The sudden fall and slow recovery

Dita KovarikovaQuynh Nga Bui Thi

FALL 2013Corporate Finance FIN 340

Publicly traded company

1998, Montreal Quebec, Canada

Founders: Min Chan, Eustace Russell

CEO: Dov Charney

Headquarter: Los Angeles, California

Clothing manufacturer, distributor, wholesaler and retailer

10 000 employees

Operates 245 retail stores in 20 countries (info from August 31 2013)

Latest annual revenue: 2012 - $ 617,310 (in thousands)

Reporting a Net Loss for the past three years (2011~2013)

Year ended Dec 31 2008 ~ 2009

YEAR 2008 NI: $14,112YEAR 2009 NI:

$1,112

Consolidated Statements of Operations

WHY?

INTEREST RATES

Consolidated Statements of Operations

Annual report 2009

Interest Rate Risk

Based on our interest rate exposure on variable rate borrowings at December 31, 2009, a 1% increase in average interest rates on our borrowings would increase future interest expense by approximately $5k per month. We determined this amount based on approximately $6.2 million of variable rate borrowings at December 31, 2009. We are currently not using any interest rate collars or hedges to manage or reduce interest rate risk. As a result, any increase in interest rates on the variable rate borrowings would increase interest expense and reduce net income.

BORROWING OF $75,074

(in thousands)

Why?

In 2009 they have opened 27 new stores world wide (mainly in USA), in order to bust their revenue

1500 illegal employees were terminated, the 1/3 of the workforce (being paid the lowest possible salary) – a need of new employees with a proper working contract

Year ended Dec 31 2010the “FALL”

facts and highlights

Design Vision

American Apparel’s design, vision and aesthetic are intended to appeal to young, metropolitan adults by providing them with a core line of iconic, timeless styles offered year-round in a wide variety of colors at reasonable prices. Since its founding, American Apparel has operated with the belief that there is a large potential market among young adults for well-designed, high-quality fashion essentials. Led by Dov Charney, Chairman of the Board of Directors and Chief Executive Officer, our in-house creative team has carefully developed the product line.

Advertising and Branding

American Apparel attracts customers through internally-developed, edgy, high-impact, visual advertising campaigns which use print, outdoor, in-store, and electronic communication vehicles. These advertising campaigns communicate a distinct brand image that differentiates us from our competitors and seek to establish a connection with our customers. Our retail stores are an important part of American Apparel’s branding and convey a modern, internationalist lifestyle. At various times, we have also drawn attention to the “Made in USA” nature of our products and the “Sweatshop Free” environment in which our garments are produced. 

Speed to Market

Our vertically integrated business model, with manufacturing and various other elements of our business processes centered in downtown Los Angeles, allows us to play a role in originating and defining new and innovative trends in fashion, while enabling us to quickly respond to market and customer demand for classic styles and new products. For our wholesale operations, being able to fulfill large orders with quick turn-around allows American Apparel to capture business. The ability to quickly respond to the market quickly means that our retail operations can deliver on-trend apparel in a timely manner and maximize sales of popular styles by replenishing product that would have otherwise sold out.

Broad Appeal

While initially targeted towards young, metropolitan adults in the U.S., the clean, simple styles and quality of our garments have helped our products appeal to various demographics around the world. We believe that our products appeal has been augmented by, and should continue to benefit from, growing trends toward casual attire and higher quality apparel.

YEAR 2010 NET LOSS: $(86,315)

THOUSANDS!!!!WHY?

Consolidated Statements of Operations

Lion Loan

$80m loan provided by British company Lion Capital, in March 2009 – a loan advanced to rescue it from financial crisis

The savior – Lyndon Lea

Sales

Sales are down, yet the company is moving its product mix into clothes that cost more to make and at the same it's pursuing a discount strategy

with Groupon and others.

Charney and other members of management just rewarded themselves with 9.1 percent of the company's stock, at a time when its price was the cheapest it's been, despite declining sales all year. (at the end of 2010)

Their own “resolution”

As a result of operating losses and negative cash flows from operations,

together with other factors, including the effect on our ability to borrow under our

revolving credit agreements as a result of the “going concern” qualification with

respect to our 2010 financial statements, we may not have sufficient liquidity to

sustain operations and to continue as a going concern.

