American Apparel Reports Second Quarter 2008 Financial Results

LOS ANGELES--(BUSINESS WIRE)--American Apparel, Inc. (Amex: APP), a vertically integrated manufacturer, distributor, and retailer of branded fashion basic apparel, today announced its financial results for the second quarter of 2008 and for the six month period ended June 30, 2008.

American Apparel reported net sales for the quarter ended June 30, 2008 of $133.0 million, a 38.9% increase over net sales of $95.7 million for the quarter ended June 30, 2007. Total retail sales increased 58% to $81.3 million from $51.3 million for the prior year second quarter, with comparable store sales for stores open at least 12 months rising 23%. American Apparel ended the second quarter of 2008 with 195 stores, having opened 9 stores in the period. The company operated 154 stores at the end of the second quarter of 2007. Total wholesale sales increased to $51.7 million for the second quarter of 2008, as compared to $44.4 million for the second quarter of 2007, an increase of 16.4%.

Gross margin for the second quarter of 2008 increased to 59.5% from 56.5% for the prior year second quarter. The increase in gross margin was primarily the result of an increase in the mix of sales coming from retail sales and online consumer sales, which generate a higher gross margin than wholesale sales. This benefit was partially offset by the impact of hiring of approximately 1,400 new manufacturing employees in the second quarter of 2008 to support increased production. During the period, American Apparel began operating a fabric dyeing and finishing facility in Garden Grove, California, which it purchased in May. Gross margin for the U.S. Wholesale segment decreased to 28.4% in the second quarter of 2008, versus 28.9% in the second quarter of 2007.

Operating expenses for the second quarter of 2008 increased to 47.7% of net sales, versus 43.9% for the second quarter of 2007. Operating expenses increased due to higher payroll, rent and occupancy expense related to the growth in the number of retail stores from 149 as of April 1, 2007 to 195 as of June 30, 2008, and an increase in advertising expense. Pre-opening expenses for retail stores were $2.5 million in the second quarter of 2008, versus $2.0 million in the prior year second quarter. Operating expenses were also higher due to an increase in corporate expense of approximately $4.3 million, related primarily to an increase in accounting and professional fees, including fees related to Sarbanes-Oxley compliance, as a result of American Apparel operating as a public company in 2008.

Operating income for the second quarter of 2008 increased 29.4% to $15.6 million from $12.1 million in the second quarter of 2007. Operating margin declined to 11.8% in the second quarter of 2008 compared to 12.6% in the prior year second quarter as a result of higher operating expenses offsetting the gross margin increase in the quarter.

Interest expense for the second quarter of 2008 decreased 22.8% to $ 3.7 million from $4.8 million in the second quarter of 2007. The decrease in interest expense was due to lower outstanding borrowings in the 2008 period versus the prior year, as well as a decrease in the LIBOR rate of on which the company’s floating rate debt is based. The decrease in interest expense was offset by the incurrence of approximately $0.5 million of loan fees consisting of waiver fees and legal fees in connection with the renegotiation of the company’s credit agreements during the second quarter of 2008.

Net income for the second quarter of 2008 increased 42% to $6.8 million from $4.8 million in the second quarter of 2007. Earnings per diluted share in the second quarter of 2008 were $0.10 based on 70.7 million diluted shares, compared to $0.10 in the second quarter of 2007 based on 48.4 million diluted shares.

The company continues to expect diluted earnings per share in the range of $0.32 to $0.36 for 2008, before giving effect to a one-time non-cash stock compensation expense resulting from the company’s previously announced employee stock grant.

As of July 31, 2008, American Apparel had opened 20 new store locations since the beginning of the year. The company currently has 40 signed leases for retail stores in its pipeline. Additionally, on July 29, 2008, American Apparel entered into a purchase and sale agreement to purchase leasehold interests of seven retail locations out of a bankruptcy auction. American Apparel expects to be open for business at these seven locations by the end of August 2008. Based on the foregoing, the company currently expects to open 50 to 55 retail locations in 2008, compared to its previous guidance of 40 to 45 stores. While the company believes the addition of these incremental locations will be mildly accretive to earnings in 2008, it is maintaining its previously stated earnings per share guidance as described above.

