American Apparel, Inc. Reports Improved Second Quarter Financial Results

LOS ANGELES--()--American Apparel, Inc. (NYSE Amex: APP), a vertically integrated manufacturer, distributor, and retailer of branded fashion basic apparel, announced financial results for its second quarter ended June 30, 2011.

Comparing the 2011 second quarter to the corresponding period last year, the company reported that:

  • Retail comparable store sales were flat for the second quarter with improving trends as comparable store sales increased 3% in June followed by a 4% increase in July. Net sales were flat between periods despite a 9% decrease in the number of stores in operation.
  • Internet sales increased 23% and wholesale net sales decreased 4%.
  • Gross margin was 54.5% vs. 51.6%.
  • Consolidated Adjusted EBITDA was $3.7 million vs. $0.1 million.
  • Loss per common share was $0.00 vs. $0.21.

“We are pleased to see improving sales trends with a comparable store sales increase of 3% in June followed by a 4% increase in July. I believe that our stores look better than ever and our sales improvements were achieved at normal margins,” said Dov Charney, chairman and CEO, American Apparel. “Consolidated Adjusted EBITDA production at $3.7 million for the quarter resulted primarily from improving manufacturing efficiency that more than offset higher yarn prices.

“During the month of July we received $8.3 million in new capital in connection with share purchase transactions consummated in April 2011. To date, we have received $22.5 million in gross proceeds for the sale of shares and exercise of purchase rights in connection with these transactions. This additional capital will allow us to take advantage of improving business conditions in order to build upon our recent successes. Together with our improved operating performance, this new capital makes us well positioned to strengthen our balance sheet.”

Comparable store sales were flat for the second quarter of 2011 versus a decline of 16% reported for the same quarter last year. During the 2011 second quarter, the Company had an average of 254 stores in operation vs. an average of 280 stores during the second quarter last year. Reported sales for the international segment benefited from a weaker U.S. Dollar.

Gross margin for the second quarter of 2011 was 54.5% vs. 51.6% for the corresponding period last year. Gross margin increased primarily due to improvements in manufacturing efficiency and logistics related expenses, foreign currency gains from a weaker U.S. Dollar, and a shift in mix from wholesale to online sales. In addition, margins were favorably impacted as a result of reduced shrink from a June 2011 U.S. warehouse inventory which contributed to the overall margin improvement. These benefits were somewhat offset by higher yarn and fabric costs.

Loss from operations was $5.2 million for the second quarter of 2011, less than the loss of $8.6 million reported last year as a result of improved gross profit margins and higher gross profit of $3.9 million, lower distribution expenses of $0.8 million, lower store operating and other selling expenses of $0.8 million, offset by increase in general and administrative expenses of $2.1 million. General and administrative expenses were impacted by stock based compensation of $1.2 million, salaries and wages of $2.1 million primarily from increases in senior management personnel, $0.3 million in additional professional fees incurred primarily in connection with financial planning and associated legal fees, offset by a reduction in depreciation, impairment and other miscellaneous charges of $1.5 million.

Interest expense for the second quarter of 2011 increased to $7.8 million from $5.7 million in the second quarter of 2010 due to a higher balance of outstanding debt and a higher average rate of interest.

A non-cash change in the value of the Company’s warrant liabilities caused a $14.0 million improvement in the loss before income taxes between the quarterly periods.

Net loss for the second quarter of 2011 was $0.2 million, or $0.00 per common share, compared to net loss for the second quarter of 2010 of $14.7 million, or $0.21 per common share. The 2011 second quarter net loss included an income tax provision of $0.5 million vs. an income tax benefit of $2.2 million in the 2010 second quarter.

In accordance with U.S. GAAP, the Company has discontinued recognizing potential tax benefits associated with current operating losses. As of December 31, 2010, the Company has available net operating loss and tax credit carry forwards of $33.9 million which may be available to reduce future U.S. income taxes that would otherwise be payable.

