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March 18, 2008

Good News From American Apparel But Stock Remains Under Pressure

I was quite pleased with the 4Q07 results, 2008 guidance, and conference call from American Apparel (APP), which reported after the close last night. The consensus I was using consisted of just one analyst so it wasn't really meaningful. Just three analysts asked questions on the call but they were enthusiastic, asked a lot of questions, and seemed very pleased by the answers they were getting. The only meaningful negative in the quarter was the announcement that the company has material weakness in accounting per Sarbanes Oxley. I think this is a routine matter for a newly public company via blank check IPO but some may not like it.

For 4Q07, APP reported revenues of $111.2 million, up 48%. This figure was a little higher than I was expecting driven by the retail business (the company operated 182 stores at year end), where same stores sales rose a stunning 40% in the quarter. Adjusted EBITDA came in at $13.3 million, up 56%. This was slightly short of the $60 million figure I hoped reflecting heavy investment by the company in its transition to public reporting standards and by its commitment to set the stage for America Apparel to be a major global brand with 100s of new stores over the next five years. The company reported a small net loss for the quarter after backing out a tax benefit. I was expecting a small net profit and the difference was due to the higher expenses I just mentioned and greater than expected net interest expense. Overall, I fund these numbers to be excellent for a growth retailer like APP and the analysts on the call all congratulated the company on the results.

APP provided detailed guidance for 2008, pointing to revenues of $470-485 million and EBITDA of $70-64 million, both up 24%, and EPS of 32-36 cents, vs. the adjusted 2007 result of 19 cents. At first I was a bit disappointed that EBITDA and EPS guidance was not higher but on the call it became pretty call that guidance is conservative. First, guidance is based on comps of 15% versus the 2007 figure of 29%. Tougher comps will lead to a slowing but January and February are up 40% and 45%, respectively! Also conservative is the projection for $15 million net interest expense given a total debt level of $117 million and current cash of over $80 million. Finally, at 74 million, the share count is about 4 million ahead of my spreadsheet. I strongly believe APP will easily beat guidance on the revenue, EBITDA, and EPS line in 2008....

....One other important takeaway from the call was the superb performance of CEO Dov Charney. Charney is a controversial figure because of an outstanding sexual harassment suit, two prior settled suits, and his flamboyant and "different" attitudes toward corporate culture and sex. That said, anyone listening to the call would have heard a superb merchant totally in command of every detail. Additionally, Charney clearly wants to please the street and to do so he said the company will now be announcing monthly comps. He talked in detail about specific stores, mall architecture, international expansion, foreign currency impact, inventory management, store productivity plans, gross margins, operating margins, apparel trends, and competition in the retail and wholesale business segments. APP will trade with a Charney discount for a bit but if the numbers continue anywhere close to recent results I don’t think it will last.

The shares have been crushed recently, mostly I think due the March 7th exercise of 16 million warrants. I believe the quarter cleared the air and the stock is headed higher. At 12 times EBITDA, the shares would be around $11.50 and trading at less than 30 times this year's probably EPS. I think that is a bargain for a very hot apparel brand that is executing superbly and comping at an incredible rate. I've been a buy for slightly over a year at prices ranging from the mid 8s to $13. I plan to buy more in the next few days if the stock stays near current levels.

Posted by Steve Birenberg at March 18, 2008 09:32 AM in eda