Controversial and rapidly growing retailer American Apparel reported 1Q08 results last night after the close. While there are many extremely positive numbers in the results, I believe that several confusing items will cause the shares to trade lower today, possibly much lower. That said, I think the trends in core retail business look better than expected and on that basis the shares are deeply undervalued.
For 1Q, revenues rose 52% and gross profits rose 45%. US Wholesale gross profits fell 32% as gross margins in this segment fell from 38% to 20%. All other business segments, which are predominately US and International retail, enjoyed a 72% increase in gross margins. EPS were 2 cents. There was only a single analyst estimate which called for 5 cents on revenue of $99 million. Management also outlined approximately $3 million in legitimate one-time expenses which cost 2 cents.
Management affirmed full year guidance of 32-36 cents and EBITDA of $70-75 million. Management also tried to explain the drop in wholesale gross margins but given the fact that company is not Sarbox compliant and has minimal finance staff the two sell-side analysts and the two hedge fund analysts were skeptical (worth noting is that SAC Capital, the largest outside shareholder, was one of the hedge funds putting to rest rumors that they had sold their position). The explanation actually makes sense assuming the promised lift in US Wholesale gross margins for the rest of the year occurs. But since EPS “missed” the single estimate and the conference call was confusing expect the shorts to bear their teeth initially. I had hoped this quarter would be the one that swung momentum to APP bears but it looks like it will take at least one more.
So here is the situation, you have a company comping in the mid 30s in 1Q and likely to comp in the mid 20s against tougher comparisons in 2Q. Retail operations are growing over 50% on the top line and operating income more than doubled in 1Q. The American Apparel brand and retail concept can be described as nothing less than “hot.”
At the same time, accounting remains an issue. The CEO remains an issue due to his personal practices although one can hardly argue with what he has done with growing the company. No one outside of shareholders like me, the two sell-side analysts, and the few hedge fund shareholders, will cut these guys any slack. No one will trust the numbers….

….Shorts have something to chew on and a great story to spread. Only execution of the business plan, hiring of additional financial staff, Sarbox compliance, and a few good quarters will increase confidence. If that happens, the shares will double from were they were indicated during yesterday’s post close conference call.
Call me crazy. Call me stubborn. Tell me I got better fights to fight and better stocks to invest in. But I plan to stick with APP for now. And unless I learn something new I’ll average down if the shares get beat up too badly in the next few days.