Weighted average shares outstanding for the 2011 second quarter were 89.1 million vs. 71.4 million for the 2010 second quarter. As of July 31, 2011 there were 103.3 million shares outstanding.

Please refer to the Table A attached to this press release wherein the Company presents a calculation and reconciliation of consolidated net income as reported to Consolidated Adjusted EBITDA, a non-GAAP financial measure.

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 June 30, 2011, American Apparel had approximately 10,000 employees and operated 254 retail stores in 20 countries, including the United States, Canada, Mexico, Brazil, United Kingdom, Ireland, Austria, Belgium, France, Germany, Italy, 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.net.

Safe Harbor Statement

This press release, and other statements that the Company may make, may contain forward-looking statements. Forward-looking statements are statements that are not historical facts and include statements regarding, among other things, the Company's future financial condition, results of operations and plans and the Company's prospects and strategies for future growth and cost savings. Such forward-looking statements are based upon the current beliefs and expectations of American Apparel's 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: the ability to generate or obtain from external sources sufficient liquidity for operations and debt service; changes in the level of consumer spending or preferences or demand for the Company's products; increasing competition, both in the U.S. and internationally; the evolving nature of the Company’s business; the Company's ability to hire and retain key personnel and the Company's relationship with its employees; suitable store locations and the Company's ability to attract customers to its stores; the availability of store locations at appropriate terms and the Company’s ability to identify and negotiate new store locations effectively and to open new stores and expand internationally; effectively carrying out and managing the Company's strategy, including growth and expansion both in the U.S. and internationally; disruptions in the global financial markets; failure to maintain the value and image of the Company's brand and protect its intellectual property rights; declines in comparable store sales and wholesale revenues; financial nonperformance by the Company’s wholesale customers; the adoption of new accounting pronouncements or changes in interpretations of accounting principles; seasonality of the business; consequences of the Company's significant indebtedness, including the Company's relationships with its lenders and the Company's ability to comply with its debt agreements, including the risk of acceleration of borrowings thereunder as a result of noncompliance; the Company's ability to generate cash flow to service its debt; the Company's ability to extend, renew or refinance its existing debt; the Company's liquidity and losses from operations and related impact on the Company's ability to continue as a going concern; the Company's ability to develop and implement plans to improve its operations and financial position; costs of materials and labor, including increases in the price of yarn and the cost of certain related fabrics; the Company’s ability to pass on the added cost of raw materials to its wholesale and retail customers; the Company's ability to improve manufacturing efficiency at its production facilities; the Company's ability to effectively manage inventory and inventory reserves; location of the Company's facilities in the same geographic area; manufacturing, supply or distribution difficulties or disruptions; risks of financial nonperformance by customers; investigations, enforcement actions and litigation, including exposure from which could exceed expectations; compliance with or changes in U.S. and foreign government laws and regulations, legislation and regulatory environments, including environmental, immigration, labor and occupational health and safety 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 including disruption of markets and foreign supply sources and changes in import and export laws; technological changes in manufacturing, wholesaling, or retailing; the Company's ability to upgrade its information technology infrastructure and other risks associated with the systems that are used to operate the Company's online retail operations and manage the Company's other operations; adverse changes in its credit ratings and any related impact on financing costs and structure; general economic and industry conditions, including U.S. and worldwide economic conditions; disruptions due to severe weather or climate change; and other risks detailed in the Company's filings with the Securities and Exchange Commission, including the Company's Annual Report on Form 10-K for the year ended December 31, 2010. The Company's 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 OPERATIONS

(Amounts in thousands, except per share amounts)

 
  Three Months Ended June 30,   Six Months Ended June 30,
  2011       2010     2011       2010  
Net sales $ 132,804 $ 132,733 $ 248,871 $ 254,547
Cost of sales   60,378     64,248     112,807     124,922  
 
Gross profit 72,426 68,485 136,064 129,625
Operating expenses   77,650     77,046     154,378     159,743  
 
