The Frayed Fabric of American Apparel

Steve Kanaval  |

You might know American Apparel Inc. (APP) by the brands Neo Max, Vintage California Select - Prints Charming and Made in L.A., or the F.F. Beat Collection popular with teens and the back to school crowd However, investors know APP by the litigious nature of Ex-CEO Dov Charney, Hedge Fund Standard General and the company’s current management that is constantly in the news with a variety of lawsuits that distracts the company from executing its business plan. 

The American Apparel stock price currently sits at 60 cents. The company is in danger of becoming delisted on the NYSE, which would cause suffering to all shareholders. There doesn’t seem to be any hope in sight other than someone acquiring the company – which is unlikely considering their current mountain of litigation – or privatization, which would cloak some of the ugly feuding that plagues the brand. I must say, at this stage, the board needs to be held responsible for the current state of the company. They also need to resolve issues with suitors and get back to the business of making and selling clothing.

A Long and Painful Decline for AAP

Shares of American Apparel have never really recovered from the market decline in 2008, when global markets brought down all stocks. Furthermore, shares have never approached the near billion dollar valuation the company once held – shares declined from $8 per share, and have traded as low as 10 cents. It now seems that all the company does is issue shares, which seems to be the company’s current strategy.

A recent press release makes note that they intend to dilute shareholders even more in order to fund operations with a shelf registration when American Apparel announced last week that it has “commenced a $10.0 million ‘at-the-market’ offering program. Under the program, the company may, from time to time and at its discretion, offer and sell shares of its common stock, having an aggregate gross sales price of up to $10.0 million through Cowen and Company, LLC, which will serve as sales agent. The company intends to use the net proceeds generated through the program for working capital and general corporate purposes”.

I don’t hold out much hope for this fractured company – it looks like a suburban divorce, where everyone gets taken down with the ship, including the children. In this case, though, the children are the common shareholders. The board made huge mistakes here, which is reflected in its current stock price with nothing but sellers and dilution on the horizon. My guess is that Standard General Hedge Fund will be taking this private at some point, which would make common shares worthless.

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