Dov Charney, Chairman and Chief Executive Officer, stated: "2008 continues to be a year of significant growth for American Apparel. We are pleased with our financial performance for the second quarter, and believe we are only still laying the groundwork for a very successful future. During the second quarter, American Apparel opened its first store in Spain and only its second store in Australia. We are very pleased with our performance in these new markets, which we believe speaks to the power and universal reach of our brand. We are excited to open our first stores in China and Brazil in the coming weeks, as well as all of the other stores that we have opening soon around the world.”

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 July 31, 2008, American Apparel employed over 9,000 people and operated 200 retail stores in 16 countries, including the United States, Canada, Mexico, United Kingdom, Belgium, France, Germany, Italy, the Netherlands, Spain, Sweden, Switzerland, Israel, Australia, Japan and South Korea. American Apparel also operates a leading wholesale business that supplies 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://store.americanapparel.net.

Safe Harbor Statement

This press release may contain forward-looking statements which are based upon the current beliefs and expectations of our management, but are subject to risks and uncertainties, which could cause actual results and/or the timing of events to differ materially from those set forth in the forward-looking statements, including, among others: changes in the level of consumer spending or preferences or demand for our products; increasing competition; our ability to hire and retain key personnel and our relationship with our employees; suitable store locations and our ability to attract customers to our stores; effectively carrying out and managing our growth strategy; failure to maintain the value and image of our brand and protect our intellectual property rights; declines in comparable store sales; seasonality; consequences of our significant indebtedness, including our ability to comply with our debt agreements and generate cash flow to service our debt; costs of materials and labor; location of our facilities in the same geographic area; manufacturing, supply or distribution difficulties or disruptions; risks of financial nonperformance by customers; investigations, enforcement actions and litigation; compliance with or changes in laws and regulations; costs as a result of operating as a public company; material weaknesses in internal controls; interest rate and foreign currency risks; loss of U.S. import protections or changes in duties, tariffs and quotas and other risks associated with international business; our ability to upgrade our information technology infrastructure and other risks associated with the systems that operate our online retail operations; general economic and industry conditions; and other risks detailed in our filings with the Securities and Exchange Commission, including our 2007 Annual Report on Form 10-K. Our filings with the SEC are available at www.sec.gov. You are urged to consider these factors carefully in evaluating the forward-looking statements herein and are cautioned not to place undue reliance on such forward-looking statements, which are qualified in their entirety by this cautionary statement. The forward-looking statements speak only as of the date on which they are made and the company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.

AMERICAN APPAREL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share amounts)
(unaudited)
		Three Months Ended June 30,							Six Months Ended June 30,
		2008			2007				2008				2007
NET SALES		$	132,971		$	95,730			$	244,605			$	169,233
COST OF SALES			53,901			41,657				103,786				73,176
GROSS PROFIT			79,070			54,073				140,819				96,057
OPERATING EXPENSES (including related party charges of $212
and $179 for the three months ended June 30, 2008 and 2007,
respectively, and $449 and $400 for the six months ended
June 30, 2008 and 2007, respectively)			63,442			41,993				120,826				77,784
INCOME FROM OPERATIONS			15,628			12,080				19,993				18,273
INTEREST AND OTHER (INCOME) EXPENSE
Interest expense (including related party interest expense
of $91 and $173 for the three months ended June 30, 2008
and 2007, respectively, and $181 and $359 for the six
months ended June 30, 2008 and 2007, respectively )			3,699			4,792				7,037				8,752
Foreign currency transaction (gain) loss			476			177				(2	)			223
Other (income) expense			981			(385	)			769				(542	)
TOTAL INTEREST AND OTHER EXPENSE			5,156			4,584				7,804				8,433
INCOME BEFORE INCOME TAXES			10,472			7,496				12,189				9,840
INCOME TAX PROVISION			3,681			2,703				4,294				3,364
NET INCOME		$	6,791		$	4,793			$	7,895			$	6,476
Weighted average basic shares outstanding			70,709			48,390				68,447				48,390
Weighted average diluted shares outstanding			70,709			48,390				70,701				48,390
Basic Earnings per share		$	0.10		$	0.10			$	0.12			$	0.13
Diluted Earnings per share		$	0.10		$	0.10			$	0.11			$	0.13
PRO FORMA COMPUTATION RELATED TO CONVERSION TO C
CORPORATION FOR INCOME TAX PURPOSES
Historical income before income taxes					$	7,496							$	9,840
Pro forma provision for income taxes						2,857								3,751
Pro forma net income					$	4,639							$	6,089
Pro forma basic earnings per share					$	0.10							$	0.13
Pro forma diluted earnings per share					$	0.10							$	0.13

