Shares of Garment Maker May Soon Be in Fashion

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American Apparel Inc. shares tumbled last week on news that its second quarter loss more than doubled from the same period last year due to charges related to refinancing and the cost of consolidating distribution.

But it might be the last kick in the shins the company has to take for a while. At least, analysts believe better days will follow.

The company reported a second quarter net loss of $37.5 million, compared with $15.3 million a year ago. It missed Wall Street earnings estimates for the quarter, reporting an adjusted net loss of 10 cents a share that was worse than analysts’ predictions of a loss of 5 cents a share.

Shares plunged before recovering partly to close at $1.84 on Aug. 14, a 5 percent loss for the week.

But analysts said much of the pain was confined to the quarter.

“It was a one-time negative that should have huge positives going forward,” said Eric Beder, analyst at Brean Capital in New York. “It was actually a pretty good quarter.”

The expenses included $32.1 million in debt extinguishment related to an April refinancing deal. Excluding those charges, the net loss would have been $10.9 million, better than an adjusted $13.9 million net loss a year ago. The company also had unexpected costs related to attempts to consolidate distribution at a new La Mirada facility.

Analysts had expected the refinancing charges, but the extra costs of the La Mirada facility took them by surprise. The consolidation was the main reason earnings missed forecasts.

Those costs are expected to be reduced or eliminated in coming quarters, Beder said.

American Apparel did not respond to a request for comment.

The company, once one of the fastest-growing retailers in the country, has been a turnaround project since 2010, when it announced it could potentially file for bankruptcy and was threatened with delisting by the New York Stock Exchange. The company was badly hurt by the economic downturn and an immigration raid in 2009 that caused it to lose much of its workforce.

Since then, it hired a new management team, reduced inventory and closed some stores. It also found lenders in private equity firm Lion Capital LLP and hedge fund Crystal Financial LLC that rescued it from the jaws of bankruptcy. In April, it refinanced $206 million in loans with Capital One and used the proceeds to repay Lion and Crystal.

Stronger sales

But the good news is that sales have been steadily rising across the company’s wholesale division as well as its online retail and store operations. American Apparel has reported same-store sales growth for 26 consecutive months. Earlier this year, the company announced an initiative to expand online sales, which have historically been a low priority. Revenue in the most recent quarter was up 9 percent to $162 million.

“They have momentum,” said David King, an analyst at Roth Capital Partners in Newport Beach. “It’s not just from the turnaround of some of these issues they’ve had, it’s that their brand is actually continuing to resonate with customers.”

In addition to the still-strong brand, he cited a loyal customer base and an online push as reasons for the growth in sales. After the collapse of a factory in Bangladesh this year where clothing was manufactured, American Apparel took the opportunity to promote that it makes its garments in downtown Los Angeles. King said the “Made in Los Angeles” message resonates with consumers.

The company has struggled to hit profitability. Investors are watching for an improvement in gross margins, something the company is trying to address with the consolidation of its supply chain. The new distribution center is expected to save up to $4 million a year eventually. King said that he believes the company will hit full-year profitability next year.

“Hiccups are inevitable when companies are looking to turn around their operations,” he said. “The programs they’re implementing are for the long-term benefit of the company.”

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