The recent devastation of the garment building collapse in Bangladesh was both horrific and a reminder that many of these sweatshop operations that make your clothing are not operating according to American standards. But the fact is that many of these operations in Bangladesh and other low-cost labor markets in Asia produce the clothes you buy; this is what allows prices to be cheap for American buyers and others. The low cost of production also allows companies to reap more earnings.
Yet while the collapse of the factory building was a total shock, the underlying issues of major apparel makers using cheap labor in these poor countries have been going on for decades as a way of improving earnings.
In the pursuit of earnings growth, The Gap, Inc. (NYSE/GPS) and Wal-Mart Stores, Inc. (NYSE/WMT) have long been accused of turning a blind eye to the extremely poor working conditions of the third-party factory workers who produce cheap goods for consumers here and abroad. The reason is the need to deliver earnings.
The reason why the conditions are largely ignored is simply a matter of cutting costs and increasing earnings. Consumers in the richer countries want cheaper clothing and goods. Companies want lower costs and higher earnings. The demand for low costs places immense pressure on the third-party manufacturers to run a very tight operation, which is why the incident in Bangladesh was allowed to happen and why similar incidents will continue to occur as long as earnings are key. (Read “Market Near Record High, but Where’s the Revenue?”)
For those who want to support the local manufacturing sector, especially in the highly competitive apparel sector, there are still some U.S. companies that manufacture here.
A small-cap speculative retail play with high risk and above-average upside potential is Los Angeles, California-based American Apparel, Inc. (AMEX/APP), with a share price of $1.81. A big surprise is that the manufacturing for American Apparel is not done in China or another low-cost country; rather, the company makes its clothes out of an 800,000-square-foot facility in downtown Los Angeles. Other facilities are found in California.
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The company is a vertically integrated manufacturer, distributor, and retailer of branded fashion apparel for women, men, children, and babies. Its products include T-shirts, denim, sweaters, jackets, and casual wear, along with related accessories and personal care products.
American Apparel is a global company with over 260 retail stores in 19 countries, including the United States, Canada, Mexico, Brazil, the United Kingdom, Ireland, Austria, Belgium, France, Germany, Italy, the Netherlands, Spain, Sweden, Switzerland, Australia, Japan, South Korea, and China. About 146 stores are situated in the U.S., with Canada at around 38 stores.
American Apparel reported 23 straight months of positive comparable store sales, according to the company web site. In April, comparable store sales jumped five percent, but the growth from the company’s online sales to over 60 countries surged 17%.
American Apparel is a high-risk buying opportunity that can return big profits if the company can deliver steady revenue and earnings growth.
The earnings side will come, but it’s more difficult, given the higher domestic labor costs.
The company reported sequential annual revenue growth from $201.5 million in 2006 to $558.8 million in 2010 to $547.3 million in 2011 and $617.3 million in 2012. The revenue growth is estimated to continue at 6.2% in 2013 and seven percent in 2014, according to data by Thomson Financial.
If you want to buy “Made in the USA” stocks while taking a stand against the terrible working conditions in global sweatshops, look to American Apparel.