American Apparel CEO Open to Launching Stores

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American Apparel Inc. has struggled since a bad economy and a deported work force caused plummeting sales that brought the downtown L.A. clothing company to near bankruptcy.

Are things finally turning around? The evidence in favor: Chief Executive Dov Charney is starting to talk about opening stores again.

“We believe we could be in a position to open as many as 50 additional stores over the next three years,” he said in a statement earlier this month, when the company announced that preliminary June and second quarter net sales were up 16 percent and 12 percent, respectively.

New stores would be a significant step for the company, which over the past two years has closed many more than it opened. The company had 281 stores open worldwide at its peak in 2009. That number is down to 249 today.

Liz Pierce, a senior research analyst with Roth Capital Partners LLC in Newport Beach and the only analyst who officially covers American Apparel, said it’s a good sign that the clothing maker is entertaining the idea of expanding its retail footprint.

“When companies start talking about unit expansion it tends to be a good thing, but you always have to make sure that the infrastructure is positioned to support it,” she said. “That’s why I think they’re talking about a multiyear period. I think they recognize that they still have some work to do, but they’re moving in the right direction.”

Charney told the Business Journal last week that the company plans to take it slow, opening only as many as 12 stores in the next year.

“Opening stores always sounds good, but let me be clear that my plan right now is not to open stores aggressively,” he said. “The real opportunity for American Apparel is not opening stores in the short term, it’s working on the productivity of the stores that we have. We’re very, very committed to proving to the public that this business is profitable in its current form.”

Nikoleta Panteva, an apparel analyst in the Santa Monica office of market research firm Ibisworld, said 50 stores in three years might be too optimistic.

“It does seem a bit ambitious for a company that’s been struggling financially for the past three years,” she said. “It’s great to see their sales are rebounding pretty strongly, but at the same time maybe they need a couple of quarters or even a year of steady profit before they go jumping into ventures that require even more investment.”

Working retail

Charney founded American Apparel in 1989 and grew the company primarily through its wholesale business, selling blank T-shirts to fashion brands, screen printers and uniform companies. The company made its first foray into retail in 2003, then went public in a reverse merger in December 2007.

Today, retail makes up the majority of American Apparel’s business even though the company shuttered a net total of 32 stores in the last three years. Retail and online sales made up about 53 percent of the company’s U.S. business last year, while wholesale made up the rest. In the first quarter of fiscal year 2012, American Apparel closed two U.S. stores and opened two international ones.

The company has plans to open two stores in the next few months: one at the Irvine Spectrum Center and another in Beijing.

But Charney said the company’s doing more to maximize the potential of existing stores. For example, the American Apparel locations on Melrose Avenue and at the Hollywood & Highland Center are undergoing layout revisions.

“That’s one way we’re getting more sales out of them, reorganizing without renting more square feet,” he said. “Once the blood is flowing through perfectly, we’re going to say, ‘Time to move.’ We’re doing a little bit now, but once the productivity levels are up, at a certain point it’s cheaper to start expanding horizontally.”

The company could do more of its growth overseas in the next few years because the brand’s message seems to resonate abroad.

Panteva said a safe option for the company would be to expand in Asia rather than risk the financial turmoil in Europe.

Managing issues

American Apparel was forced to fire about 1,800 garment workers in October 2009 after a 2008 investigation by Immigration and Customs Enforcement concluded they were not authorized to work in the United States. That was about one-third of the company’s local work force.

After that, American Apparel couldn’t keep its stores stocked and whatever clothing items it did manage to get to shops tended to come late. Even this past spring the stores in Paris ran out of V-neck T-shirts for a couple of days.

The company also has a lot of debt – $88 million with an interest rate of 18 percent from Lion Capital LLP in London. Many creditworthy businesses can secure interest rates well below 10 percent.

But because sales have been up lately, Charney is optimistic that the company will have the opportunity to refinance the debt to get lower interest rates as early as later this year.

Panteva said it’s important the company refinances its debt before opening a host of stores.

“The debt they have is not an investment in anything,” she said. “It’s like burning money, especially when interest rates are so low these days.”

Roth’s Pierce said that while she thinks it’s important the company take things slow and get a handle on its debt, most of the company’s financial woes are in the past.

“The same-store sales exceeded our expectations, the online sales continue to grow and wholesale was a little bit better than we thought it’d be,” she said. “This is a turnaround, and turnarounds take time.”

Charney acknowledged as much.

“We still have to rehabilitate the existing business,” he said. “But we’ve passed the halfway point.”

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