More Insights about Distressed Apparel Companies

• Posted by Michael Bigger
• on January 29th, 2013

Oscar Schafer, in this Barron’s roundtable column, makes an interesting argument for Quicksilver ($ZQK) the surfing and action sports apparel company. As a distressed investor, I bookmarked the following insights for future reference:

• Global apparel brands with an authentic and rich heritage are very valuable. In a world of free and perfect information they are harder to build since it is becoming increasingly hard to gain potential customers attention.
• The valuation needle can move to 10 to 15 times EBITDA for go private transactions.
• These brands get in trouble when they lever up too much for acquisitions or other expansion gambles.  High levels of debt can be very risky.
• The recovery catalyst for these situations revolves around a commitment  trimming the cost structure to allow operating earnings to reduce the debt load and interest expenses.

Our biggest position in distressed apparel is American Apparel ($APP). We believe that when $APP returns to optimal health, which should happen within two to three years, the company will generate 15% to 20% of sales in EBITDA at full capacity. At $800 million in revenues, the company could generate $120 million of EBITDA at a minimum.

How much is that worth?

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.