American Apparel at $10 within Five years?

American Apparel had sales of $616 mm in 2012. The company should grow sales by about 10% in 2013. Starting in 2014 the company should open about 20 stores per year according to the 2012 4th quarter earnings release from  252 as of year end 2012. This should help the company grow revenues by closer to 15 percent annually.

I have prepared a chart showing what the EBITDA picture could look like in 5 years from now using different scenarios. There is strong EBITDA margin expansion as the production throughput converges towards $800 mm of sales annually. And now for the numbers:


If you average the data in the matrix located at the bottom of the table you get $.73 of pre tax earnings. Using a 14 * price to earnings ratio that gets you a stock price of $10. This is a very rough calculation and as you can see the range of outcome is very wide. However, I believe that at $2.30, the stock is still a bargain even if it reaches only a fraction of this level.

In addition, Dov Charney, the company’s CEO, has an anti-dilution provision that works the following way: If $APP stock price reaches performance goals of $3.25 by 2014, $4.25 by 2015, and $5.25 by 2016, the CEO receives a total of 39.7mm additional shares. The likelihood that the stock goes out and takes out these strike is high, don’t you think?

Oscar Schafer made the point in Barron’s a few weeks ago that go private transactions for distressed apparel companies are done at between 10 and 15 times EBITDA. You can read more about Schafer’s thesis here: More Insights about distressed Apparel Companies. Using these factors on the data included in EBITDA per share for 2017 matrix, we get a stock price of in between $4.90 and $22.90.

I believe reasonable boundary conditions on APP within five years is $5.00 to $10.

Makes sense?

Written by Michael Bigger. Follow me on Twitter and StockTwits.

P.S. American Apparel is still a highly distressed situation and it is not suitable for the majority of investors. The purpose of the post is to write down how I think about this and share it with you.

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.

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