American Apparel, Inc. (the "Company") (NYSE MKT: APP), a
vertically-integrated manufacturer, distributor, and retailer of
branded fashion basic apparel, announced financial results for its
first quarter ended March 31, 2015.
Highlights
- Initial phase of strategic turnaround
under way, and includes key initiatives in the areas of product
development, e-commerce, retail store productivity, wholesale
optimization, speed to market, cost cutting, brand building and
infrastructure
- Program to clear excess and slow-moving
inventory implemented as part of management’s strategic shift to
change the profile of inventory and actively reduce inventory
levels to improve store merchandising, working capital and
liquidity initiated in the first quarter
- Strengthened the leadership team with
hiring of the Chief Digital Officer, SVP Marketing, VP Demand
Planning and Forecasting and SVP Chief Information Officer.
- Reorganization and restructuring of
critical business processes and platforms to drive performance
improvements initiated in the first quarter
- Loss per share in the first quarter
2015 was $0.15 and included $0.09 of significant charges
- Adjusted EBITDA in the first quarter
2015 was $(7.9) million
- Cash provided by operating activities
in the first quarter 2015 was $3.1 million
- Operating expenses in the first quarter
2015 decreased $8.6 million, or 11%, compared to the same period in
2014
- Inventories in the first quarter 2015
decreased $25 million, or 17%, compared to the same period in
2014
Paula Schneider, Chief Executive Officer,
commented, "American Apparel is an iconic brand with a loyal
customer following and tremendous global brand awareness. The new
executive management team and board of directors is committed to
driving shareholder value and has implemented the initial phase of
a multi-year strategic turnaround plan designed to improve
operating and financial results over the long-term. Key areas of
focus under the plan include infrastructure, operational and
financial planning, expense control, design/product development,
retail store productivity, e-commerce and wholesale optimization,
e-commerce analytics, speed-to-market, and brand building. In the
first quarter, we launched a program to improve the profile of our
inventory by significantly reducing slow-moving merchandise. While
we knew this would have a temporary negative impact on sales and
margins, it should improve store merchandising, working capital and
liquidity going forward. We also launched a merchandising
turnaround plan to start replenishing stores with new styles and
product. Also in the quarter, we began the arduous but vital task
of reorganizing and restructuring a number of critical business
processes, including product development, merchandise planning,
operational and financial planning, inventory management,
procurement, and demand planning. We are dedicated to this process
and in the early stages of the strategic turnaround that will
require time."
Operating Results - First Quarter 2015
Net sales for the first quarter of 2015 decreased 9% to 124.3
million from 137.1 million for the same period in 2014. Excluding
the year over year impact from foreign exchange and stores closed
in 2014 net sales decreased 4% for the same period in 2014. First
quarter comparable store sales were negative 5% for both the first
quarter of 2015 and 2014. Negatively impacting comparable store
sales in the first quarter of 2015 was a strategic initiative to
reduce inventory levels by accelerating the sale of slow-moving
merchandise in the retail stores. This initiative shifted the
merchandise mix in the retail and online stores towards
clearance-related product.
Gross profit for the first quarter of 2015 decreased 34% to
$47.5 million from $72 million for the same period in 2014. The
decrease was related to discounts related to management’s strategic
initiative to reduce inventory levels by accelerating the sale of
slow-moving inventory, the foreign exchange impact of the
strengthening US dollar and lower retail sales. Gross profit,
excluding significant charges, decreased to 42.0% of net sales in
the first quarter of 2015 from 52.5% in the first quarter of
2014.
Operating expense for the first quarter of 2015 decreased 11%
from $79.0 million, compared to $70.3 million for the same period
in 2014 due primarily to lower payroll from our cost reduction
efforts and reduced rent, supplies and miscellaneous
activities.
Net loss for the first quarter of 2015 was $26.4 million or
$0.15 per share, compared to net loss of $5.5 million, or $0.05 per
share for the first quarter of 2014. Results for the first quarter
of 2015 include $9.5 million, or $0.05 per share, related to
significant charges.
EBITDA add backs
Sale of slow-moving inventory program discounts - In the first
quarter management implemented an initiative to accelerate the sale
of slow moving inventory with a graduated sales discount program
through our retail and online sales channels, as well as through
certain off-price channels. The program resulted in a significant
reduction of slow moving inventory. This program is a part of
management’s strategic shift to change the profile of our inventory
and actively reduce inventory levels to improve store
merchandising, working capital and liquidity.
Internal investigation, litigation and professional fees - We
incurred additional legal, litigation and consulting costs related
to various claims and lawsuits and the sale of the slow moving
inventory.
