TPS Trade Alert – November 27, 2013
November 27, 2013
Recommendation:
Buy American Apparel (AMEX: APP) up to $1.40 per share.
Trade Rationale:
It’s almost Black Friday again, and you know what that means. It’s holiday shopping season! Of course, this is the time of year when many retail companies make their big profits for the year.
It’s an especially important period for traditional brick and mortar stores, such as clothing shops. It’s this time of year when consumers are out at malls making purchases from physical locations.
What’s more, many retail companies reserve a vast majority of their marketing efforts and inventory stock-up for holiday shopping. In other words, a lot is riding on this period in terms of a big sales boost.
This year’s holiday season is of particular important to one clothing retailer. You see,American Apparel (AMEX: APP) just went through a major transition and is counting on robust Q4 sales to get back on track.
APP is a branded fashion retailer based in the US. The company designs and produces basic apparel products and clothing accessories for women, men, children, and babies.
The company sells its products through the wholesale distribution channel, retails stores, and an online retail website. Retail is the most important channel for the company, followed by online sales. APP currently operates 246 retail stores in 20 countries.
Here’s where APP stands out from its competitors…
First off, the company prides itself on its local, vertically integrated business. That means they do the vast majority of their knitting, dyeing, sewing, marketing, and distribution all from their facilities in Los Angeles. There is minimal usage of offshore labor.
While having all the labor based in the US is expensive, there are several benefits. The entire process has complete visibility. There are minimal transportation costs built into the product pricing. There aren’t socio-political issues to deal with such as sweat shops. And, efficiency in general can be maximized with everything under one roof.
As a matter of fact, the company just finished transitioning to a new distribution center. The new facility will allow the company to grow substantially and meet future demand.
Unfortunately, the transition to the new facility was a painful one. Distribution delays as a result of the move caused out of stock problems and hurt revenues and profits.
However, it looks like the company has finally completed the transition in time for the holiday season and is ready to operate at full steam.
Operating without supply chain restrictions is vital to APP this holiday season given the potential for high revenues generated during this period. Moreover, the company needs to prove to investors it’s back on track.
Here’s the thing…
Moody just downgraded APP this month based on their high debt levels and potential liquidity issues. A solid quarter for APP could help put some of those concerns to rest. Plus, it will give management some leverage to negotiate new debt terms with creditors.
The fact is, the company is seeing strong demand, both through its retail and online channels and from private labels. APP recently received an order for 500,000 units of its Made in USA printed items.
With the revenue losses from transitioning to the new distribution center out of the way, APP is on pace to generate nearly $700 million in revenues in 2014. Plus, the company is already EBITDA positive.
APP is just a good holiday season away from turning the corner, as well as tackling its debt problem for the long-term.
Yet despite the company’s popular products and new distribution center, the shares are trading at just 0.20x sales. Meanwhile, APP’s competitors trade for more than twice that amount.
We think it’s a great time to take a chance on APP. With the holiday season just around the corner, the stock is in great position to get a big lift from Q4 spending.
Remember to use limit orders when placing your trades. And stick to your position sizing rules.
Key Facts:
| Company: | American Apparel |
| Ticker: | APP |
| Recent Price: | $1.20 |
| Market Cap: | $133 million |
| Avg. Daily Volume: | 710,062 shares |
Chart:
Category: TPS Trade Alert
