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American Apparel - The sudden fall and slow recovery
1. The sudden fall and slow recovery
Dita Kovarikova
Quynh Nga Bui Thi
FALL 2013
Corporate Finance FIN 340
2. Publicly traded company
1998, Montreal Quebec, Canada
Founders: Min Chan, Eustace
Russell
CEO: Dov Charney
Headquarter: Los
Angeles, California
Clothing
manufacturer, distributor, whol
esaler and retailer
3. 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)
7. 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.
8.
9. 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
11. 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 welldesigned, 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.
12. 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 turnaround 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.
14. Lion Loan
$80m loan provided by
British company Lion
Capital, in March 2009 – a
loan advanced to rescue it
from financial crisis
15. 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.
16. 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)
17. 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.
19. 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.
20.
21.
22. Reduction in the stores => reduction in expenses for
the salaries/wages, administration and etc.
23.
24. 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.
25. 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.
26. 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.
27. 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)
28. 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.
30. 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.
31. 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?