Why American Apparel Shares Got Dumped

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of American Apparel (NYSEMKT: APP  ) were getting taken to the cleaner's today, down as much as 13% after a subpar second-quarter earnings report.

So what: The teen fashion retailer actually reported solid revenue growth as sales increased 9% to $162.2 million, in line with expectations, and same-store sales improved 7%, an impressive clip for a retailer. Earnings took a hit, however, due to the transition to a new distribution center, but the company's adjusted net loss improved from $13.9 million a year ago to $10.9 million, or $0.10 a share. Analysts were expecting just a $0.05 loss, though. CEO Dov Charney was positive about the performance, noting strong sales growth across all three business channels, and steps taken to improve efficiency and lower costs with the change in distribution centers.

Now what: American Apparel has struggled over the last few years, and despite sales moving in the right direction, profits continue to be elusive. Its operating loss actually grew from a year ago as gross margin fell 120 basis points, though management explained that as a consequence of increased wholesale division sales. While the top-line improvements are promising, this stock will remain highly risky until management can get its cost equation in order and turn a profit, or at the very least, beat earnings estimates.

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