American Apparel Shares Ready to Double

Retail

Published: July 13, 2014 9:05 am

Last Updated: July 13, 2014 9:06 am

With new financing in place, the appointment of new board members in the offing and an upcoming resolution about whether founder Dov Charney will remain as CEO, American Apparel Inc. (NYSEMKT: APP) shares need only one push to soar back above $2: a quarter of good earnings.

American Apparel shares popped above $1 last week. They had been below that level for most of the year. Hedge fund Standard General provided $25 million in financing for the company, which faced bond default and possible insolvency. Based on several analyses, Standard General owns or controls between 40% and 45% of American Apparel’s shares, making it the de facto owner of the company.

Wall Street will be further relieved when an investigation clears Charney of sexual misconduct and buying his parents a small number of airline tickets. Probably a new and seasoned retail CEO would be viewed as better than Charney. His instability will cast doubt over America Apparel’s chances to have smooth operations.

Another critical juncture will be the appointment of new board members. Co-chairs Allan Mayer and David Danziger will stay. If new board members have reasonable credentials, it will give Wall Street another sign that a turnaround effort could be serious.

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However, a company without good earnings is a company short of real recovery, no matter what steps are taken in terms of financing and governance. American Apparel lost $106 million last year on revenue of $634 million. There was a good trend. Revenue the year before was $617 million. And the year before it was $547 million. The most recent quarter was at least stable. Revenue was down 1% to $137 million, and the loss for the period was a modest $5 million.

A small amount of cost control and an improvement in sales should take American Apparel to a profit. The risks remain that new apparel lines, and perhaps the loss of Charney’s creativity, cannot be overcome. However, strong retail executives would mitigate those risks.

If American Apparel can grow again, and show that it does not need to eat through cash to stay afloat, the market will have a reason to bid its shares back above $2 — where they traded, by the way, less than a year ago.

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