Unrealized Gain/Loss on Change in Fair Value of
Warrants
As of March 31, 2015, Lion Capital LLP held warrants to purchase
24.5 million shares of our common stock, with an exercise price of
$0.66 per share. As the share price of our stock increases, the
fair value of warrant liability recorded on the balance sheet
increases, and we record an expense to recognize the increase in
fair value of the warrant liability. Conversely, when the share
price of our stock decreases, we record a gain to recognize the
related reduction in the fair value of the warrant liability on the
balance sheets. Although the income statement impacts associated
with warrants are appropriate and required under GAAP, they do not
impact our operating performance nor do the credits and charges
have an impact on the cash balances since the liability recorded is
not an obligation that will be settled with cash. Instead, these
warrants will be reclassified to equity when they are
exercised.
Liquidity and Capital Resources
As of March 31, 2015, we had $20.9 million in cash, $35.1
million outstanding on our asset-backed revolving credit facility
and $11.2 million of availability for additional borrowing under
the facility. As of May 6, 2015, we had $5.2 million of
availability for additional borrowings under the facility.
On March 25, 2015, we entered into the Sixth Amendment to the
Capital One Credit Facility ("the Sixth Amendment") which (i)
waived any defaults under the Capital One Credit Facility due to
failure to meet the obligation to maintain the obligation to
maintain the maximum leverage ratio and minimum adjusted EBITDA for
the measurement periods ended December 31, 2014, as defined by the
credit agreement, (ii) waived the obligation to maintain the
minimum fixed charge coverage ratio, the maximum leverage ratio and
minimum adjusted EBITDA required for the twelve months ended March
31, 2015, (iii) included provisions to permit us to enter into the
Standard General Credit Agreement (as defined below), (iv) reset
financial covenants relating to maintaining minimum fixed charge
coverage ratios, maximum leverage ratios, maximum capital
expenditures and minimum adjusted EBITDA, and (v) permitted us to
borrow $15 million under the Standard General Credit Agreement.
On March 25, 2015, one of our subsidiaries borrowed $15 million
under an unsecured credit agreement with Standard General, dated as
of March 25, 2015 (the "Standard General Credit Agreement"). The
Standard General Credit Agreement is guaranteed by us, bears
interest at 14% per annum, and will mature on October 15, 2020. The
proceeds of such loan are intended to provide additional liquidity
to the Company as contemplated by the Nomination, Standstill and
Support Agreement, dated July 9, 2014.
We fulfilled our commitment to make the April 15, 2015 interest
payment of $13.8 million on our senior notes.
Definitions and Disclosures Regarding Non-GAAP Financial
Information
The Company reports and discusses its operating results using
financial measures consistent with generally accepted accounting
principles (GAAP) and believes that this should be the primary
basis for evaluating the Company's performance.
The preceding discussion of the Company's results of operations
includes a discussion of non-GAAP financial measures including the
following: Adjusted Earnings before Interest, Taxes, Depreciation
and Amortization (Adjusted EBITDA); gross profit, excluding
significant charges; operating expenses, excluding significant
charges; and income from operations, excluding significant charges.
These non-GAAP measures should not be viewed as alternatives or
substitutes for GAAP reporting.
The Company believes the presentation of these non-GAAP measures
is useful to investors because they are used by lenders to measure
its ability to service debt, by industry analysts to determine the
market value of the Company and by management to identify cash
available to service debt, make investments, maintain capital
assets and fund ongoing operations and working capital needs.
Additionally, these measures allow management to gauge company
operating performance by isolating the effects of significant
charges.
Adjusted EBITDA is calculated as income or loss from operations
plus income tax provision, interest expense, depreciation and
amortization, share based compensation expense, retail store
impairment, and the effects of significant charges (sale of slow
moving inventory, and internal investigation, litigation and
professional fees), plus or minus unrealized gain or loss on change
in fair value of warrants and foreign currency transaction gain or
loss.
Gross profit, excluding significant charges, is calculated as
gross profit less significant charges related to the sale of slow
moving inventory, and internal investigation, litigation and
professional fees.
Operating expenses excluding a significant charge is calculated
as operating expenses less significant charges related to the
internal investigation, litigation and professional fees.
Loss from operations excluding a significant charge is
calculated as loss from operations less a significant charge
related to the sale of slow moving inventory, and internal
investigation, litigation and professional fees.
About American Apparel
American Apparel, Inc. (the "Company," "we," "us," and "our") is
a vertically-integrated manufacturer, distributor, and retailer of
branded fashion basic apparel based in downtown Los Angeles,
California. As of March 31, 2015, the Company had approximately
10,000 employees and operated 239 retail stores in 20 countries
including the United States and Canada. The Company also operates a
global e-commerce site that serves over 50 countries worldwide at
http://www.americanapparel.com. In
addition, the Company operates a leading wholesale business that
supplies high quality T-shirts and other casual wear to
distributors and screen printers.
