17, 2010

 

American Apparel, Inc. (NYSE Amex: APP), a vertically integrated manufacturer, distributor, and retailer of branded fashion basic apparel, announced that it received a letter from the NYSE Amex LLC (the “Exchange”) that the Exchange accepted the company’s updated plan of compliance and, pursuant to such plan, has granted the company an extension until November 15, 2010 to regain compliance with its continued listing standards.

 

As previously disclosed on August 23, 2010, the company received a letter from the Exchange stating that the company’s timely filing of its Quarterly Report on Form 10-Q for the quarter ended June 30, 2010 (the “Form 10-Q”) is a condition for the company’s continued listing on the Exchange, as required by Sections 134 and 1101 of the Exchange’s Company Guide, and that the company’s failure to timely file the Form 10-Q is a material violation of the company’s listing agreement with the Exchange. The letter from the Exchange provided that the company must submit to the Exchange by August 31, 2010 any supplemental information addressing how the company plans to regain compliance with Sections 134 and 1101 of the Company Guide by no later than November 15, 2010. On September 13, 2010, the company received a letter from the Exchange stating that the Exchange completed its review of the company’s updated compliance plan and granted the company an extension until November 15, 2010 for the company to file the Form 10-Q.

 

The company will be subject to periodic reviews by the Exchange during the extension period. Failure to make progress consistent with the plan or to regain compliance with continued listing standards by the end of the extension period could result in the company being delisted from the Exchange.

 

Although no assurances may be given in this regard, the company currently expects to complete the preparation and review of the financial statements and related disclosures for the Form 10-Q, and file the Form 10-Q as soon as practicable, but in any event by no later than November 15, 2010.

 

About American Apparel

 

American Apparel is a vertically integrated manufacturer, distributor, and retailer of branded fashion basic apparel based in downtown Los Angeles, California. As of September 15, 2010, American Apparel employed approximately 10,000 people and operated over 280 retail stores in 20 countries, including the United States, Canada, Mexico, Brazil, United Kingdom, Ireland, Austria, Belgium, France, Germany, Italy, the Netherlands, Spain, Sweden, Switzerland, Israel, Australia, Japan, South Korea, and China. American Apparel also operates a leading wholesale business that supplies high quality T-shirts and other casual wear to distributors and screen printers. In addition to its retail stores and wholesale operations, American Apparel operates an online retail e-commerce website at http://www.americanapparel.com.

 

 

We are up 60% on our APP position as of today's close on big money... Happy Weekend!