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American Apparel (APP) |
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WIKI ANALYSIS
American Apparel is a vertically integrated business located in Los Angeles, California. They are a retail company targeting individuals of all ages. They perform all aspects of the business from raw materials all the way to the customer’s shopping bag.
Business Summary
American Apparel, as is inferred by its name, is based out of the United States, specifically Los Angeles, California. They are a vertically integrated company performing manufacturing, distributing and retailing of their products themselves. American Apparel is considered to have balanced vertical integration because they control all components of the supply chain from raw materials all the way to the customer’s shopping bag [1]. All of the manufacturing components, including knitting, dying, cutting, sewing, photography as well as, marketing and distribution happen at the Los Angles location. While many retailers are sending manufacturing off-shore to benefit from lower labor costs, American Apparel believes this is unethical and takes jobs away from hardworking Americans. They donate to local charities, use solar power, recycle fabric scraps and even use organic cotton. Their commitment to the community is also shown by how they treat their employees. They offer an on-site medical clinic, offer wages starting at $12 per hour and are one of the largest employers in LA. They are also a very outspoken firm that supports gay/lesbian rights as well as, immigration reform. [1]
Marketing Strategy and Supply Chain
Product
In 1989 when American Apparel was founded they began as a wholesale brand selling t-shirts to screen printers and boutiques. Since then it has grown to become a clothing manufacturer, wholesaler, and retailer. As the company grew American Apparel became a duel gender company selling products for men, woman, children, babies and even household pets. CEO Dov Charney uses his creative and almost sometimes wacky mindset to create fashion styles that are very unique that don’t follow the usual fashion trends for customers between the ages of 20-32. Since their wholesale days of selling T-shirts and underwear expressed has branched out by selling products for women including, leggings, leotards, tank tops, denim jeans and vintage clothing. For men products vary from denim jeans, belts, t-shirts, hooded sweatshirts and even shoes. Accessories include nail polish, sunglasses, and even bedding. With a plethora of clothing options and styles, APP always comes to the minds of the more young and free spirited people who are looking for something new and unique to wear.
Place
The number one way that American Apparel reaches its customers is through their stores. American Apparel has 273 throughout the world, with most of that majority in the United States. 157 of these stores are located throughout the United State and 116 located internationally. American Apparel reaches out to both foreign and domestic customers online as well at americanapparel.net. The website is visited by more that 1.5 million people per month. APP does not offer their products in department stores like Nordstrom’s or Macy’s . They do however, similar to most of their competitors offer outlet store locations.
Promotion
APP has a very unique advertising method, because they design, create, and print their own. Their advertising techniques are very controversial due to the provocative and somewhat straightforward style. For example, the advertising that takes place the website often shows their models very lightly dressed and sometimes even naked. The company also used adult film actresses in many adds. Many consumers notice the small sizing that APP offers which is generally smaller than the normal American sizes. Those against the company believe label the models as “cocaine-chic,” which typically means very tiny and skinny people. Nevertheless, in 2005 APP was awarded the “Marketer of the Year” by L.A. Fashion Awards and is still recognized as leading trendsetting brand.
Price
American Apparel offers a distinct fashion design and great quality clothing for attractive prices. Due to the fact that APP’s target market customers are between ages 20-32 they price their clothing accordingly. In addition to their everyday great prices APP continuously offers sales and deals consisting seasonal pricing and volume discounts.
Supply Chain
APP is a vertically integrated clothing manufacturer, wholesaler, and retailer. Being vertically integrated they also do their own designing, advertising and marketing. Because they avoid outsourcing APP has a fast turnaround from designing the product to completing the finished product. Their main production factory is located in Los Angeles, California this includes their own fabric dye house, garment dye house, and knitting facility. American Apparel uses team manufacturing within their production plants, which gathers the strongest and most productive workers towards orders of higher priority. This is the largest single garment factory in the United States.
