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American Apparel gives business update, warns about possible bankruptcy

By Press Releases
April 01, 2011 10:42 AM

From American Apparel's annual report filed with the SEC.

 

"We are currently experiencing significant liquidity constraints. If we are not able to generate sufficient cash flow from operations or obtain external sources of financing sufficient to fund our debt service requirements and operational needs in the near future, or we are not able to successfully or efficiently implement the strategies that we are pursuing to improve our operating performance and financial position, and may determine that it is in American Apparel's best interests to voluntarily seek relief through a pre-packaged, pre-arranged or other type of filing under Chapter 11 of the U.S. Bankruptcy Code, including prior to the time we would otherwise be required to do so in an acceleration event."

 

Here is the press release announcing Q4 and annual 2010 results:

 

Press Release:

 

LOS ANGELES--(BUSINESS WIRE)-- American Apparel, Inc. (NYSE Amex: APP), a vertically integrated manufacturer, distributor, and retailer of branded fashion basic apparel, today announced its financial results for the fourth quarter and the year ended December 31, 2010. The Company also provided a business update through March 31, 2011.

 

Business Update

 

Tom Casey, Acting President, of American Apparel stated: “2010 was an extremely challenging but productive year. We suffered the after-effects of a major labor disruption resulting from an immigration intervention in 2009. The disruption of our 2010 production schedule resulted in significantly higher production costs per unit and late deliveries of products to our stores and to our wholesale clients. In addition, we encountered extraordinarily challenging world-wide economic conditions. We also experienced higher yarn and fabric costs in the second half of 2010. These factors along with a weak retail environment and intense competition resulted in weak comparable store sales and a lower EBITDA.”

 

“In spite of adverse circumstances in 2010, we achieved a number of important objectives through March 2011:

 

Recruited, hired and trained over 2,700 new factory workers since the second half of 2009. As a result of their tenure and training we have seen an overall improvement in our manufacturing efficiency in the fourth quarter of 2010, and expect these trends to further improve in 2011.

 

Hired three new senior executives over the past six months. Last October, I was hired as Acting President to build the operating management team and bring additional operating disciplines to the business. In February 2011, John Luttrell joined the Company as Chief Financial Officer. Marty Staff joined American Apparel in March 2011 as Chief Business Development Officer. Marty Staff has a long history with leading designer brands and is focused on driving top line. Together, the new management team is working closely with Dov Charney to drive sales while improving efficiencies in inventory and operating costs.

 

Made strategic investments in technology including installation of RFID in 28 stores with a total of 35 stores now on RFID. RFID uses radio frequency scanning to help control accuracy and flow of inventory. We installed traffic counters and security cameras in 100 stores and completed installation of anti-theft tagging in 223 stores globally. In addition, we implemented advanced labor scheduling and optimization for both manufacturing and global retail. These investments will enhance our ability to support inventory of hot sellers, improve store execution, reduce shrink and lower operating costs.

 

Online sales growth at 25% in 2011 and tracking to that objective in the first quarter. We have improved our online customer experience through a new website which affords better presentation of our high quality fabrics. We have also improved customer satisfaction by significantly reducing backorders.

 

Expanded our offering of fashion forward items to enhance our core basics and reinforce the strength and relevance of the American Apparel brand. Best-selling new items include lace and chiffon dresses, skirts and tops as well as wovens such as shawl cardigans and the fisherman’s pullover sweater along with accessories. In the second quarter we are launching our first indigo denim product, a high wasted jean for women.

 

Implemented a more aggressive approach to optimizing inventory and refining product assortment.

 

Enhanced our store base by remodeling or expanding over 40 stores and visibly improving appearance at over 60 stores and closing 13 stores.”

 

“Our principal goal in 2011 is to stabilize the business and create a platform for renewed growth and increasing sales,” said Casey. “Our customers are delighted by American Apparel’s distinctive high-quality product offering and the American Apparel brand is as strong as ever.”

 

Our same store sales are improving and we expect first quarter 2011 comps to be in the negative mid to high single digits. We expect to achieve positive comp store sales for 2011. Each percentage point increase in comparative store sales generates approximately $2.5 million in additional operating income, before consideration of variable costs. We are excited about Marty Staff’s new initiatives to develop wholesaling of American Apparel product to retailers as well as expanding store-in-store opportunities.

