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November 09, 2007

American Apparel/Endeavor Delivers Good News All Around

In the midst of the carnage yesterday, Northlake had one winner: Endeavor Acquisition Corporation (EDA). EDA is in the final stages of completing its acquisition of privately held American Apparel, a very hot teen retailer. The shares rose over 5% on heavy volume in response to a very positive press release.

EDA announced that that it will file the definitive proxy to complete the acquisition by the end of November. A shareholder vote is scheduled for December 12th. These items while routine are significant because EDA's status as a blank check company means that it has to complete the deal by mid-December or return its assets to shareholders. Those assets are worth just $7 or $8.

More significantly for the long-term prospects of the company, EDA announced that AA's 3Q same store sales rose 27%. This is on top of a 24% gain in 2Q. Furthermore, EDA stated that AA has already produced over $40 million in EBITDA through nine months and would significantly exceed previous full year EBITDA guidance of $40 million.

As a result of AA's outstanding financial performance this year, the terms of the acquisition were amended to give AA's founder and CEO, Dov Charney, more shares. Additional shares were also allocated for AA employees while Charney's partner will now be bought for cash by EDA instead of Charney himself.

I believe that AA's operating and financial momentum will prove sustainable through at least 2008. If so, there is substantial upside to the shares as the EBITDA multiple is just under 13 on my 2008 estimate. For the hot teen retailer of the moment this is a cheap valuation. Previous hot retailers have traded at 15-20 times EBITDA. 15 times my 2008 estimate gets EDA to $16, 25% higher. Personally, I think this target will prove conservative. To back up my optimism I was bidding for more stock all day yesterday but I didn't buy any as I kept my bid too low given the crappy stock market action.

Posted by Steve Birenberg at November 9, 2007 01:28 PM in eda