American Apparel's Bankruptcy Is InevitableS

Things have gone from bad to worse for the pants-optional C.E.O. and his t-shirt company. To put it nicely, it's highly probable that the retailer will go bankrupt — and soon. Bluntly: American Apparel is probably fucked. Here's why.

To get a sense of just how fucked, allow me to explain how relative levels of fucked-ness are calculated, in retail. "Same-store" sales or "comparable store" sales are sales figures retailers report from stores open 12 months or longer, and these results are considered a key indicator of retail health for two reasons. Firstly, just measuring a brand's overall sales without distinguishing between sales at newly opened stores and sales at existing stores camouflages the huge start-up costs incurred by store openings. Secondly, if it's the case that a retailer has over-saturated its market, if it then persists in opening new stores, those new stores can actually cannibalize sales from its older outlets. Just measuring "sales" is misleading if you had 223 stores in 2009 and 190 in 2008, because 223 stores will move a lot more product than 190 stores, almost no matter what; while overall sales growth is important, you also need to measure how those same 190 stores fared year-on-year.

American Apparel, as it turns out, has experienced declining year-on-year same-store sales in every month for which the company has made records available since February, 2009. In that month, comps fell by 9%. In March, they were down 11%. April's same-store sales fell 7%; the following month the decline was 10%; the month after that, 13%; the month after that, same-store sales fell 13% again. Then, in August, same-store sales fell 20%. The month after that, they were down 15%. The next month, they fell 6%; the month after that, the decline was 11%; American Apparel wrapped up its horror year with a decline in same-store sales of 6% during the month of December.

As for 2010's numbers, official results aren't even yet available for the first three months of this year, because American Apparel wasn't ready to file by the Securities and Exchange Commission's deadline. The SEC gave Charney's company until August 16 to tell investors how it did in the months of January, February, and March of this year. (As one financial writer quipped, "I guess we'll get Q2 around Christmas.") American Apparel's preliminary first-quarter report showed a decline in same-store sales of 10%, and an operations loss of $17.6 million during the period. (Comparatively, the $3.6 million it lost in the first quarter of 2009 seems small.) There's no reason to believe the company has experienced any miraculous reversal of fortune in the intervening months. 2009 was a bad year for retail, and American Apparel wasn't the only company to experience months of successive year-on-year declining comps — Abercrombie & Fitch was also left reeling for a long spell — but Charney's baby did perform a lot worse than almost all of its competitors. (Even Abercrombie eventually made a hesitant reversal.)

Meanwhile, the company is struggling to manage the mountain of debt it took on during the boom years, when it signed dozens of leases at the height of the real-estate bubble and more than occasionally hired 17-year-old high school drop-outs Charney took a shine to to "manage" the new stores. The company was forced to admit that it would default on its $80 million revolving credit if it didn't renegotiate with the lender, Lion Capital. For now, American Apparel is apparently worth more to its creditors as a going concern than as a bankruptcy, so Lion decided to work with the the company. But American Apparel's interest rate did rise from 15% to 17% when it restructured its loans. And that still leaves open the question of what will happen should its creditors — supermarket billionaire Ron Burkle is now among them — ever change their minds about American Apparel's salvagability.

Yesterday, its auditing firm, Deloitte & Touche, announced it would no longer be working with the retailer because, according to an SEC filing, "Deloitte identified material weaknesses in [American Apparel's] internal control over financial reporting...and advised that the Company has not maintained effective internal control over financial reporting," and because information had come to Deloitte's attention that "may materially impact the reliability of either its previously issued audit report or the underlying consolidated financial statements." Deloitte said more investigation would be needed "before the Company and Deloitte can reach any conclusions as to the reliability" of its financial reports for 2009.

This news sent the stock price tumbling to near-52-week lows.

American Apparel is behaving more and more like a company that knows there really is no way to fight back from 18 months of plummeting same-store sales. It has slashed its advertising budget by nearly 40%. And the company is still relying on its failed strategy of going through costly store openings to gin up its sales — it opened 15 new stores in the U.S. alone last year. Beleaguered Charney, who said last month, "I'm getting punched in the face for the slightest mistake, but it's going to be fun and we're going to do the great things," is sounding more self-delusional than ever.

If and when American Apparel does fold, it would be a shame if commentators were to lay the blame, say, on the company's policy of manufacturing its clothing in the U.S. and paying its workers a fair wage, rather than on Dov Charney's record of abysmal business decisions. American Apparel — once a respected t-shirt maker with a booming, if un-sexy, wholesale business — expanded beyond the point of rationality or even sanity. Let's not forget that during the year 2005, when American Apparel was at the apex of its ill-conceived retail expansion, the company did not even have a CFO, because the last person to hold the position literally died of a heart attack. (Charney had junior staffers do the bookkeeping.) Let's not forget the sexual-harassment lawsuits. Let's not forget the lawsuit from Woody Allen. Let's not forget the lavish apartments he rented for the shop assistants he liked to sleep with, all on the company dime. Let's not forget the time Charney told the Wall Street Journal that the man he eventually hired as CFO was "a complete loser" and a real stickler for details. No, the manufacturing model wasn't American Apparel's problem; its vertically integrated structure probably gave it a competitive advantage in a garment industry where ordinary suppliers can take 4-6 months to complete orders in China. The problem was Dov Charney's bad judgment.

American Apparel's Auditing Firm Resigns, Stock Plunges 14%
[LATimes]

Earlier:
American Apparel's Plans For Recession Success: More Sex, Please
American Apparel Now Has Less Skin In The Game: Ad Budget Slashed As Debt Piles Up [BNET]
American Apparel Snags Debt Lifeline, Burkle Bet [Reuters]

Dov Charney Defends Himself Against The Haters' "False Crusade"