 

"We currently have successful store-in-store operations at Selfridges and Galleries Lafayette and we believe we can be very successful in significantly expanding this channel in 2011. We expanded our product line significantly in 2010 and we’ll focus in 2011 on refining our assortment while reducing unit inventories by 20%. We also expect to achieve over $30 million in cost savings over the next few years through efficiencies in retail, distribution, general and administrative costs and manufacturing processes.”

 

“I am especially proud of our manufacturing workers and our dedicated retailing associates in 20 countries who have remained loyal and hard-working through a difficult year. We employ over 7,000 employees in the Los Angeles County alone, including seamsters and seamstresses, knitters, dyers, productions supervisors, factory managers, administrators, retail and production coordinators, planners, administrators as well as over 5,000 additional employees globally in 20 countries.”, said Dov Charney, CEO and founder of American Apparel.

 

“I believe we are well along on our journey to restore manufacturing efficiency. We have solid plans to drive increased sales through existing and new channels. We are also diligently working on improving our return on invested capital through effective asset management. Therefore, I believe we will restore the Company’s historical levels of profitability by 2013.”

 

“We also appreciate the support of Lion Capital as well as our other financial and vendor partners. Lion Capital announced that it is currently giving up its two board seats at American Apparel in order to optimize their flexibility regarding potential future investments in the Company but it has retained its ability to designate directors to the board at an appropriate time in the future. I would like to thank Lyndon Lea and his partners at Lion for their support on the American Apparel Board, said Charney.”

 

Financial Results

 

American Apparel reported net sales for the fourth quarter ended December 31, 2010 of $144.0 million, an 8.9% decline over sales of $158.1 million for the fourth quarter ended December 31, 2009. Total retail net sales declined 10.4% to $96.9 million for the fourth quarter of 2010 as compared to $108.2 million for the same period in 2009, with comparable store sales for stores open at least 12 months declining 11.5% on a constant currency basis. American Apparel ended the quarter with 273 stores, having reduced the number of stores it operates by eight during 2010. Total wholesale net sales, excluding online consumer sales, declined 6.0% to $36.2 million for the fourth quarter of 2010 compared to $38.5 million for the fourth quarter of 2009. Online consumer sales declined 4.4% to $10.9 million for the fourth quarter of 2010 compared to $11.4 million for the fourth quarter of 2009. In addition to the effect of world-wide economic conditions, the Company’s sales results include the adverse results from delayed production and deliveries to its stores as a result of labor inefficiencies in its manufacturing facilities.

 

Gross margin for the fourth quarter of 2010 improved to 55.6% as compared to 55.0% for the prior year fourth quarter. Gross margin increased primarily due to improvement in overall manufacturing efficiency. This improvement was partially offset by a slight shift in mix from retail to wholesale sales as the wholesale business delivers lower margins and higher yarn and fabric costs.

 

Operating expenses for the fourth quarter of 2010 were $92.0 million, or 63.9% of net sales, as compared to $77.6 million, or 49.1% of net sales for the prior year period. The increase was primarily related to higher payroll-related expenses, including the full year effect of stores opened in 2009, and lease termination costs to close some of the Company’s less profitable stores. Operating expenses were also higher in the fourth quarter of 2010 due to $2.4 million in non-cash retail store impairment charges booked in 2010 compared to $1.5 million in the fourth quarter of 2009.

 

Loss from operations for the fourth quarter of 2010 was $11.9 million versus operating income of $9.5 million in the prior year fourth quarter.

 

The provision for income taxes of $0.2 million reflects the effects of the Company no longer recording the tax benefit of pre-tax losses. Beginning in 2010 the Company no longer recognizes the benefits associated with pre-tax losses and has provided a reserve against substantially all of its deferred tax assets.

 

The net loss for the fourth quarter of 2010 was $19.3 million, or $0.27 per diluted share, compared to net income for the fourth quarter of 2009 of $3.0 million, or $0.04 per diluted share.

 

Adjusted EBITDA for the fourth quarter of 2010 was $1.5 million.

