American Apparel in Trouble

American Apparelmade headlines recently when it's auditors, Deloitte and Touche, resigned recently due to the increased likelihood of "potential material errors to the [December 31, 2009] consolidated financial statements."  Recently, AA announced a preliminary second quarter loss and cast doubt on it's ability to continue as a going concern.  Other interesting details:

  • AA is expecting a loss of $5-7 million for the quarter ended June 30th compared with net income of about $7 million for the same period last year.
  • Debt increased to $120 million, an increase of 32% from the previous quarter.   An amended debt covenant on a $75 million loan from London- based Lion Capital LLP requires American Apparel to report at least $20 million of Ebitda, which will most likely be breached given their operating losses.
  • The SEC and US Attorney's office have launched enquiries into the resignation of Deloitte, who have indicated that AA's 2009 financial statements may not be reliable.
  • Subsequent to Deloitte's resignation, AA has hired back Marcum LLP, it's previous auditors.
  • Their stock price has plummeted from a high in 2008 of about $15 to a closing price of $1.03 on August 17, 2010.
  • Their colourful CEO, Dov Charney, hails from Montreal (of course). He demonstrated an entrepreneurial spirit and an interest in apparel at a young age and founded AA in 1989, when he was just 20 years old. The company currently has 270 stores in 18 countries.
  • The company faces being delisted from the NYSE if it is not able to submit it's SEC filings in time.  The deadline was Monday.

It is not completely evident what has brought AA to this point; it is probably a combination of factors including bad management, high costs of production (it's a lot more expensive to manufacture in the US than China) and marketing, over-expansion and the effects of the recession.  Given that AA is an internationally recognized brand (it's hard to miss their "normal people" ads) with a business model that appears to be successful, they may just need some new leadership to steer them in the right direction. 

Update on 2010-11-13 03:51 by Ronika Khanna

Update on American Apparel's financial situation and survival prospects