American Apparel (APP)

mlrtist (< 20) Submitted: 12/28/07 7:52 PM : Start Price: $14.82 APP Score: -16.64

Background:
American Apparel is arguably the hottest retailer in the industry, with 150+ stores worldwide... with same store sales growing at tremendous 27%, and plans to expand by 700-900 stores.

Under the current share price, they are extremely undervalued.

Not only, are they the hottest retailer in the industry, but they are also the largest manufacturer of t-shirts and apparel in the US. Their customers are not only consumers who enter the retail stores, but also b2b custom screen printing companies who print unique designs onto AA made goods.

Here’s a comparison of American Apparel (APP) to Lululemon Athletica inc. (LULU)

This details how undervalued and cheap the stock price is right now.

LULU is the best current retail comparison, because LULU has received such a rich valuation. However, there really is no other vertically integrated retailer out there with AA's brand strength and same store sales growth above 20%, with the exception of maybe Apple, another very strong brand.

Abercrombie, American Eagle, J Crew, etc., are all way past their peak growth levels so it's impossible to compare at this time. Under Armour, Crox, Deckers (makers of popular Teva sandals and Uggs boots), are all good comparisons in terms of product, but none of those companies have the store expansion model of American Apparel. The only other retail company out there with same store sales growth over 20%, EPS growth 50-100% and looking to expand their store base by more than 4 times is Lululemon.

1. LULU has higher sales and EPS growth, but APP has more than double the total revenue. (LULU expects 150 million in '07, APP expects over 350 million) In '08, AA is expected to have double LULU's revenue again.

2. LULU hopes to expand to 600 stores in the next several years. AA plans to reach 800-900.

3. Both companies have approximately 68 million shares outstanding. LULU has a market cap of $2.6 billion while APP has a cap of $1 billion. At a cap of $2.6 billion (and keep in mind that is not assuming the same valuation of LULU only the same market cap) APP would trade at the same price as LULU, in other words $38.00 per share. APP currently trades at about $15.00.

The current analyst consensus is for $345 million in revenue and 440 million for '08.

At a current price of $15, EDA is trading at less than 3x trailing sales and only 2x forward sales!

GIL = 5.25x sales
UA = 4.2x sales
CROX = 4.1x sales (even after recent 40%+ decline)
DECK = 4.5x sales

LULU = 8x sales


APP '08 sales will grow at least 35%, but likely more as retail sales become a greater percentage of sales compared to wholesale, margins expand, same store sales grow over 20%, and we open 20-25 new stores. (Retail sales are growing at a rate of more than 50%)

APP is expanding faster, has better same store sales, and has a hotter brand than almost anyone in the industry. With store expansion happening all over the world, APP can also benefit from the weak dollar. A fair valuation could very likely give us a double ($30/share) from here in a short period of time.
$26/share gives a mkt cap of $1.77B, still just 4x forward sales.

Media:

Forbes| Video: Fit to a Tee
http://www.forbes.com/video/?video=fvn/business/ab_americanapparel&partner=email

The Street | Video: American Apparel Has Sex Appeal
http://www.thestreet.com/video/index.html?clipId=1373_10380314&channel=Market+Strategy&cm_ven=&cm_cat=&cm_ite=#10380314

CBS | Video: Interview with founder Dov Charney
http://www.youtube.com/watch?v=hYqR8UIl8A4
Google PBS | Video: Interview with founder Dov Charney
http://www.americanapparel.net/gallery/charlierose/qt.html

Seeking Alpha | Three Long Picks
http://seekingalpha.com/article/55843-vic-scott-bommer-of-sab-capital-three-long-picks?source=yahoo

Seeking Alpha | American Apparel Set to Double
http://www.seekingalpha.com/article/57483-american-apparel-set-to-double

Tim Sykes | The Best Kept Secret in Retail
http://timothysykes.com/index.php/myblog/the-best-kept-secret-in-retail.html

Forbes | Top Stocks for 2008
http://www.forbes.com/free_forbes/2007/1210/134.html?partner=yahoomag

The Street | Try EDA On for Size
http://secure2.thestreet.com/cap/login/rm_mbp_summarylong.jsp?flowid=15e4e64a5d&url=http%3A%2F%2Fwww.thestreet.com%2Fp%2F_mktw%2Frmoney%2Fretail%2F10390375.html&denied

The Minnesota Daily | Unkempt, Urban, Ubiquitous.
http://www.mndaily.com/articles/2007/10/05/72163645

American Apparel recently held a factory flea market in LA.
Link: http://www.americanapparel.net/fleamarket/

Here's a YouTube video of all the people waiting in line to get into the flea market:
http://www.youtube.com/watch?v=cdijxKeOTpI

Lindsay Lohan | American Apparel shopping spree
http://lindsaylohansite.blogspot.com/2007/12/lindsay-lohan-went-for-late-night.html

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