American Apparel Inc. (APP): Is This Company’s Comeback Complete or Is it a Short Candidate?

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American Apparel Inc. (NYSEMKT:APP) has encountered some significant setbacks in the past six years since it started trading publicly, but is now showing some signs of life. The company is a manufacturer and distributor of basic fashion apparel. American Apparel is well known, in part, for its sweatshop-free business model, its form-fitting t-shirts, and often controversial advertisements. It has received some negative press over the past few years due to some issues with its founder Dov Charney. Charney became the target of numerous sexual harassment lawsuits in the mid-2000s. A number of these suits have since been dismissed, but some are still pending. The negative press hurt the company’s stock price, but more recently the share price has bounced back considerably. The decision for investors is whether American Apparel will continue to grow, or if it may be a short opportunity.

Charney began making basic t-shirts in 1991. He soon began instilling progressive politics into his business plan by promoting a sweatshop-free model of fair wages, and further refusing to outsource the manufacturing of the company’s garments to foreign countries. American Apparel currently has around 10,000 employees and operates over 200 retail stores in twenty different countries.

American Apparel’s Metrics

American Apparel Inc. (NYSEMKT:APP) still continues to operate at a loss. The company reported Q1 sales increased 4% to $138.1 million, on an 8% increase in comparable store sales and a 1% increase in wholesale net sales. The company further reported a loss of $0.7 million for Q1, versus a loss of $2.1 million for the prior year’s quarter. On an annual basis, net revenue increased 11% to $327.4 million in 2012, versus $294.9 million in 2011. The company further reported a loss of $0.35 per diluted share for 2012, an improvement from a loss of $0.42 per share in 2011. American Apparel Inc. (NYSEMKT:APP) recently refinanced a portion of its higher interest rate senior debt by entering into a $35 million credit facility with Capital One Bank.

American Apparel Inc. (NYSEMKT:APP) underwent a reverse merger in 2006 and was thereafter listed on the American Stock Exchange. The stock traded around $26.50 for most of 2006, until it dropped in December of that year to around $15.85. The shares finally hit an extreme low of around $.52 in December of 2011. Shares have since risen from the dead, and are up 93% year to date. Still, shares have backed off a high of $2.4 in late March. Recent price action has been flat, trading near $2 on low volume, and appears to be hugging the 50-day SMA. There is heavy short interest with 5.5 million shares being shorted, for a short float of 9.53%.

Who Do They Compete With?

Urban Outfitters, Inc. (NASDAQ:URBN)

American Apparel Inc. (NYSEMKT:APP)’s closest competitor in the retail fashion sector is Urban Outfitters, Inc. (NASDAQ:URBN). Urban Outfitters, Inc. (NASDAQ:URBN) has a much higher market cap of $5.99 billion, versus a market cap of $210 million for American Apparel. Urban Outfitters, Inc. (NASDAQ:URBN) has a P/E ratio of 23.76, with an EPS of 1.72, and recently reported that its first quarter fiscal year profit rose 39%.

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