Porter’s 5 Forces Analysis and the Competitive Landscape
The Intensity of Competitive Rivalry
American Apparel does business in an exceptionally competitive landscape. APP has many competitors; however, a few of their main competitors are The Gap, Urban Outfitters, American Eagle, and Express. These companies not only offer similar products to American Apparel, but also target a very similar demographic. Their products are intended to appeal to young, “metropolitan” adults between the ages of 20-30. These consumers are mostly nearing the end of their education and moving on to careers in the workforce. They mostly do not have access to a large disposable income, therefore clothing cannot be so expensive that it will be unable to be purchased regularly. However, because of their age, they still want high quality products. Because of these seemingly contradictory considerations, companies like American Apparel and its competitors have an increasingly difficult time straddling the line between those two. The companies that can pull this balancing act off will be successful, and the ones who cannot will be left in the dust.
One of the prominent reasons for such intense competition is the non-existent cost for consumers to switch companies. Customers are constantly looking for the best products at the lowest prices, APP and its competitors are forced to be highly innovative in obtaining and retaining customers. This target demographic is a difficult group to appeal to because of their constantly evolving fashion tastes. A company could have a strong hold on the demographic one season, and completely lose their footing in the next if their fashions aren't updated. These companies are willing to spend hundreds of thousands of dollars in market research because this demographic will make up the majority of each of these company’s sales each fiscal year. If APP or any of their competitors are unable to determine new fashion trends and respond to shifting consumer preferences quickly, they will see a decrease in sales. Every year, as the older customers are outgrowing the demographic, new customers enter into the market with no current brand allegiance. It is these new customers that must be converted in order for these companies to remain profitable and stay alive.
The Threat of New Entrants
The threat of new entrants to the apparel industry market leaders in the clothing and apparel industry are relatively low. This is mainly due to the fact that the big player’s superior financial resources greatly overpower the new entrants. The main players have all been in existence for 30 to 40 years, and with that established credibility, there exists quite a bit of brand loyalty among consumers. Relatively new entrants like American Apparel have only been in existence for 1 to 20 years and therefore lack the brand loyalty of its competitors. This does not mean that well-established stores can simply rest on their laurels. New extranets will try to chip away at the market share pie by undercutting prices or offering other sales.
The Bargaining Power of Customers
In the clothing and apparel industry, the bargaining power of buyers is relatively large. As previously stated above, the cost of switching companies is non existent and as simple as walking from one store to another. In addition, consumers do not see high-end clothing products as an essential commodity so, its price elastic. If APP or a competitor raises prices, customers will go find a more affordable option. These companies rely on continuous sales to remain in business; therefore, a steady loss of customers to a rival store would be detrimental to an apparel company.
The Bargaining Power of Suppliers
For the clothing and apparel industry in general, the power of suppliers is low merely because there are many different suppliers who are readily available to offer up their services. If a supplier raised its costs, a firm could move on elsewhere. Despite their low power, American Apparel and its competitors are still sensitive to increased costs for all suppliers such as an increase in yarn and other raw materials. An increase in these things would have a very negative affect on American Apparel.
The Threat of Potential Substitutes
The threat of substitute products for the clothing and apparel industry is non-existent purely because there is no substitute for wearing clothes. Barring a huge technological breakthrough, in mainstream society everyone buys clothing from somewhere. This means that because there are no substitutes, the competition for the consumer clothing shoppers is that much more intense.
SWOT Analysis (Strength, Weakness, Opportunity, Threats)
Strengths
When examining American Apparel’s unique strengths, the first area of notice is their manufacturing operations. American Apparel is a fully vertically integrated corporation. That means that APP controls everything from the sewing and cutting to the marketing and distribution of their products. Furthermore, all of this is done from one building at their California based headquarters. APP believes that this gives them a distinct advantage over their competition because they can use their superior manufacturing control to respond to market demand (or lack of demand) and a much faster pace. Complementing their vertical integration is their “made in the USA branding campaign. Because all of American Apparels products are manufactured in the USA, they can promote the fact that they have a “sweatshop free” environment, which helps to increase brand reputation and connect with the consumer base.123
Weaknessess
American Apparel has many weaknesses that put itself at a disadvantage compared to its competitors. Firstly and most importantly, in 2010, APP incurred a substantial loss from operations with net income totaling -86.315 million dollars. This loss combined with APP’s inability to borrow money due to the restrictions of their revolving credit agreements warrants a tremendous concern not only for APP’s short-term operations, but also its ability to continue as a company long term. Furthermore, due to APP’s extreme debt it has incurred, coupled with its inability to pay said debt back anytime soon, the company will not be able to pursue any of there expansion plans, thus leaving the company at a severe competitive disadvantage. If APP cannot find a solution to their financial situation very soon, it will then be forced to declare chapter 11 bankruptcy. Another weakness of American Apparel is actually its CEO, Dov Charney. While Charney is the brains behind American Apparel’s controversial, yet effective brand campaigns, his behavior outside of the realm of company decision making has put his company in a very negative light on more than one occasion. Charney has been the subject of several sexual harassment lawsuits during his time as CEO. This kind of continued behavior could very well drive down American Apparel’s brand image, and profits along with it. It should be noted, however, that despite several accusations, none of them have been proven in a court of law.