Loss from operations (5,224 ) (8,561 ) (18,314 ) (30,118 )
 
Interest expense 7,752 5,682 14,883 10,728
Foreign currency transaction (gain) loss

(263

)

1,927 (1,074 ) 2,684
Change in warrant liability expense (13,000 ) 1,034 (15,100 ) 1,034
Loss on extinguishment of debt - - 3,114 -
Other income   (20 )   (355 )   (55 )  

(201

)

 
Income (Loss) before income taxes 307 (16,849 ) (20,082 ) (44,363 )
Income tax provision (benefit)   520     (2,171 )   876     13,158  
 
Net loss $ (213 ) $ (14,678 ) $ (20,958 ) $ (57,521 )
 
Basic loss per share $ - $ (0.21 ) $ (0.26 ) $ (0.81 )
Diluted loss per share $ - $ (0.21 ) $ (0.26 ) $ (0.81 )
 
Weighted average basic common shares outstanding 89,111 71,447 81,668 71,358
Weighted average diluted common shares outstanding 89,111 71,447 81,668 71,358
 
AMERICAN APPAREL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except per share amounts)

 
 

June 30, 2011

 

June 30, 2010

ASSETS
CURRENT ASSETS:
Cash $ 6,881 $ 8,068
Trade accounts receivable, net of allowances of $2,692 and $1,819 at June 30, 2011 and June 30, 2010, respectively 17,397 21,068
Prepaid expenses and other current assets 6,940 6,510
Inventories, net 192,589 153,030
Income taxes receivable and prepaid income taxes 6,141 6,374
Deferred income taxes   513     2,705  
 
Total current assets 230,461 197,755
 
PROPERTY AND EQUIPMENT, net 77,067 89,482
DEFERRED INCOME TAXES 1,298 176
OTHER ASSETS, net   22,837     25,314  
 
TOTAL ASSETS $ 331,663   $ 312,727  
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Cash overdraft $ 1,180 $ 1,395
Revolving credit facilities and current portion of LT debt, net of unamortized discount of $18,334 at June 30, 2010 56,546 112,229
Accounts payable 40,438 22,486
Accrued expenses and other current liabilities 38,289 38,418
Income taxes payable 519 384
Fair value of warrant liability 19,507 -
Current portion of capital lease obligations   1,243     1,077  
 
Total current liabilities 157,722 175,989
 

LONG-TERM DEBT, net of unamortized discount of $23,241 and $20,537 at June 30, 2011 and June 30, 2011, respectively

84,175 388
SUBORDINATED NOTES PAYABLE TO RELATED PARTY - 4,460
CAPITAL LEASE OBLIGATIONS, net of current portion 2,308 732
DEFERRED TAX LIABILITY 270 -
DEFERRED RENT 23,877 23,427
OTHER LONG-TERM LIABILITIES   11,058     7,898  
 
TOTAL LIABILITIES   279,410     212,894  
 
COMMITMENTS AND CONTINGENCIES
 
STOCKHOLDERS’ EQUITY
Preferred stock, $.0001 par value, authorized 1,000 shares; none issued

Common stock, $.0001 par value, authorized 230,000 shares; 99,219 shares issued and 94,054 shares outstanding at June 30, 2011 and 72,881 shares issued and 71,447 shares outstanding at June 30, 2010

10 7
Additional paid-in capital 150,652 151,675
Accumulated other comprehensive loss (1,753 ) (3,297 )
Accumulated deficit (94,499 ) (38,508 )
Less: Treasury stock, 304 shares at cost at June 30, 2011 and 1,434 shares at cost at June 30, 2010   (2,157 )   (10,044 )
 
TOTAL STOCKHOLDERS’ EQUITY   52,253     99,833  
 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 331,663   $ 312,727  
 
AMERICAN APPAREL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(unaudited)

