With American Apparel (APP) having finally fired founder Dov Charney and replaced him with Paula Schneider, investors will be asking whether she can save the company and whether they should invest in that chance.
The company's financials indicate she has just joined the Titanic after it hit the iceberg. (Her first full day at work is January 5 - Merry Christmas, Paula.) By the end of the last quarter the company had $252 million in debt against $307 million in assets. It hasn't broken even since 2009. During the last quarter alone it bled out $19.18 million on sales of $155.87 million. The good news? Operating cash flow has been narrowly positive through most of this year, after coming in at a negative $12.72 million last year.
Schneider is usually referred to in the media as a "veteran executive" but her specialty is building companies, not saving them. On the front of the shop she ran sales for BCBGMaxAriaGroup through the 1990s, and helped launch it through a multi-line representative firm called Take Two in the 1980s. In the back of the shop she was President of Warnaco's (now part of PVH Group (NYSE:PVH) swimwear group for almost four years. She has management chops, in other words, but is not a turnaround artist.
Warnaco sourced its product from overseas, while American Apparel actually makes things in a Los Angeles factory. Moving operations overseas might help with the bottom line in the short term, but it could destroy brand equity in the longer term. Keeping on Martin Bailey, 54, her factory manager, is thus Schneider's first task.
American Apparel produces clothes for a number of designers but its own work has little to distinguish it from other products. You know what UnderArmour (NYSE:UA) is and you know what Lululemon (NASDAQ:LULU) is. We don't really know what American Apparel is - what it looks like and how it feels - except for a vague sexuality and rampant sexism. (Go to the factory page link in the previous paragraph and click on the roof, where the solar panels are discussed, to learn more, but be aware it's not completely safe for work.) Schneider has to keep the sexuality but ditch the sexism - she has to make the brand image positive in some way, even wholesome.
Schneider doesn't have much, financially, with which to find someone who can execute a new vision. The stock, which once traded as high as $15/share in 2007 and even paid two dividends, is now a penny stock, trading at 55 cents/share a few days ago and as high as 65 cents/share today. The board, in other words, has really "left it late" in terms of executing a turnaround. With a total market cap now under $100 million, the stock-based compensation needed to bring in a "star" designer is bound to water down other shareholders considerably.
Schneider first has to convince notes-holders that the company deserves another chance, then recruit a designer with a unique American vision, and finally execute those designs in time to make a difference. She is, in other words, just the first step in a turnaround, not the full act. Schneider seems to have most of the management and sales talent to execute the rest of what needs to happen.
But until I see the design talent, until I get some clue as to what Schneider's product will look like, what the brand will stand for in the marketplace, I wouldn't touch the stock. I might wind up missing some profit that way, but this ship is taking on water fast and I don't want to lose my whole investment.
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