AMERICAN APPAREL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
		June 30, 2008				December 31, 2007
		(unaudited)
ASSETS
CURRENT ASSETS
Cash		$	24,555			$	19,292
Trade accounts receivable, net of allowances of
$2,290 and $1,876 at June 30, 2008 and December
31, 2007, respectively			18,895				16,602
Other receivables			1,752				1,120
Prepaid expenses and other current assets			6,968				4,498
Inventories, net			127,609				106,434
Deferred taxes, current portion			5,446				4,894
Total Current Assets			185,225				152,840
PROPERTY AND EQUIPMENT, net			90,457				64,868
INTANGIBLE ASSETS, net			3,671				2,286
GOODWILL			1,906				950
DEFERRED TAXES			3,255				3,146
OTHER ASSETS			11,708				9,260
TOTAL ASSETS		$	296,222			$	233,350
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Cash overdraft		$	3,967			$	2,778
Current portion of long-term debt			94,083				99,930
Accounts payable			17,755				15,451
Accrued expenses			22,473				21,877
Income taxes payable			5,645				7,300
Current portion of capital lease obligations			2,837				3,384
Total Current Liabilities			146,760				150,720
LONG-TERM DEBT, net of current portion			549				642
SUBORDINATED NOTES PAYABLE TO RELATED PARTIES			6,013				6,036
CAPITAL LEASE OBLIGATIONS, net of current portion			2,875				4,066
DEFERRED RENT			13,752				10,065
TOTAL LIABILITIES			169,949				171,529
COMMITMENTS AND CONTINGENCIES
STOCK HOLDERS’ EQUITY
Preferred stock, $.0001 par value, authorized
1,000 shares; none issued			--				--
Common stock, $.0001 par value, authorized
120,000 shares; total issued 71,150 and 69,716
outstanding at June 30, 2008 and 57,595 issued
and outstanding at December 31, 2007			7				6
Additional paid-in capital			123,212				57,162
Accumulated other comprehensive income			1,415				865
Retained earnings			11,683				3,788
Less: Treasury stock, 1,433 shares at cost			(10,044	)
TOTAL STOCKHOLDERS’ EQUITY			126,273				61,821
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	296,222			$	233,350

AMERICAN APPAREL, INC. AND SUBSIDIARIES
BUSINESS SEGMENT INFORMATION
(Amounts in thousands)
(unaudited)
The following table presents key financial information for the Company’s business segments:
	Three Months Ended June 30, 2008
	U.S. Wholesale				U.S. Retail			Canada			International			Consolidated
Net sales to external customers	$	41,011			$	39,039		$	16,512		$	36,409		$	132,971
Gross profit		11,649				29,406			11,428			26,587			79,070
Income from operations		4,128				8,049			4,213			8,320			24,710
Inter-segment sales (eliminated in consolidation)		39,902				—			—			—			—
Depreciation and amortization		1,758				1,453			552			924			4,687
Capital expenditures		4,327				7,264			1,010			5,917			18,518
Deferred rent expense (benefit)		(42	)			640			105			1,452			2,155
	Three Months Ended June 30, 2007
	U.S. Wholesale				U.S. Retail			Canada			International			Consolidated
Net sales to external customers	$	35,446			$	27,762		$	10,899		$	21,623		$	95,730
Gross profit		10,242				21,849			7,380			14,602			54,073
Income from operations		4,563				6,333			760			5,237			16,893
Inter-segment sales (eliminated in consolidation)		23,256				—			—			—			—
Depreciation and amortization		1,252				1,072			466			444			3,234
Capital expenditures		427				1,434			142			1,642			3,645
Deferred rent expense (benefit)		(37	)			419			22			66			470

	Six Months Ended June 30, 2008
	U.S. Wholesale				U.S. Retail			Canada			International			Consolidated
Net sales to external customers	$	78,446			$	72,163		$	28,675		$	65,321		$	244,605
Gross profit		19,370				54,482			19,979			46,988			140,819
Income from operations		6,219				13,690			5,917			13,245			39,071
Inter-segment sales (eliminated in consolidation)		59,374				—			—			—