Apparently investors are writing off the continuing crises
in Ukraine and Iraq along with Argentina’s debt problem as just mild
inconveniences since all the major indexes ended the week with solid gains. But
one person is definitely not smiling, Dov Charney, you might know him as the
man who founded American Apparel in 1998, or as the controversial C.E.O who has
a history of sexually harassing employees, but this week he is known as the man
who was fired from the company he started 16 years ago.
Whatever
the drama behind the ouster, the recent firing of American Apparel’s C.E.O and
founder has led many on Wall Street to notice the recent struggles at American
Apparel and other casual clothing stores. Alright, I know “struggles” is an understatement
if there ever was one, but with all the media attention on American Apparel I figured
it would be a good idea to analyze the company and its competitors and see if
there was a potential buying opportunity because of cheap prices or at the very
least, a shorting opportunity.
What
truly shocked me during my research is just how low shares of American Apparel
and some of its competitors including Aeropostale had fallen. As of Friday
stock in American Apparel is at just $.97, that’s shocking considering the
stock was at $15 in 2007. The question now becomes can the struggling retailer,
which has not made a profit since 2009, make a comeback?
First
of all lets address the companies evaluation, which acts as an indicator if the
company has the potential to see its stock bounce back or see if it makes sense
for the company to be bought out by a 3rd party. By taking a quick look at American Apparel’s 1st
Quarter earnings report for 2014 it is obvious to me and to any value investor
that American Apparel has no hope of seeing its stock bounce back.
A
simple way of demonstrating this is by looking at the true value of American
Apparel, by true value I mean the value shareholders will receive in case the
company is liquidated. A simple way of finding the true value of a company is
by subtracting the company’s total assets from its liabilities. The closer the company’s
market cap is to the company’s true value the better. In the case of American
Apparel the true value is negative
$53.672 million. As of Friday American Apparel’s market cap stands at $167.6
million.
The
company’s deficit makes it highly unlikely the stock will bounce back at all,
but the recent ouster of its controversial founder did give some investors hope
that American Apparel, which does have some brand recognition amongst 19-30
year olds, might get bought out by a 3rd party such as Urban
Outfitters or Abercrombie & Fitch. Personally I feel that such a buyout is
highly unlikely, not just because Co-chairman Allan Mayer said that “the
company was not pursuing a transaction and has no plans to put its self-up for sale”.
But also because American Apparel’s balance sheet has no hidden jewels that
would make an acquisition worth it and the stock does not trade for less than
the sum of its parts (which is something buyers tend to look at).
With
all this evidence I feel confident saying that American Apparel will probably
be forced to declare bankruptcy within the next few years. The only thing shareholders
in the company can hope for is that ousted founder Dov Charney, who still owns
nearly 27% of the company will assemble a consortium and buy back his company. Unfortunately
that appears to be a forlorn hope since the board has recently taken steps to
protect the company from any take over attempt by Charney. Worse still the
battle between the ousted founder and his company has shifted to the court
house, where Charney will attempt to sue American Apparel for smearing his name
and wrongfully firing him from his position. Whatever the outcome of the suit
American Apparel will have to spend millions in legal fees, millions that the
company does not have. It appears that Charney could take revenge on his board
by uing the company within an inch of bankruptcy (unfortunately the company is
already within an inch of bankruptcy so that is kind of a bad pun). However
with that said be wary of shorting this stock, as a penny stock American
Apparel has become rather volatile so I would stay away from this company altogether.
American Apparel seems to be doomed
are its rivals also destined for the same fate? Stocks of other casual
retailers like Aeropostale and American eagle have been under pressure recently
as sales slump do to changing fashions. But other competitors such as Abercrombie
& Fitch have actually seen their stocks rally somewhat in 2014. So what is
the future of these retailers?
The
first retailers that came to mind after doing some digging into American
Apparel were Aeropostale and American eagle. Both companies have seen their
stocks fall sharply in 2014 (American eagle is down nearly 20% year to date
while Aeropostale stock is off over 63%). Aeropostale is almost at the level of
American Apparel, with its own stock trading at just $3.55.
Unfortunately
for Aeropostale there does not seem to be any hope on the horizon, the company
trades at a true value of $207.97 million and with a market cap of $279.2
million. The company has been losing money for 5 quarters straight and has been
encouraged to either go private or sell itself to a competitor. The company has
recently been closing up to 70 stores in order to lower expenses but this might
be too little too late. It appears that with just $24.5 million in cash and
with an expected loss of over $50 million coming in the 2nd quarter
of 2014 it might appear that Aeropostale is doomed to the same fate as American
Apparel.
American
eagle on the other hand is in slightly better shape, shares in this popular
teen clothing store currently trade at over $11, and unlike American Apparel or
Aeropostale the company is actually profitable. Since American Eagle brings in
revenue of over $3 billion, and has so far been able to remain profitable I feel
that this retailer will survive. With that said buying the stock is a risk move
because the trend has so far been negative and the stocks volatility is high.
While
American Eagle adapts to the new fashion environment another competitor in the
industry is actually seeing its stock rally in 2014. Abercrombie & Fitch
stock is up over 30% year to date as the analysts say the company is a ripe
takeover target. Whether that’s true is a different question entirely. Personally I would stay away from this stock,
even if an outside company does buy Abercrombie it is unlikely to do so at a
high premium, and with slim margins and a constantly changing fashion market I do
not believe this company’s stock could keep its current levels if a buyout does
not occur.
However
you look at it he apparel retail industry appears to be a dangerous proposition
for an investor. With companies like American Apparel and Aeropostale barely
fending off bankruptcy and competitors like American Eagle and Abercrombie
barely being able to adjust I do not think any investor should invest in this industry.
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