The following is a letter I wrote to thestreet.com today. It is a good starting point.
I have one concern about this stock and that is the share count. I spoke to investor relations and they indicated there would be a press release in the very near future that would clarify that issue but that we could expect the count not to differ significantly from the 58 million number given in their 12/06 presentation.
That one concern aside, I think your numbers are far too conservative. Here's why:
In light of their recent announcement of 24% comps, AA is going to get a hefty premium to the market. 24% (as I'm sure you're well aware) is practically unheard of in retail outside of lululemon, and lululemon's low 30's comps are partially attributable to the recent strength of the CAD. So while I wouldn't expect 9x sales and 30x Ebitda like lululemon, I would point out that I think many people who missed lululemon will see AA as a "second chance." AA however appeals to a much larger crowd with more opportunity for expansion (a 7-10yr goal of 900 stores worldwide, compared to lululemon's goal of 600). Lululemon has a market cap of 3.38B (yes I know it's nuts but humor me for a minute) with Q2 revenues up 80% to 52 million. AA's Q2 revenues were 95.6 million, w/ retail sales up 51% but AA garners only a modest market cap of ~661 million. AA's expansion is really only beginning as they receive the influx of cash from the merger. Both companies are growing EPS nearly100%. Again, I am not saying I expect AA to get a 300 p/e and trade at 9x sales (though I'd like that). But possibly a fairer value for AA might be near the price of lululemon's close on its first day of trading, 28 (market cap - 1.8B) before investor euphoria took hold.
> But let's say that lululemon is the exception and AA doesn't get that kind of premium.
> Even at 3-4x sales - (ZUMZ gets 3.7x sales, 24x Ebitda w/ similar revenues but a fraction of the sales growth and eps growth. VLCM trades at over 4.5x sales, 20x Ebitda also with significantly lower growth) - we're looking at a cap of 1.2B/58m shares (though that no. may change slightly) = $20 share price. I also think the $40m ebitda number is crazy (as you pointed out in your article) seeing as they did $18m in Q2 alone (28m so far this year) and they're not going to suddenly start doing only $6m per quarter. So I wouldn't value the co. on that estimate. We should see Q3 earnings in the next couple weeks and we'll have a better idea.
>
> American Apparel aside, i think there are two major additional upside catalysts.
> 1. a 30% short position in EDA. This is largely due to an arbitrage opportunity with the outstanding warrants but nonetheless it will provide buying power and support.
> 2. My research indicates that there is such a powerful stigma against SPAC's that half of Wall Street wouldn't touch one even if they were handing out free shares. While SAC (as you mentioned) owns a stake, Morgan Stanley owns a large stake, and a few others . . . I believe this is a stock that would get a thrilling response as an IPO but is being largely ignored as a SPAC. It often trades under 100,000 shares and that is certainly not due to a lack of excitement about AA. It might take a few months for people to warm up to it after the unorthodox method of going public, though AA's Q3 report will probably assuage any fears people had.
> Come December, there is going to be a tremendous demand for one of the hottest retailers in the world, growing eps next year likely at (100%), with a social conscience that should appeal to many investors and certainly appeals to AA's customers. And anecdotally, any investor with kids or who has been in one of these stores knows that these clothes appeal to a massive demographic of almost all ages, ethnicities, and both sexes.