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American Apparel Shares Surge but 3 Big Problems Loom

NEW YORK (TheStreet) -- American Apparel (APP) shares rose 2.4% on Monday to 98 cents following a report that the specialty apparel company will raise new financing from hedge fund Standard General.

A key factor in this transaction would be the replacement of the entire board of American Apparel, except its two co-chairmen. Should American Apparel receive such financing from Standard General, the company would reportedly be able to avert a default on a $50 million line of credit with Capital One (COF).

With the prospect of a default lessening amid this new financing arrangement, and a more competent board being installed minus controversial founder Dov Charney, markets may be positioning for a buyout of the company by a private-equity firm.

However, either way one slices the cake, American Apparel may no longer be a viable entity given what's happening around it in the mall and online. In other words, distractions surrounding the company, as well its troubled financial state, have caused it to fall behind competitors in many areas.

For example:

Manufacturing: American Apparel manufactures its products primarily from an 800,000-square-foot facility in California, meaning its cost of production remains high. Competitor Gap (GPS) purchases private label and non-private label products from more 1,000 vendors in 40 countries. About 98% of Gap's product purchases, by dollar value, were from outside the United States (28% in China) in 2013.

Online: American Apparel operates an e-commerce Web site with 12 different localized online stores in seven languages, serving customers from 30 countries, including the U.S. But having a Web site that happens to ship internationally is no longer cutting-edge in the world of retail.

Many retailers have now begun to introduce creative programs to allow consumers to shop via mobile devices. Macy's (M) has the capability to take an online product from its stores and have it solidify an order for an online shopper. In 2013, Gap introduced a reserve in-store function, whereby consumers could order a product online, and have it reserved in store for pickup in about an hour.

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American Apparel's financial troubles have impacted its ability to invest in order to position itself for the future of retailing.

Retail stores: Having critical mass is important in retail --  it helps to reach more customers and keeps operations efficient. Call it the Walmart (WMT) way of doing business. American Apparel has only opened five stores in the U.S. in the past three years, while shuttering 23.

So not only is American Apparel lacking critical mass, it's become smaller, inching further from the minds and wallets of U.S. consumers.

-- By Brian Sozzi CEO of Belus Capital Advisors, analyst to TheStreet. This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff. At the time of this publication, Belus Capital Advisors rated Walmart a sell. Brian Sozzi is the CEO and Chief Equities Strategist of Belus Capital Advisors. He is responsible for developing and managing an equities portfolio of mid- and large-cap positions, in addition to leading the firm's digital content initiatives. He is also a personal finance columnist for Men's Health magazine.

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