Opportunities
American Apparel has plans to expand their business and pursue new opportunities, however, it must be noted that these plans will not be able to be executed until APP can find a way to bring their sales numbers back up, reduce their current debt, and get their financial standing out of the red. American Apparel has said many times that in order to have success in the long term, they must open new American Apparel retail stores. However, due to their recent financial troubles, APP was forced to close eight stores by the end of the 2010 fiscal year. Before their financial woes were fully realized, APP had begun upgrading their information systems company wide. This upgrade, among other minor benefits, was meant to help reform workforce management, thus leading to more precise organization and greater cost savings. It is unknown at this point whether or not these upgrades have been halted due to APP’s current financial standing.
Threats
American Apparel is, like its competitors, directly affected by declines in consumer spending, therefore any recession of the economy would hurt APP’s finical standing. However, due to American Apparels already dire money situation, such a recession could become a very serious problem. In addition to economic conditions, APP, like all clothing stores encounter seasonality in their operations. It is common that sales during the third and fourth quarters are normally much higher than sales during the first quarter. Historically however, APP’s retail segment has not seen the normal pronounced effect on their sales due to seasonality as most retailers have.
Business Segments
Retail Stores:
APP’s retail segment targets women, men, children, and babies. “APP’s design, vision, and aesthetic are intended to appeal to young, metropolitan adults by providing them with a core line of iconic, timeless styles offered year-round in a wide variety of colors at reasonable prices. APP has expanded beyond its core product offering of T-shirts and into denim, sweaters, jackets, and accessories [2]. APP retail operations principally target young adults aged 20-32 through a unique assortment of fashionable clothing and accessories and our compelling in-store experience that features spacious isles and a chic and energetic white store décor [2] APP stores are located in large metropolitan areas, emerging neighborhoods, and select university communities, such as Michigan State University and the University of Michigan. As of December 31, 2010, APP operated a total of 273 stores throughout the world: 157 store locations in United States, 40 in Canada, and 76 international locations. APP stores average approximately 2,500-3,000 square feet of selling space and average $345 revenue per square foot[2].
APP only leases stores, which is the trend in the industry. In 2010, APP closed a net of eight stores, and as of March 31, 2011, APP had not signed lease agreements for any new stores[2]. Over the past three years, APP has experienced a sharp increase in the number of stores open. Due to economic factors and a decrease in sales, APP has closed stores over the past two years.
APP competes with national and local department and retail stores, with similar lines of merchandise to GAP (NYSE: GPS), American Eagle (NASDAQ: AEO), Urban Outfitters (NASDAQ: URBN), and Express (NYSE: EXPR). Many of APP’s competitors are significantly larger than APP and have substantially greater name recognition and financial, marketing, and other resource. As a result, APP is disadvantaged and cannot adapt to changes in customer requirements as quickly as their competitors. However, APP makes up for its disadvantage with relatively competitive revenue per square feet.
Although APP operates the second to least amount of stores (limiting its ability to generate sales), on a revenue per square foot basis, APP remains quite competitive, averaging $345 per square foot. Urban Outfitters average 9,200 square feet of retail space, American Eagle averages 5,800 square feet of retail space, Gap averages 9,998 square feet of retail space, and Express has 8,700 square feet of retail space.