 
  Six Months Ended June 30,
  2011       2010  
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers $ 248,714 $ 249,838
Cash paid to suppliers, employees and others (252,752 ) (265,567 )
Income taxes paid (2,030 ) (4,527 )
Interest paid, net of capitalized interest (2,550 )

(3,684

)

Other   125     218  
 
Net cash (used in) provided by operating activities   (8,493 )   (23,722 )
 
CASH FLOWS USED IN INVESTING ACTIVITIES
Capital expenditures (4,727 ) (7,258 )
Proceeds from sale of fixed assets   68     39  
 
Net cash used in investing activities   (4,659 )  

(7,219

)

 
CASH FLOWS FROM FINANCING ACTIVITIES
Cash overdraft from financial institution (2,148 ) (2,338 )
(Repayments) borrowings under revolving credit facility, net (836 ) 34,973
Net proceeds from issuance of common stock and purchase rights 14,418
Repurchase of common stock for payment of payroll tax withholding on stock-based compensation (592 )
Proceeds from capital lease financing 3,100
Payment of debt issuance costs (1,213 )
Borrowings under term loans and notes payable, net of $5,000 discount
Proceeds from term loans and notes payable (7 )
Repayment of capital lease obligations   (651 )   (1,035 )
 
Net cash provided by financing activities   12,663     31,008  
 
EFFECT OF FOREIGN EXCHANGE RATE ON CASH   (286 )   (1,045 )
 
NET DECREASE IN CASH (775 ) (978 )
CASH, beginning of period   7,656     9,046  
 
CASH, end of period $ 6,881   $ 8,068  
 
 

RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES

Six Months Ended June 30,
  2011     2010  
Net (loss) income $ (20,958 ) $ (57,521 )
Depreciation and amortization of property and equipment and other assets 12,983 14,415
Accrued interest – paid in kind 8,781 3,263
Amortization of debt discount and deferred financing costs 3,564 2,939
Gain on disposal of property and equipment 71 16
Stock-based compensation expense 2,445 1,763
Retail store impairment charges 1,652 5,598
Foreign currency transaction Loss (gain) (1,074 ) 2,684
Allowance for inventory shrinkage and obsolescence (75 ) 1,397
Loss on extinguishment of debt 3,114
Change in fair value of warrant liability (15,100 ) 1,034
Bad debt expense 343 242
Deferred income taxes 608 13,670
Deferred rent (1,378 ) 1,835
Changes in cash due to changes in operating assets and liabilities
Trade accounts receivables

(501

)

(4,951 )
Inventories (12,294 ) (15,450 )
Prepaid expenses and other current assets 2,282 3,051
Other assets (1,439 ) (1,270 )
Accounts payable 9,606 3,388
Accrued expenses and other liabilities 639 (1,005 )
Income taxes (receivable)/payable   (1,762 )   1,180  
 
Net cash (used in) provided by operating activities $ (8,493 ) $ (23,722 )
 
NON-CASH INVESTING AND FINANCING ACTIVITIES
Property and equipment acquired and included in accounts payable $ 375 $ 506
Notes payable converted to equity $ 4,688 $
Reclassification of lion warrant from equity to debt $ 11,339 $
Issuance of warrants and purchase rights at fair value $ 5,036 $
 
AMERICAN APPAREL, INC. AND SUBSIDIARIES
BUSINESS SEGMENT INFORMATION

(Amounts in thousands)

(unaudited)

 

The following table presents key financial information for American Apparel’s business segments before unallocated corporate expenses:

 

 
 

Three Months Ended June 30, 2011

U.S. Wholesale   U.S. Retail   Canada   International   Consolidated
Net sales to external customers $ 38,139 $ 40,359 $ 14,364 $ 39,942 $ 132,804
Gross profit 10,533 27,685 8,075 26,133 72,426
Income (loss) from operations 5,094 (1,510 ) (547 ) 3,900 6,937
Depreciation and amortization 2,015 2,592 409 1,333 6,349
Capital expenditures 301 1,645 53 165 2,164
Retail store impairment charges - 68 - 934 1,002
Deferred rent expense (benefit) (84 ) (127 ) (414 ) 78 (547 )
 
