Why American Apparel (APP) Stock Is Plummeting on Tuesday

NEW YORK (TheStreet) -- American Apparel (APP) is tumbling on Tuesday after announcing it has commenced an underwritten public offering of $30.5 million worth of common stock.

By early afternoon, shares had plummeted 19.2% to 61 cents. Trading volume of 1.9 million shares had surpassed its three-month daily average of 1.1 million.

The beleaguered teen apparel chain said it intends to use net proceeds to fund working capital and for general corporate purposes. The latter includes funding its April 2014 cash interest payment on senior secured notes.

The Los Angeles-based business said it will also grant underwriters a 30-day option to purchase up to an additional $4.575 million in common stock.

Roth Capital Partners will act as sole book-running manager, while Brean Capital is co-manager of the offering.

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TheStreet Ratings team rates AMERICAN APPAREL INC as a Sell with a ratings score of D. TheStreet Ratings Team has this to say about their recommendation:

"We rate AMERICAN APPAREL INC (APP) a SELL. This is driven by a few notable weaknesses, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. The company's weaknesses can be seen in multiple areas, such as its deteriorating net income, generally disappointing historical performance in the stock itself and feeble growth in its earnings per share."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Textiles, Apparel & Luxury Goods industry. The net income has significantly decreased by 845.9% when compared to the same quarter one year ago, falling from $4.90 million to -$36.57 million.
  • Despite any intermediate fluctuations, we have only bad news to report on this stock's performance over the last year: it has tumbled by 61.93%, worse than the S&P 500's performance. Consistent with the plunge in the stock price, the company's earnings per share are down 925.00% compared to the year-earlier quarter. Naturally, the overall market trend is bound to be a significant factor. However, in one sense, the stock's sharp decline last year is a positive for future investors, making it cheaper (in proportion to its earnings over the past year) than most other stocks in its industry. But due to other concerns, we feel the stock is still not a good buy right now.
  • AMERICAN APPAREL INC has experienced a steep decline in earnings per share in the most recent quarter in comparison to its performance from the same quarter a year ago. The company has reported a trend of declining earnings per share over the past two years. However, the consensus estimate suggests that this trend should reverse in the coming year. During the past fiscal year, AMERICAN APPAREL INC reported poor results of -$1.10 versus -$0.35 in the prior year. This year, the market expects an improvement in earnings (-$0.65 versus -$1.10).
  • APP, with its decline in revenue, underperformed when compared the industry average of 14.2%. Since the same quarter one year prior, revenues slightly dropped by 2.3%. Weakness in the company's revenue seems to have hurt the bottom line, decreasing earnings per share.

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Editor's Note: Any reference to TheStreet Ratings and its underlying recommendation does not reflect the opinion of TheStreet, Inc. or any of its contributors including Jim Cramer or Stephanie Link.

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