 

For the year ended December 31, 2010, American Apparel reported consolidated net sales of $533.0 million, a 4.6% decline over sales of $558.8 million for the year ended December 31, 2009. Total net retail sales declined 8.7% to $346.4 million for 2010 as compared to $379.4 million for 2009. Comparable store sales for stores open more than 12 months declined 13.4% for the year on a constant currency basis. Total wholesale net sales, excluding online consumer sales, increased 6.3% to $151.1 million for 2010 compared to $142.1 million for 2009. Online consumer net sales declined 5.0% to $35.5 million for 2010 versus $37.3 million for 2009. In addition to the effect of world-wide economic conditions, the Company’s sales results for 2010 include the effect of delayed production and deliveries to its stores as a result of labor inefficiencies in its manufacturing facilities. These manufacturing inefficiencies caused the Company, in many instances, to miss having the right product in its stores as it entered its key selling seasons.

 

Gross margin for 2010 was 52.5% as compared to 57.3% in 2009. Gross margin was negatively impacted by higher production costs, primarily in the first three quarters, due to lower labor efficiency in its manufacturing facilities, a continued shift in production mix towards more complex styles and introduction of substantial amount of new styles. The decrease for 2010 was also due to a shift in mix from retail to wholesale sales, as wholesale increased from 25.4% of total net sales in 2009 to 28.3% of total net sales in 2010. The Company’s wholesale channel yields a lower gross margin than its retail channel.

 

Operating expenses for 2010 were $330.0 million, or 61.9% of net sales, as compared to $295.5 million, or 52.9% for 2009. The increase was primarily related to higher payroll-related expenses including the full year effect of new stores opened throughout 2009, lease termination costs to close some of the Company’s less profitable stores, marketing expenses, and professional service fees primarily related to the costs associated with the change in Company’s independent public accounting firm. Operating expenses were also higher in 2010 due to $8.6 million in non-cash retail store impairment charges, compared to $3.3 million in of such charges in 2009.

 

Loss from operations for 2010 was $50.1 million, versus income from operations of $24.4 million for 2009. The tax provision for 2010 primarily reflects recording of reserves for deferred tax assets due to the uncertainty surrounding the realization of these potential assets. The 2009 tax provision included contingency accruals for the Company’s uncertain tax positions.

 

The net loss for 2010 was $86.3 million, or $1.21 per diluted share, compared to net income of $1.1 million, or $0.01 per diluted share in 2009.

 

Adjusted EBITDA for 2010 was ($7.4) million.

 

To date in 2011 the Company has closed 13 underperforming stores.

 

In 2010, the Company incurred a substantial loss from operations and had negative cash flows from operating activities for the year ended December 31, 2010. The Company’s current operating plan indicates that the Company will incur a loss from operations for fiscal 2011 and generate negative cash flows from operating activities. As a result of these factors and the negative comparative store sales results in 2010, together with world-wide economic conditions and significant increases in yarn and fabric prices, among others, there exists substantial doubt that the Company will be able to continue as a going concern. In addition, the Company could be prevented from borrowing under its revolving credit agreements and this could have an immediate and significant impact on its liquidity. Additional details with respect to this matter and other risk factors to consider are included in the Company’s Annual Report on Form 10-K, filed on March 31, 2011.

 

The audit opinion with respect to the Company’s consolidated financial statements as of and for the year ended December 31, 2010 included in the Company’s 2010 Form 10-K contains a “going concern” explanatory paragraph. The financial statements included herein and in the 2010 Form 10-K do not include any adjustments to reflect the possible future effects on the recoverability of assets or the amounts of liabilities that may result should the Company be unable to continue as a going concern.

 

Table A presents a calculation and reconciliation of consolidated net income to Adjusted EBITDA for American Apparel, Inc. and Subsidiaries for the years ended and for the three months ended December 31, 2010 and 2009.

 

About American Apparel

 

American Apparel is a vertically integrated manufacturer, distributor, and retailer of branded fashion basic apparel based in downtown Los Angeles, California. As of March 28, 2011, American Apparel had approximately 10,000 employees and operated 273 retail stores in 20 countries, including the United States, Canada, Mexico, Brazil, United Kingdom, Ireland, Austria, Belgium, France, Germany, Italy, the Netherlands, Spain, Sweden, Switzerland, Israel, Australia, Japan, South Korea, and China. American Apparel also operates a leading wholesale business that supplies high quality T-shirts and other casual wear to distributors and screen printers. In addition to its retail stores and wholesale operations, American Apparel operates an online retail e-commerce website at http://www.americanapparel.com.

 

 

 

 

 

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