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 and liquidity including the impact of
compliance with, and availability under, our debt instruments,
results of operations, and future business plans and expectations,
including statements related to the effect of, and our expectations
with respect to, the operation of our business, inventory and sales
impacts related thereto. Such forward-looking statements are based
upon the current beliefs and expectations of the Company'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: consequences of the termination of Dov
Charney, our former chief executive officer (or the internal
investigation related thereto), including any litigation or
regulatory investigations, any alleged actions of Dov Charney, or
any impact on our sales or brand related thereto; changes in key
personnel, our ability to hire and retain key personnel, and our
relationship with our employees; voting control by our directors,
lenders and other affiliates, including Standard General Group and
Dov Charney; ability to successfully implement our strategic,
operating, financial and personnel initiatives; ability to maintain
the value and image of our brand and protect our intellectual
property rights; general economic conditions, geopolitical events,
other regulatory changes, and inflation or deflation; disruptions
in the global financial markets; the highly competitive and
evolving nature of our industry in the U.S. and internationally;
risks associated with fluctuations and trends of consumer apparel
spending in the U.S.; changes in consumer preferences or demand for
our products; our ability to attract customers to our retail and
online stores; loss or reduction in sales to wholesale or retail
customers or financial nonperformance by our wholesale customers;
seasonality and fluctuations in comparable store sales and
wholesale net sales and associated margins; ability to improve
manufacturing efficiency at our production facilities; changes in
the price of materials and labor, including increases in the price
of raw materials in the global market and minimum wages; ability to
pass on the added cost of raw materials and labor to customers;
ability to effectively manage inventory levels; risks that our
suppliers or distributors may not timely produce or deliver
products; ability to renew leases on economic terms; risks
associated with our facilities being concentrated in one geographic
area; ability to identify new store locations and the availability
of store locations at appropriate terms; ability to negotiate new
store leases effectively; and ability to open new stores and expand
internationally; ability to generate or obtain from external
sources sufficient liquidity for operations and debt service;
consequences of our significant indebtedness, including our
relationship with lenders, ability to comply with debt agreements,
ability to generate cash flow to service our debt, and the risk of
acceleration of borrowings thereunder as a result of noncompliance;
adverse changes in our credit ratings and any related impact on
financial costs and structure; continued compliance with U.S. and
foreign government regulations and legislation, including
environmental, immigration, labor, and occupational health and
safety laws and regulations; loss of U.S. import protections or
changes in duties, tariffs and quotas, risks associated with our
foreign operations and supply sources such as market disruption,
changes in import and export laws, and currency restrictions and
exchange rate fluctuations; litigation and other inquiries and
investigations, including the risks that we, our officers or
directors in cases where indemnification applies, will not be
successful in defending any proceedings, lawsuits, disputes, claims
or audits, and that exposure could exceed expectations or insurance
coverage; tax assessments by domestic or foreign governmental
authorities, including import or export duties on our products and
the applicable rates for any such taxes or duties; ability to
maintain compliance with the exchange rules of the NYSE MKT LLC;
the adoption of new accounting standards or changes in
interpretations of accounting principles; adverse weather
conditions or natural disaster, including those which may be
related to climate change; technological changes in manufacturing,
wholesaling, or retailing; the risk, including costs and timely
delivery issues associated therewith, that information technology
systems changes may disrupt our supply chain or operations and
could impact cash flow and liquidity, and ability to upgrade
information technology infrastructure and other risks associated
with the systems that operate our online retail operations; the
risk of failure to protect the integrity and security of our
information systems and customers' information; 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, as
amended, for the year ended December 31, 2014 and Quarterly Report
on Form 10-Q for the quarter ended March 31, 2015. 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
(in thousands, except per share
amounts)
(unaudited)
Three Months Ended March 31, 2015
2014 Net sales $ 124,263 $ 137,096 Cost of sales
76,801 65,122 Gross profit 47,462 71,974 Selling and
distribution expenses 45,472 54,062 General and administrative
expenses 24,862 24,909 Retail store impairment 58 499
Loss from operations (22,930 ) (7,496 ) Interest expense
9,781 10,039 Foreign currency transaction loss (gain) 625 132
Unrealized gain on change in fair value of warrants (7,508 )
(12,667 ) Other income (141 ) (8 ) Loss before income taxes (25,687
) (4,992 ) Income tax provision 737 474 Net loss $
(26,424 ) $ (5,466 ) Net loss per share, basic and diluted
(a) $ (0.15 ) $ (0.05 ) Weighted-average shares outstanding, basic
and diluted (a) 176,259 111,554 (a) The dilutive
impact of incremental shares is excluded from loss position in
accordance with U.S. generally accepted accounting principles.
