The Wall Street Journal wrote a damning and extremely damaging article about one of Northlake’s long positions. The story on American Apparel (APP) appeared on the front page of the Saturday edition. As someone who had done his homework and read the filings, most of negative news in the article was nothing new to me. There were a few new nuggets that were quite negative, however.
The stock is likely to be exceptionally weak today. This is true even thought the shares are already down 40% this year and fell sharply on very heavy volume last week. I suspect last week’s selling was by longs or shorts who got wind of the article. The biggest hope for longs is that the stock already reflects much of the damage and the bad news that the stock action was signaling is finally out in the open.
The article paints are very bad picture of APP while completing the many positives. Almost all of the negatives in the article concern the company’s history from 2005 and 2006. There is no denying the history is terrible but it is history. It completely overlooks the new financial position the company has as a result of its blank check IPO that was completed at the end of 2007. More importantly, the article barely even mentions results over the past year: comp store sales gains consistently in the mid-20% range or higher rapid growth in operating income and earnings per share, and consistent and well-executed new store openings all over the globe….

….Bears or potential longs will say that you can’t trust any of the positives because management is thin, incompetent, and untrustworthy and there are “material weaknesses” in accounting standards. As a long, there is not much I can say that would convince anyone otherwise. However, the accounting issues are fixable (they are already being worked on) and management depth can be added. Maybe controversial CEO Dov Charney will continue to do it his way and not bring in outside help. But maybe the article and poor action in the stock despite fantastic store level results will convince him to play Wall Street’s game.
I don’t expect a recovery in the shares anytime soon. That said, I do believe that several quarters of consistent execution while addressing management depth and resolving the accounting issues will make investors realize that history is in the past. The shares are quite cheap given their growth rate and the ongoing strength of their brand. I expect to catch a lot of grief about my position in APP from my clients and subscribers of RM.
But I don’t plan to throw in the towel. At least not until 1Q08 EPS are released at which time I expect increased guidance, announced progress on the accounting issues, and possibly a commitment to add senior management depth. If I am proven wrong my current small loss will grow larger. That is a risk I am willing to take.