Retail Locations
In the United States, APP boasts 40 stores in California, 24 in New York, 11 in Florida, 8 in Illinois, and 8 in Texas [2]. These five states represent 58% of APP’s stores. Just like its competitors, APP’s store locations are highly concentrated in California, Florida, New York, and Texas. California, Texas, and New York comprised 26.5% of the U.S. population in 2010 with 37.3 million people, 25.1 million people, and 19.4 million people in each respective state [3].
In addition, Florida and Illinois are two more of the most populous states [3]. It is clear that APP’s strategy has been to align its retail locations in states with the largest populations.
Locating retail stores in high populous areas allows APP to reach a very large numbers of college communities, which are home to individuals who are passionate about trendy fashions, who are excited to buy APP’s core product, t-shirts, and who are responsive—either by buying the product or boycotting the store—to APP’s sexually explicit advertising. Overall, the underlying principle in targeting college campuses is effective because it limits the churn of customers since there is a continuous stream of 20-30 year olds in college communities. APP’s international business struggled in 2010 and significantly impacted the company’s overall financial strength. Retail net sales decreased $15.3M, or 11.6% in 2010[2]. “The decrease was caused by a decrease in the number of units sold combined with a slight decrease in price per units sold”.
Compared to these competitors, APP's sales per square foot ($325) is substantially lower. There are a couple of reasonable explanations for this. First, APP's price points may be relatively high in relation to the competition and effect the volume of sales and items purchased. Second, APP stores may operate with a significant amount of unoccupied selling space. In order to improve its sales per square foot, APP should focus on the reducing excess inventory and focus on its specific market segment of 20-30 year olds. Moreover, APP can better utilize online marketing to leverage brand loyalty to drive traffic into stores.
APP retail locations are exposed to significant competition from Urban Outfitters since both retailers locate themselves in similar demographic areas, target college communities for a majority of their foot traffic, and sell similar products. For example, in East Lansing (Michigan State University) and Ann Arbor (University of Michigan), Michigan, APP and URBN stores are located within three blocks of each other. APP should consider new ways of differentiating itself from Urban Outfitters in store location and product lines in order to gain customer loyalty and its brand identity.
Seasonality
Historically, sales during the third and fourth fiscal quarters have generally been the highest (back to school, holidays), with sales during the first quarter being the lowest. Generally, APP’s retail segment has not experienced the same pronounced sales seasonality as other retailers, in part to the concentration of stores in warmer climates that do not require substantially different product lines in order to match the shift in seasons[2].
Working capital requirements are typically higher in the second and fourth quarters due to inventory-related working capital requirements for early Fall and holiday selling periods. In its 2010 annual report, APP stated that it is struggling to maintain sufficient capital requirements, and "if it is unable to improve its liquidity position, it may voluntarily seek protection under the U.S. Chapter 11 Bankruptcy codes".[2]
APP and its competitors are also subject, at certain times, to calendar shifts, which may occur during key selling periods close to holidays such as Easter, Thanksgiving and Christmas. Furthermore, the seasonal nature of the retail business may affect comparisons between periods as well as the number of stores per state.
Gift Cards
The number of gift cards outstanding usually is dependent on the size of the companies in terms of number of store locations and brand size. While gift cards offer convenient forms of payment for consumers, they also represent financing for the company with very little cost since the customers are essentially providing them cash to be redeemed at a later point in time. APP had $4.927M in gift card/ store credits for FY 2010, Express has $21.2M, Gap had $244M, and American Eagle had $41M. Urban Outfitters did not disclose their gift card liabilities for FY 2010 in their 2010 annual report. By driving more customers into their stores and reaching out to a broader customer base, APP can create the opportunity for more gift card sales during holiday seasons.
Revenue Streams
E-Commerce
Since 2004, American Apparel has operated an online retail e-commerce website, www.americanapparel.com, where APP directly sells to customers. In 2010, APP documented $21.2 of online sales in the United States, or 6.7% of 2010 net sales, which was down from $23.3M in 2009 and $25.5M in 2008. [2] Globally, APP claimed $35.5M in online sales. [2] APP’s decrease in online sales can be attributed to many economic and non-economic factors, such as lower buying power, the reminisce of the global economic recession, and more advertising/marketing campaigns by APP’s larger competitors.
