As apparel becomes cheaper and easier to make -- thanks to overseas manufacturing and cheap cotton -- the time it takes to burn out a trend shortens. The term for this rapid turnover in "what's hot" is "fast fashion," but using the term "fashion" here is a mistake. Really, companies are just trying to cash in on a trend before the trend evaporates into thin air. Chasing trends can be incredibly lucrative, and there are few earning calls that don't make reference to cutting down the amount of time it takes to get clothing from concept to store. Shortening the process usually means relying on cheap labor.
The horrors of this year's factory collapse in Bangladesh, which killed more than 1,000 employees, have made many consumers rethink their purchases. The problem holding us back is that most of us don't really value workers' safety over looking good. That's where a company like American Apparel (NYSEMKT:APP) can try to make a niche for itself.
Made in the USA
American Apparel makes all of its clothing in Los Angeles. As a result, it can ensure worker safety, pay, and product quality. While most American brands have used these assurances to help bolster the cost of their craftsmanship, American Apparel has tried to go where the market is. The company sells trendy items, which change with the whims of fashion -- in effect, it attempts to recreate the popular model in the U.S.
The obvious drawback is that it can't compete on price. American labor isn't cheap, and that cost has to flow through to consumers. A pair of men's jeans cost $85 on the American Apparel website while $70 gets you a comparable pair from Gap. As much as we may like to talk about paying more for quality, studies have shown that we're very susceptible to increases in price. An eye on cost has helped Gap grow into the multibillion-dollar, high-operating-margin business that it now is, while American Apparel is losing money at the operating level.
The future of American-made
Even with its current losses, American Apparel does seem to be gaining ground. The company has increased comparable sales every month this year, including a recently announced 7% increase in year-over-year comparable sales in June. On the other hand, it's still behind the growth pace it was on last year, with comparable sales up 5% year to date versus 14% at this time last year.
Others seem ready to believe in the business, and American Apparel has had an influx of cash this year from lenders. Analysts have estimated that the new influx will help the company clear its debt over the next five years. That would put American Apparel in a good place. Right now, cash is thin and debt is thick, and while sales are growing, margins have yet to see the big impact.
Financially, it's easy to look at the American Apparel story as a one of redemption, with all of the decisions leading to the current point. A point that the company uses as a launch pad to take its business to the next level -- basically, the story above. That leaves out one small detail that may end up making the difference for American Apparel: It's just not that popular.
The company has a very distinctive style, which means that some people love it, and when certain fashions come swinging through, the business really thrives. Unfortunately, it also means that some people hate it, and when trends buck away, the company has a hard time making clothing that both feels like American Apparel and meets the demands of customers.
CEO Dov Charney seems to like it that way. He's not a "please all the people some of the time" kind of guy, and that could be disastrous for investors. While I agree with a lot of Charney's ideals about living wages and made-in-America policies, his design sense baffles me -- which is a problem, because I'm part of his target audience.
If Charney can be reined in and if the finances hold out, American Apparel may be poised for a big turnaround. The stock is down 80% from its pre-crash high, and the push for American-made everything is made stronger with each factory disaster. At some point, it's going to be American Apparel's day to shine. Hopefully, the company will be there to take advantage.
Fool contributor Andrew Marder has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.