Nobody's favorite t-shirt company is facing hard times. Loans are coming due. Financial reports are five months late. Sales are falling. Auditors are quitting. Stock prices are plummeting. Investors are investigating. But Dov Charney maybe can still turn things around.
Early this morning, American Apparel finally managed to file its results from the first quarter. To give you an idea just how very catastrophically late that is, last year American Apparel filed its first quarterly report in May; right now, in August, competitors like Urban Outfitters are filing their results from the second quarter of this year.
That means American Apparel also missed the August 16 final deadline for filing Q1 by one day; the New York Stock Exchange had earlier warned the company that the failure to meet that deadline could result in its stock being delisted. The NYSE had no comment on the potential consequences of American Apparel's failure to meet that deadline this morning.
Meanwhile, the news from the quarterly report is not good:
The Company incurred a substantial loss from operations and had negative cash flows from operating activities for the three months ended March 31, 2010. Based upon results of operations for the three months ended March 31, 2010 and trends occurring in the Company's business since the first quarter and through the issuance date of these financial statements and projected for the remainder of 2010, the Company may not have sufficient liquidity necessary to sustain operations for the next twelve months.
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The report gives American Apparel's net quarterly loss as $42 million. Credit issues and other factors, the company says, "raise substantial doubt that we will be able to continue as a going concern."
Additionally, the report discloses that the SEC is investigating the company over the shoddy accounting procedures that its last auditors, Deloitte & Touche, identified just before they quit, and that the U.S. Attorney for the Southern District of New York has subpoenaed documents relating to Deloitte & Touche's departure.
Also this morning, American Apparel released its preliminary results for the second quarter of 2010. The company says that for the three months ended June 30, sales at stores open more than one year (a key indicator of retail health) fell 16% from what they were during the same three months of 2009. (2009, you will recall, was a retail annus horribilis — and in Q2 of '09, American Apparel's sales were already well into what has proven to be an enduring slide). American Apparel estimates its second quarter operations loss to be $5-$7 million.
But most worryingly, American Apparel — which has a debt load of $120.3 million, as of June 30 — anticipates that it will breach the terms of its revolving credit facility, which amounts to a default on that loan. If the lender waives those terms and agrees to work with the company — or if American Apparel gets another loan from somewhere else — it might make out all right. If not, then the company could be blocked from using its revolving credit, and/or the entire revolving loan could come due. American Apparel says, "There can be no assurance that if either or both of these events were to take place, that the Company would be able to obtain the additional sources of liquidity required to continue operations."
So things are looking pretty bad. But there are a lot of potential outcomes, not all of which would result in the total annihilation of America's largest clothing manufacturer. This isn't the first time American Apparel has failed to meet the terms of its credit agreements — and so far, its lenders seem to be content with jacking up its interest rates rather than insisting on the payday they know would likely trigger a bankruptcy. (American Apparel is, for now, worth more to its creditors as a dysfunctional, but functioning, company than as a bankruptcy.) And even a bankruptcy — if it were to permit the company to reorganize, jettison under-performing stores, get the debt monkey off its back, and emerge anew — might leave the company in better condition overall. Alternatively, American Apparel might be saved by being acquired by a larger corporation. No matter what happens, here are the steps we think American Apparel should be taking right now to correct its course:
- Get its financial house in order. We're pretty sure American Apparel's head honchos are on this, but it has to be said: Filing quarterly reports nearly six months late, courting delisting, and flouting Securities and Exchange Commission deadlines, is not okay. It is not conduct becoming of a publicly traded company. Given the fact that when its public accounting firm, Deloitte & Touche, quit, it warned that it could not be confident of American Apparel's internal accounting controls, and you get the pattern of behavior that attracts the ire of shareholders who want to sue you. Cut it the fuck out. Making timely, accurate filings — even if the numbers are bad — is the most basic thing a company can do to shore up public trust.
- Change its ads. Remember when American Apparel ads used to be sexy, rather than gynecological? Remember when the people in them were hot but funny-looking, with different kinds of bodies? Remember when the people in them might have actually been employees, rather than models and porn stars the company calls "employees"? Remember when American Apparel ads looked appreciably different from other stupid fashion ads, and therefore made American Apparel look like it might be peddling something different from other stupid fashion brands? That was a pretty good time. Sales were higher then, too.
- Revamp everything it sells. American Apparel has been making a big to-do about its move away from neon-thong-ironic-80s-NSFW-jazzercise-wear and towards beige-ironic-90s-(mostly)-SFW-preppy-wear. Frankly, after years of assless tights and gold lamé booty shorts, it's a relief. And it fits with fashion's prevailing winds; virtually every women's magazine might as well be called Beige Monthly this season. So why is the website landing page still showing two chicks in hideous lace bodysuits who look like they could be filming girl-on-girl in an a suburban office park after hours? If 18 consecutive months of falling same-store sales indicates one thing, it's that American Apparel urgently needs to change its products to better appeal to its customers. There should be more of the classics it does so well — well-fitting, perfectly conceived basics like pants, leggings, and anything jersey — and less of the overpriced tacky shit. Vivienne Westwood's mini-crini may be an inspiration to us all, but that does not mean that American Apparel can get away with offering a ruffled nylon petticoat for $70. Selling things above a Size 6 also wouldn't hurt.
- Ditch its idiotic hiring policies. In fashion, image counts for a lot — but so does having sales people who are actually knowledgeable, personable, and helpful. American Apparel currently makes hiring, firing, and promotion decisions based on what its candidates and staffers look like. That's crazy-makingly dumb.
- Sideline Dov Charney. It's not necessarily a bad thing for a company to have a controversial, media-friendly showman in a prominent role. And that wacky Canadian t-shirt entrepreneur obviously has a strong vision for the company and an intimate knowledge of the brand he created. However, he also has an intimate knowledge of the many, many employees who have sued him for sexual harassment. And he's also the guy who thought it was a good idea to open more than 100 stores in a single year. (That overexpansion, financed by massive debt at what proved to be the height of a real estate bubble, is the cause of the credit issues that still threaten to cripple the company. And many of those ill-advised stores are haemorrhaging money: BNET points out that in the latest quarterly filing, Charney has had to cop to "personally guaranteeing" the leases for five prominent stores in New York, Chicago, and Los Angeles.) There are some things that are going wrong for American Apparel right now — like rising cotton prices that are hurting its razor-thin wholesale margins, an immigration raid that forced the company to fire about one-third of its factory workforce — that are not necessarily Charney's fault, but there are plenty of others that definitely are. In any case, a C.E.O. is fundamentally responsible for the direction his company takes. And under Charney, the company has suffered, because his judgment, again and again, has proven to be disastrously poor.
Oh, and maybe do some immigration lobbying. Because money talks.
Following all the bad news — the bad quarterly report for Q1, and the possibly even worse provisional quarterly results for Q2 — American Apparel's share price today has sunk to 1.08, a new historical low for the company.
We called Dov Charney several times today to get his take on all this; he never picked up.
At American Apparel, The Federal Subpoena And SEC Probe Aren't Even The Worst Of It [BNET]
">American Apparel's Future In Doubt [WWD]
American Apparel Inc. Long-Term Investigation Alert: Board Under Investigation [PRLog]
American Apparel Q1 10-Q Form [SEC]
Provisional Results For Second Quarter of 2010 [American Apparel]