In comparison, Express had $87M in online sales in 2010 and Gap had $324M. Urban Outfitters relies heavily on catalog sales and distributed 15.8 million in FY 2010. Urban Outfitters revenues from catalog sales were not disclosed in their 2010 annual report From a customer's perspective, buying online offers a convenient shopping experience at the click of a button. A majority of the time, online stores offer larger selection of products than the brick-and-mortar stores do in the shopping malls and lifestyle centers. In addition, online-shopping offers exclusive coupons, shipping rates, and free return policies. By reaching further out into the e-commerce market, American Apparel could realize significant increase in sales, perhaps more than investing in new retail storefronts. However, it may be difficult to drive consumers to view the APP site when other competitors, such as Gap, possess more resources to drive website traffic.
Wholesale
APP’s wholesale operations consist of producing undecorated apparel products to distributors and third party screen printers in the United States and Canada. [2] APP’s wholesale operations, excluding online sales, was $127.8M or 23% of 2010 net sales. APP’s wholesale operations increase $9.7M from 2009 and appears to be the only bright spot in the company’s operations.
APP participates in approximately two dozen trade shows annually to expand and enhance customer relationships, exhibit product offerings, and share new promotions with customers. APP also produces print catalogs for wholesale products. Trade show and catalog costs were $15.4M, 2.8% of net sales, in 2009, down from $25M in 2008. This decrease was primarily due to a reduction in discretionary expenses to promote new store openings and to promote products in print publications, magazines, and online media.
A probable reason for APP’s wholesale success is because of the increased desire by third parties to resource shirt production for their screening operations in the midst of the economic recession. Since APP is a vertically operated company and owns its production operations, it makes sense for other companies to enter into agreements to purchase t-shirts from APP instead of spending their own capital on machines and infrastructures to product shirts. For the future success of APP, it may be desirable for APP to focus more on its wholesale segment of t-shirts and retract items from its newly broadened product line, thus making the company a larger distributor of textiles.
APP Staff says that APP's CEO Dov Charney has received interest from retail chains and competing fashion brands to use APP's excess factory capacity, in part because its U.S.-based plants can turn around orders faster than Asian rivals. Charney says the company made about 47 million garments last year but could expand production to 70 million.[4] Allowing other retail chains to use APP's excess factory capacity may allow APP to position itself more competitively in the specialty retail segment.
Financial Ratios and Valuation
Valuation
APP Price/Earnings ratio for FY 2010 was -0.8, AEO was 17.8, URBN was 19.2, GPS was 11.9, and EXPR was 14.1. The industry average was 24.3. [5] It is clear that investors do not expect APP to have high future returns compared to its competitors, since APP's price to earnings ratio is -.8. Over the past three years, APP's earnings growth has steadily declined while the apparel industry as a whole has experienced increases in growth. [5]
APP’s Price/Book ratio or price to equity ratio (P/E) was 1.0, AEO was 2.3, URBN was 3.5, GPS was 3.2, and EXPR was 14.2.[5] The industry average was 2.5.[5] Since March 18, 2011, EXPR has realized a 15 percent return and has attracted a lot of investor attention because of its performance.
The risk in investing in companies with such high P/E ratios is that since they are selling at a premium, Wall Street has already taken notice of its performance, and consequently, leaves little flexibility for poor performance, thus putting the investor at risk of losing a lot of money if there is a slide in company performance. Additionally, high P/E ratios may suggest that the stock is overvalued due to a band-wagon effect by investors who are caught up in the hype of companies performance.