Year ended Dec 31 2011~2012

In 2011 things became worse, when the company started to feel the difficulty even to stay afloat.

In its annual report company specified that its operations are at risk and as a going concern. As the crisis grew, the company desperately looked for new investors raised substantial doubt that the company may be able to continue.

Dov Charney, the CEO is now facing up to massive debt load, falling share prices and decreasing margins.

After the “fall” the stock price went

rapidly down

Net Loss of “only”2011 - $(39,314) 2012 - $(37,272) in thousands

Reduction in the stores => reduction in expenses for the salaries/wages, administration and etc.

THIS

Unrealized loss (gain) on change in fair value of

warrants and purchase rights The $23.5 million unrealized gain in the fair value of

warrants and purchase rights for the year ended December 31, 2011 relates primarily to the issuance

of purchase rights to a group of investors in April 2011 and the subsequent decrease in the fair value

of both the warrants and the purchase rights.

Recovery plan

On the view of bankruptcy, the CEO Dov Charney secured $14.9 million in additional financing. Moreover, he made an extensive plan for the recovery of the company through improving the operating performance, the entire process of inventory management and severely trying to crush the cost while dealing with heavy debt that it has taken.

Moreover, the strategy of building both online and offline stores. In April 2012, it launched a new online store serving Hong Kong, while continued to build brand offline and online.

According to Dov Charney

“We continue to make meaningful progress in improving inventory efficiency lower carrying costs and reduce working capital requirements over the long-term. These efforts, together with other operating performance improvement will assist in our near term refinancing efforts.” (Investors.americanapparel.net, 2012).

Moreover…Our sales exceeded plan in all channels and we saw good progress in our wholesale channel across a broad spectrum of customers. Our product is resonating well with our customers both in stores and online. We are excited about our progress in 2011 and expect to build on our recent successes in coming years.

Is this enough ??

Overall financial figures were still negative; therefore, Dov Charney had to increase debt or refinance, else it would go bankrupt.

This time again Dov Charney was able to arrange the investors and managed to get the major loans extended till 2015.

During July 2012 another $80m Second Lien Loan

If the numbers aren’t that positive, as they’re not, investors are probably buying a vision and a promise that, things will get better (Retailgeeks.com, 2012)

The Ratios

Lower values of debt-to-equity ratio are favorable indicating less risk. Higher debt-to-equity ratio is unfavorable because it means that the business relies more on external lenders thus it is at higher risk, especially at higher interest rates. A debt-to-equity ratio for retail is around 0.22.

The ratio of net profits to revenues for a company or business segment - that shows how much of each dollar earned by the company is translated into profits.

The Ratios

CONCLUSION

In 2009 the company built a unique brand and a wide network of stores across the globe.

Beginning 2009, the company faced several difficulties. The long run probe into the employment of illegal immigrants, brutally affected the performance of the company.

Immigration crackdown forced American Apparel to fire 1,800 workers, most of whom are Latino immigrants.

As a result, the company reduced from $14m in 2008 to $1m in 2009, with EPS reduced from 0.335$ to 0.02$ in just one year.

This have also impact on the employees performance in 2010.

No wonder, the company is having tough time. With huge liabilities, the company must starting to have a profit otherwise it may have to face the bankruptcy.

Some analysts believe that the company has done nothing, expect buying some time from its latest financing.

Will the recovery plan be able to enhance the profitability of the company in upcoming years?

Would American Apparel be able to pass through the crisis or is a candidate of business failure?

Bibliographyhttp://quicktake.morningstar.com/stocknet/secdocuments.aspx?symbol=app

http://ca.finance.yahoo.com/q/pr?s=APP

https://commerce.us.reuters.com/purchase/showReportDetail.do?docid=39748603

http://www.cbsnews.com/news/american-apparel-now-has-less-skin-in-the-game-ad-budget-slashed-as-debt-piles-up/

http://theweek.com/article/index/204413/american-apparel-a-timeline-of-controversy

www.ammericanapparel.com

http://www.investopedia.com/terms/n/net_margin.asp

www.retailgeeks.com