American Apparel Ripens as Target After Ousting: Real M&A

Dov Charney’s ouster at American Apparel Inc. may bring out the bargain hunters.

The maker of T-shirts and neon spandex leggings climbed as much as 22 percent yesterday amid speculation the $120 million company could be sold after the board pushed out founder Charney because of misconduct. While American Apparel hasn’t had an annual profit since 2009, the brand is still attractive and its foothold in the 19- to 30-year-old demographic -- a lucrative one for retailers -- could lure suitors, said Brean Capital LLC.

Even after yesterday’s gains, buyers can get it on the cheap: The company remains a penny stock and traded at the lowest sales multiple of any similar-sized retailer. American Apparel’s eclectic vibe may make it a good fit for Urban Outfitters Inc., said Jennifer Black & Associates LLC. Charney could also team up with another buyer to take the company private, Brean Capital said, estimating a deal valuation of $1.50 a share, or about $500 million including debt.

“This has gone from being on no one’s radar to being something interesting,” Eric Beder, a New York-based analyst at Brean Capital, said in a phone interview. American Apparel has a “very desirable market. It’s a market that we’ve seen mainline players trying to get into and fail miserably.”

Charney Departure

American Apparel’s board said June 18 that it suspended and will fire Charney amid an investigation into unspecified misconduct. Yesterday, Allan Mayer, the company’s now co-chairman, said the ousting wasn’t in preparation for a sale or bankruptcy.

“We are not pursuing any transaction,” Mayer told Bloomberg News. “We have no intention to sell the company.”

A representative for Los Angeles-based American Apparel declined to comment further.

Shares of American Apparel climbed 0.9 percent to 69 cents today.

Charney’s divorce from the company still could put his 27 percent stake, as well as the rest of the company, in play, said Beder of Brean Capital. Shares of the retailer closed 6.7 percent higher yesterday.

The company’s strong brand may appeal to buyers, said Craig Johnson, president of Customer Growth Partners LLC, a New Canaan, Connecticut-based consulting firm. American Apparel, which promotes its products as “Made in USA,” has almost 250 stores across 20 countries, including France and Japan. It had about $634 million in sales last year.

“The brand itself and the kind of style viewpoint it represents, we think has value beyond the company’s current either financial or CEO-level challenges,” Johnson said in a phone interview. “There’s no tarnishing of the brand generally in consumer land. The company can be rebuilt and re-energized. It may take a little bit of time.”

Hip, Trendy

American Apparel has a strong international presence, particularly in Asia, and it counts “hip, urban” young adults as its core customers, said Beder of Brean Capital.

“That 19- to 30-year-old customer wants something authentic that they can make their own and that’s tough for a lot of retailers,” Beder said. A larger company could buy it for access to “a customer that they don’t really get.”

With a price-sales multiple of 0.12, American Apparel is cheaper than any specialty apparel retailer valued at more than $100 million, according to data compiled by Bloomberg.

Buyer List

One retailer that may find American Apparel appealing is Urban Outfitters, said Beder and Jennifer Black of Jennifer Black & Associates. The $4.7 billion company operates the Anthropologie and Free People stores, as well as its namesake retail operations.

“That customer is kind of trendy, yet buys a lot of different stuff,” Black, chief executive officer of the Lake Oswego, Oregon-based firm, said in a phone interview. “That’s who would come to my mind.”

A representative for Philadelphia-based Urban Outfitters, didn’t respond to requests for comment.

Still, suitors may be hesitant to buy a company that’s so unstable financially, said Jaime Katz, a Chicago-based analyst at Morningstar Inc.

“You’re not turning a profit, and you haven’t turned a profit for an extended period of time, and the space is getting increasingly competitive,” Katz said. “It would be hard to think about who a strategic buyer for that sort of business would be.”

American Apparel’s stock has been plummeting since 2007, as sales growth slowed and a costly new distribution center didn’t perform as expected.

Cash Burn

The company’s missteps have translated into negative free cash flow in four of the last five quarters. At this rate, it will burn through its cash in less than eight months, according to data compiled by Bloomberg. Charney’s dismissal may trigger a notice of default under its credit agreements, the company said.

In February, Intercontinental Exchange Inc.’s NYSE MKT threatened to delist American Apparel’s stock, citing the chain’s financial state and its inability to meet obligations.

Charney had been working to create some breathing room for the troubled company, attracting an investment from Johannes Minho Roth of FiveT Capital AG earlier this year to help pay its bills. If a strategic buyer is too wary to pursue a transaction, Beder of Brean Capital said Charney could find a partner to help him take the company private.

“Could Dov come back and try to be the white knight to save his old company? Maybe.” Beder said. Still, a strategic buyer “could do the same thing too.”