On the contrary, a low P/E ratio indicates that investors feel strongly that there is something wrong with the company's operations/management, that the company is severely undervalued, or that the company is in position for a buyout or sale. As of April 6th, 2011, Reuter's reported that APP is working with advisor Rothschild to help it explore a potential sale, as the company contends with a falling stock price, a loss of $86M in 2010, and subsequently, the threat of bankruptcy.[6] In addition, Business Week reported on April 15, 2011 that APP has recently brought in professional managerial help such as, a veteran manager from Ralph Lauren, Calvin Klein, and former Blockbuster Chief Financial Officer Thomas Casey as acting president. [4] The hiring of new management help may give negative stigmas to investors, especially since some of the personnel, such as Thomas Casey, can be associated with the failure of Blockbuster. On the other hand, potential investors may see this as a positive, viewing Thomas Casey as an expert in bankruptcy finance, if APP does choose to file. Regardless, investors tend to become weary about the future of a company when the company has a significant change in management personnel, in addition to significant losses.
Perhaps the most important valuation ratio to examine when analyzing APP is the enterprise multiple (EV/EBITDA). The enterprise multiple is used for several reasons. For the case of APP, the enterprise multiple is significant because it is an accurate determinant for identifying takeover candidates. In general, a low ratio indicates that a company might be undervalued and is a good takeover candidate and a high ratio indicates that a company might be overvalued and not a strong takeover candidate.
APP's enterprise multiple is -1.6, the lowest of its competitors. This suggests that APP may be a attractive takeover candidate for a potential investor looking to invest in undervalued company with the intent of turning around the organization in order remain a competitive player in the specialty retail market. As discussed before, APP's wholesale business appears to be the core strength of its operations and could potentially prove to be a lucrative asset to a potential buyer.
Profitability & Efficiency
According to trailing twelve months (TTM) data as of April, 2011, American Apparel is seeing comparably large weaknesses in its profitability compared to its competitors. Despite hosting the largest gross margin among its competitors, it seems to be lacking in its ability to turn that margin into bottom line profits. APP's return on invested capital (ROIC) stands at -35.67%, the lowest it has ever been. The cause of such low profitability can be contributed to its negative operating margin (-5.25%) and its abnormally high cash conversion cycle (192 days). These two anomalies may suggest that APP's U.S. based vertical integration model is less cost-efficient to those competitors who outsource production to foreign countries. The high operating costs could also be associated with a poorly managed supply chain. Either way, American Apparel would have to see much improvement in these areas if it plans to keep up with the competition.
Human Resources
Key Personnel
Experience and Compensation
Below is a table of the top executives at American Apparel, their age, position, 2010 annual compensation, past experience, and education.
Controversy & Recent News
In the complaint, filed Tuesday, April 26th in Los Angeles Superior Court, Irene Morales, a former American Apparel saleswoman and two other women claimed that APP CEO Dov Charney posted nude pictures of them on the Internet. She filed her original lawsuit in New York State Supreme Court on March 4, in which she accused Charney of forcing her to perform sexual acts in his Manhattan apartment under the threat of losing her job. Morales also sued American Apparel and its directors, saying they failed to prevent Charney from acting as a "sexual predator."[8] These recent news developments have worsened the company's already damaged reputation and has furthered speculation about the eccentric behaviors of Dov Charney.
Sales Associate Compensation
According to glassdoor.com, hourly sales associate wages for APP average at $8.86 per hour, the highest among its principle competitors. These figures are based on anonymous posts by employees and employers and are therefore subject to certain biases or may vary based on the location or popularity of the website, etc. Despite that fact, it is likely that people will look at this website when searching for jobs at retail clothing stores, and may therefore pursue stores with the higher average wage. Thus, this data suggests APP's potentially higher supply of labor among sales associates and the like.
References
- ↑ 1.0 1.1 "AmericanApparel.net"' APP, 4/17/11
- ↑ 2.00 2.01 2.02 2.03 2.04 2.05 2.06 2.07 2.08 2.09 2.10 2.11 "2010 Annual Report", APP, 3/31/11
- ↑ 3.0 3.1 "2010 Census", 4/16/11
- ↑ 4.0 4.1 "APP gets adult supervision", 4/17/11
- ↑ 5.0 5.1 5.2 5.3 5.4 5.5 5.6 “2010 APP Valuation,” 4/16/11
- ↑ "Embattled American Apparel Is Exploring a Sale" 4/6/11
- ↑ "Forbes.com" 4/28/11
- ↑ "Ex-workers say American Apparel posted nude pix online" 4/28/11
- ↑ "glassdoor.com" 4/28/11
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