Several friends have asked me for my opinion of American Apparel (AMEX: APP), a clothier that recently became public through its acquisition by Endeavor Acquisition.
First a little bit of background: American Apparel was founded in 1997 by Dov Charney, and is known for its simple, high-quality clothing, and its unique practice of not plastering its logo on everything it sells. Browse through their merchandise on the company's website. The company also avoids outsourcing, manufacturing its clothing in Los Angeles where it is headquartered.
In 2006, the company had revenue of just over $264 million, an increase of 37.7%. The increase was driven by the opening of 41 new stores, but the company still reported a loss just about $1.6 million as SG&A expenses climbed.
Sales are growing quickly and the company turned a profit in its most recent quarter. American Apparel certainly has the potential to turn into a very hot retail growth stock -- it's already up big over the past few months. But there are a couple things to worry about. First, saying that founder and CEO Dov Charney is uninhibited is like saying that Alan Greenspan can ramble a bit. In 2005, the New York Times did a story on Charney's -- er ... unique management style. Here's a quick sampling:
"Mr. Charney decorates stores with covers of Penthouse and Oui magazines from the '70s, admits in interviews to engaging in sexual relationships with women who work for him, and once exposed himself for an ad in a gay magazine, all in the name of personal freedom.
"In two separate sexual harassment lawsuits, three plaintiffs who worked on American Apparel's administrative and sales staffs charge that they endured sexual misconduct and innuendo and an environment in which women did not feel safe ... Among the allegations: using crude language and gestures, conducting job interviews in his underwear, ordering the hiring of women in whom he had a sexual interest and giving one of the plaintiffs a vibrator."
Wow. In an article in Jane a couple years ago, Mr. Charney was described as having masturbated in front of the writer, and also having engaged in oral sex with an employee in the writer's presence.
How Mr. Charney, who seems to personify the phrase "brilliantly eccentric entrepreneur" will adapt to a world of quarterly conference calls with Wall Street analysts remains to be seen: He could actually give Patrick Byrne a run for his money in the eccentric department. Whether he will be able to deliver growth and earnings better than Byrne has remains to be seen.
Another concern that I have, as someone who has shopped in American Apparel stores, is that the clothing is really not particularly unique, and could be very vulnerable to lower cost competitors as it expands its footprint. This is definitely a stock to keep an eye on, if only for entertainment value. I don't really have an opinion on whether it's a buy or a sell, but I'm certainly looking forward to watching Mr. Charney Goes to Wall Street.
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Reader Comments (Page 1 of 1)
12-16-2007 @ 12:31PM
chuchogold said...
In a 9 paragraph article you mentioned the success of the company in 1 paragraph and the sexuality of the CEO in 7. No mention of 27% same store sales growth - the best in the industry. No mention of a likely quadrupling of stores in the years to come. No mention of 50% retail sales growth. This is the fastest growing retail company in history (1 kiosk in 2003 to 166 stores today). Without debating what the CEO has or hasn't done, it also should be noted that it is precisely his youthful, sexually charged personality that has led to the success of their ad campaigns, attracts many people to the stores, and makes for a cutting edge brand that appeals to young people in metropolitan cities all over the world.
12-16-2007 @ 12:38PM
newlafaya said...
Also, all this stuff about the CEO hasn't seemed to get in the way of their success at all. Celebrities love to shop here, almost everyone I know owns clothes from here. It's not true that the clothes are "not particularly unique." What's special about the clothes is how they fit. People don't realize how hard it is to find simple pieces like they sell. Also they do sell a lot of things you can't find anywhere else. i love their sunglasses!
12-16-2007 @ 1:05PM
thereticulated said...
There's no talk about APP's amazingly cheap valuation in this article either! At $15/share we're trading at 2.5x '08 sales. Other high growth retailers/wholesalers are trading at double or triple this valuation
UA - 4x sales
CROX - 4.6x sales 9even after huge decline)
GIL - 5x sales
LULU - 12x sales
APP - 3.2x '07 sales, 2.5x '08 sales (and APP's same store sales growth is almost the same as LULU's)
Lazard expects $1billion in revenue by 2010, $650-700 million in '09. We're trading at less than 2x '09 sales! In a month, when people start looking at '09 numbers, this stock is going to look absurdly cheap.
As far as earnings/profits - APP is expecting significant margin expansion and cost savings due to economy of scale. EPS is expected to grow 65% in '08. A p/e of 65 would not be at all unreasonable (forward p/e of 39) and would put the stock easily over $25 during '08.
12-16-2007 @ 6:37PM
Dr. Nick Riviera said...
I agree with both newlafaya and thereticulated. While the lascivious behavior of Dov Charney may not be embraced by Wall Street, his actions are in no way indicative of the company's performance. With same store sales, yoy, increasing more than any company in its sector, and with revenue expected to increase by 400% in 4 years, the company hardly seems hindered by Dov Charney's atypical social life. American Apparel appears to be a Charney's top priority and I sincerely doubt he would let his eccentricities carry over into quarterly conference calls.
12-16-2007 @ 8:38PM
thereticulated said...
Dov Charney is a clothier from Montreal who comes from a family that includes several Ivy League scholars and a world famous architect. He has been selling clothes since he was a teenager and his overt sexuality, while unorthodox, has not impeded the success of this company. It could easily be argued that it has helped them. (eg one of the most talked about ad campaigns in the world) The comparison to Patrick Byrne is completely flawed since Overstock has negative revenue growth and negative earnings while APP is growing revenues at a 35% rate and earnings at over 60%. Patrick Byrne blames Wall Street for his failed company. Charney created a phenomenally successful brand and business model and APP is expected to triple its revenues and earnings in the next couple years.
12-17-2007 @ 12:15PM
mindthestore said...
Interesting comments, but could it be that last sentence was supposed to be a parody of the classic adult movie series, 'Debbie Does...Dallas, Washingtion, etc.'? Then it should be "looking forward to watching 'Mr. Charney DOES Wall Street' "..right? Now that's funny!! Anyway, it's a really exciting stock. I live in Germany and the stores are popping up everywhere, people are crowding in and lining up to buy.
1-08-2008 @ 12:49PM
true said...
Completely Agree with the last point/last paragraph.
As an example I will put forward the delayed opening (since june 07) of one of their stores in spain.
My point is : Spain is well known to have a very profitable low cost textile industry ( AKA: Inditex with stores such as ZARA to name just one) known for it's ability to rip-off Couture designs in a blink of an eye for a fraction of the cost, Imagine what could/will happen to such simple designs like the ones at AP, already Ripped off from classics all the way from the 70's? and in europe you are paying 12€ ( almost 18 bucks) for a piece of underwear, wich is well above market. Pretty pictures of young teenagers just might do the trick but Overseas doesn't give a RaT$ A$$ about vertical integration all LA Produced foolosophy. I know It's doing well in Berlin and Paris, but not too sure about the rest of the continent ... My 2c.