Endeavor Acquisition Ramping Up for Pending American Apparel Purchase

| About: Citigroup Funding (EDA)

Endeavor Acquisition Corp. (EDA) is a publicly-traded Specialized Purpose Acquisition Corporation, or “blank check” acquisition company. Endeavor went public to raise capital to acquire white-hot youth retailer American Apparel. The deal is expected to close in the second half of 2007, and I am interested in snapping up shares if the price is right.

To get a hold on Endeavor, we really need to analyze American Apparel. American Apparel is a vertically-integrated manufacturer, distributor, and retailer of branded fashion basic apparel. They have become a hit with young people because their cotton is organic, their goods are made in the U.S.A., and they found the elusive edgy marketing frequency known as “cool.” Most importantly, the company’s financials look attractive too.

American Apparel reported total sales of $73.5 million for the 2007 first quarter, a 24% increase over the year before. Retail sales increased 61% to $38.2 million for the same period, with same-store sales rising 17%. American Apparel had 151 stores as compared to 116 stores last year. Wholesale results were stagnant: $35.3 million compared to $35.5 million.

I am interested in American Apparel because they have tremendous growth potential and their customers consume new clothes faster than the seasons change. To date, American Apparel has only 153 stores in 12 countries compared with bellwether Abercrombie & Fitch’s (NYSE:ANF) 950 stores in the US, Canada, and UK. Moreover, although their ravenous customers may slightly prune purchases as gas prices rise, anyone who has been around a teenager or college student knows these kids will go without food before stylish clothes – not to mention that they simply “throw it on the credit card” if personal income does not equal expenses.

At the moment, the two main risks concerning me are the company’s founder and CEO Dov Charney, and the blank check stock. Charney has been accused of being a bit mega maniacal and also engaging in some unsavory behavior with female staff. So far his ego has carried the flag very far, very fast – an advantage that has made American Apparel a new player with a very fickle crowd. I also think Charney’s high-octane personality is fair game in the always crazy fashion world. However, I will be keeping an eye on him because I do not invest in companies who waste my returns on egregious executive spending accounts or sexual harassment legal fees.

I am also not interested in owning shares of the blank check entity. As a former lawyer and investment banker, I know too many things can happen pre-acquisition that may dilute ownership or reduce share value. If American Apparel succeeds on a grand scale, waiting for the acquisition will be worth it regardless of the initial pop that might be missed. So, we will watch EDA like my new juniper bonsai.

Stay tuned …

EDA 1-yr chart


Disclosure: SmartGuyDH does not own shares of EDA