Three Months Ended June 30, 2010
U.S. Wholesale U.S. Retail Canada International Consolidated
Net sales to external customers $ 39,060 $ 42,741 $ 16,261 $ 34,671 $ 132,733
Gross profit 7,093 28,313 10,023 23,056 68,485
Income (loss) from operations 752 (3,441 ) 467 1,257 (965 )
Depreciation and amortization 2,320 2,650 599 1,730 7,299
Capital expenditures 1,648 1,800 384 484 4,316
Retail store impairment charges - 687 235 485 1,407
Deferred rent expense (benefit) 117 469 (8 ) 275 853
 
Six Months Ended June 30, 2011
U.S. Wholesale U.S. Retail Canada International Consolidated
Net sales to external customers $ 72,789 $ 77,379 $ 26,992 $ 71,711 $ 248,871
Gross profit 21,621 52,424 16,031 45,988 136,064
Income (loss) from operations 11,537 (6,505 ) (1,427 ) 2,279 5,884
Depreciation and amortization 4,182 5,288 842 2,671 12,983
Capital expenditures 1,341 2,679 132 575 4,727
Retail store impairment charges - 177 2 1,473 1,652
Deferred rent expense (benefit) 152 (1,046 ) (436 ) (48 ) (1,378 )
 
Six Months Ended June 30, 2010
U.S. Wholesale U.S. Retail Canada International Consolidated
Net sales to external customers $ 72,889 $ 83,634 $ 30,476 $ 67,548 $ 254,547
Gross profit 12,412 56,972 19,033 41,207 129,624
Income (loss) from operations 57 (7,817 ) 918 (4,393 ) (11,235 )
Depreciation and amortization 4,620 5,268 1,164 3,363 14,415
Capital expenditures 2,832 2,895 697 834 7,258
Retail store impairment charges - 2,661 477 2,460 5,598
Deferred rent expense 236 1,191 2 406 1,835

 

  Three Months Ended June 30,   Six Months Ended June 30,
  2011       2010     2011       2010  
Reconciliation to Income (loss) before Income Taxes
Consolidated income (loss) from operations of reportable segments $ 6,937 $ (965 ) $ 5,884 $ (11,235 )
Unallocated corporate expenses (12,161 ) (7,596 ) (24,198 ) (18,883 )
Interest expense (7,752 ) (5,682 ) (14,883 )

(10,728

)

Other income 20 355 55 201
Loss on extinguishment of debt - - (3,114 ) -
Change in fair value of warrant and purchase rights 13,000 (1,034 ) 15,100 (1,034 )
Foreign currency transaction gain (loss)   263     (1,927 )   1,074     (2,684 )
 
Consolidated Income (loss) before Income Taxes $ 307   $ (16,849 ) $ (20,082 ) $ (44,363 )
 
Three Months Ended June 30, Six Months Ended June 30,
  2011     2010     2011     2010  
Net Sales by Class of Customer
 
U.S. Wholesale
Wholesale $ 32,945 $ 34,402 $ 62,061 $ 63,808
Online consumer   5,194     4,658     10,728     9,081  
 
Total $ 38,139   $ 39,060   $ 72,789   $ 72,889  
 
 
U.S. Retail $ 40,359   $ 42,741   $ 77,379   $ 83,634  
 
 
Canada
Wholesale $ 3,338 $ 3,340 $ 5,753 $ 5,856
Retail 10,582 12,477 20,302 23,781
Online consumer   444     444     937     839  
 
Total $ 14,364   $ 16,261   $ 26,992   $ 30,476  
 
 
International
Wholesale $ 2,785 $ 3,122 $ 4,654 $ 6,087
Retail 32,853 28,559 58,814 55,519
Online consumer   4,304     2,990     8,243     5,942  
 
Total $ 39,942   $ 34,671   $ 71,711   $ 67,548  
 
 
Consolidated
Wholesale $ 39,068 $ 40,864 $ 72,468 $ 75,751
Retail 83,794 83,777 156,495 162,934
Online consumer   9,942     8,092     19,908     15,862  
 
Total $ 132,804   $ 132,733   $ 248,871   $ 254,547  
 

Table A
American Apparel, Inc. and Subsidiaries
Calculation and Reconciliation of Consolidated Adjusted EBITDA
(Amounts in thousands)
(unaudited)

In addition to its GAAP results, American Apparel considers non-GAAP measures of its performance. EBITDA, as defined below, is an important supplemental financial measure of American Apparel’s performance that is not required by, or presented in accordance with, GAAP. EBITDA represents net income (loss) before income taxes, interest and other expense (income), and depreciation and amortization. American Apparel’s management uses EBITDA as a financial measure to assess the ability of its assets to generate cash sufficient to pay interest on its indebtedness, meet capital expenditure and working capital requirements, pay taxes, and otherwise meet its obligations as they become due. American Apparel’s management believes that the presentation of EBITDA provides useful information regarding American Apparel’s results of operations because they assist in analyzing and benchmarking the performance and value of American Apparel’s business. American Apparel believes that EBITDA is useful to stockholders as a measure of comparative operating performance, as it is less susceptible to variances in actual performance resulting from depreciation and amortization and more reflective of changes in pricing decisions, cost controls and other factors that affect operating performance.

EBITDA also is used by American Apparel’s management for multiple purposes, including:

  • to calculate and support various coverage ratios with American Apparel’s lenders
  • to allow lenders to calculate total proceeds they are willing to loan to American Apparel based on its relative strength compared to its competitors
  • to more accurately compare American Apparel’s operating performance from period to period and company to company by eliminating differences caused by variations in capital structures (which affect relative interest expense), tax positions and amortization of intangibles.

In addition, EBITDA is an important valuation tool used by potential investors when assessing the relative performance of American Apparel in comparison to other companies in the same industry. Although American Apparel uses EBITDA as a financial measure to assess the performance of its business, there are material limitations to using a measure such as EBITDA, including the difficulty associated with using it as the sole measure to compare the results of one company to another and the inability to analyze significant items that directly affect a company’s net income (loss) or operating income because it does not include certain material costs, such as interest and taxes, necessary to operate its business. In addition, American Apparel’s calculation of EBITDA may not be consistent with similarly titled measures of other companies and should be viewed in conjunction with measures that are computed in accordance with GAAP. American Apparel’s management compensates for these limitations in considering EBITDA in conjunction with its analysis of other GAAP financial measures, such as net income (loss).

 
Table A (continued)
American Apparel, Inc. and Subsidiaries
Calculation and Reconciliation of Consolidated Adjusted EBITDA

(Amounts in thousands)

(unaudited)

 
  Three Months Ended June 30,   Six Months Ended June 30,
  2011       2010     2011       2010  
Net loss $ (213 ) $ (14,678 ) $ (20,958 ) $ (57,520 )
Income tax provision 520 (2,171 ) 876 13,158
Interest and other (gain) expense, net (5,268 ) 6,361 2,842 11,561
Depreciation and amortization 6,349 7,299 12,983 14,415
Foreign currency (gain) loss (263 ) 1,927 (1,074 ) 2,684
Retail store impairment charges 1,002 1,407 1,652 5,598
Stock based compensation expense, including employer related payroll taxes   1,574         2,445     1,763  
Consolidated Adjusted EBITDA $ 3,701   $ 145   $ (1,234 ) $ (8,341 )

Contacts

American Apparel
Tom Casey
Acting President
or
John J. Luttrell
Chief Financial Officer
213-488-0226

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Contacts

American Apparel
Tom Casey
Acting President
or
John J. Luttrell
Chief Financial Officer
213-488-0226