AMERICAN APPAREL, INC. AND
SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31, 2015 December 31, 2014 ASSETS
(unaudited) Current assets: Cash $ 20,914 $ 8,343
Trade accounts receivable, net of allowances 21,915 25,298 Prepaid
expenses and other current assets 13,258 16,442 Inventories, net
122,753 147,578 Income taxes receivable and prepaid income taxes
345 648 Deferred income taxes, net of valuation allowance 677
681
Total current assets 179,862 198,990
Property and equipment, net 44,168 49,317 Deferred income taxes,
net of valuation allowance 2,256 2,194 Other assets, net 44,999
43,888
TOTAL ASSETS $ 271,285 $ 294,389
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities: Cash overdraft $ 2,167 $ 5,714
Revolving credit facilities and current portion of long-term debt
35,091 34,312 Accounts payable 33,582 35,554 Accrued expenses and
other current liabilities 63,887 61,369 Fair value of warrant
liability 11,731 19,239 Income taxes payable 1,881 2,063 Deferred
income tax liability, current 1,215 1,045 Current portion of
capital lease obligations 3,007 2,978
Total
current liabilities 152,561 162,274 Long-term debt, net
of unamortized discount 233,621 217,388 Capital lease obligations,
net of current portion 1,217 1,982 Deferred tax liability 191 200
Deferred rent, net of current portion 12,461 13,346 Other long-term
liabilities 15,540 14,715
TOTAL LIABILITIES
415,591 409,905
STOCKHOLDERS' DEFICIT
Common stock 18 18 Additional paid-in capital 218,866 218,779
Accumulated other comprehensive loss (9,368 ) (6,915 ) Accumulated
deficit (351,665 ) (325,241 ) Less: Treasury stock (2,157 ) (2,157
)
TOTAL STOCKHOLDERS' DEFICIT (144,306 ) (115,516 )
TOTAL
LIABILITIES AND STOCKHOLDERS' DEFICIT $ 271,285 $
294,389
AMERICAN APPAREL, INC. AND
SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
(in thousands)
(unaudited)
Three Months Ended March 31, 2015
2014 CASH FLOWS FROM OPERATING ACTIVITIES Cash
received from customers $ 127,242 $ 136,815 Cash paid to suppliers,
employees and others (123,460 ) (130,984 ) Income taxes paid (158 )
(403 ) Interest paid (671 ) (1,521 ) Other 129 8 Net
cash provided by operating activities 3,082 3,915
CASH FLOWS FROM INVESTING ACTIVITIES Capital
expenditures (1,120 ) (3,958 ) Proceeds from sale of fixed assets 0
30 Net cash used in investing activities (1,120 )
(3,928 )
CASH FLOWS FROM FINANCING ACTIVITIES Cash
overdraft (3,547 ) (3,989 ) Repayments of expired revolving credit
facilities, net 0 (14,557 ) Borrowings under current revolving
credit facilities, net 781 0 Borrowings (repayments) of term loans
and notes payable 14,997 (50 ) Payments of debt issuance costs (323
) (372 ) Net proceeds from issuance of common stock 0 28,554
Payment of payroll statutory tax withholding on share-based
compensation associated with issuance of common stock 0 (125 )
Repayments of capital lease obligations (736 ) (137 ) Net cash
provided by financing activities 11,172 9,324
Effect of foreign exchange rate on cash (563 ) (1,304 ) Net
increase in cash 12,571 8,007 Cash, beginning of period 8,343
8,676 Cash, end of period $ 20,914 $ 16,683
AMERICAN APPAREL, INC. AND
SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
(in thousands)
(unaudited)
Three Months Ended March 31, 2015
2014 RECONCILIATION OF NET LOSS TO NET CASH
PROVIDED BY OPERATING ACTIVITIES Net loss $ (26,424 ) $ (5,466
) Depreciation and amortization of property and equipment, and
other assets 5,332 6,715 Retail store impairment 58 499 Share-based
compensation expense 103 1,115 Unrealized gain on change in fair
value of warrants (7,508 ) (12,667 ) Amortization of debt discount
and deferred financing costs 742 597 Accrued interest paid-in-kind
1,062 1,030 Foreign currency transaction loss 625 132 Allowance for
inventory shrinkage and obsolescence (1,075 ) 121 Bad debt expense
77 139 Deferred income taxes 24 0 Deferred rent (912 ) (2,222 )
Changes in cash due to changes in operating assets and liabilities:
Trade accounts receivables 2,902 (420 ) Inventories 23,895 5,445
Prepaid expenses and other current assets 2,853 2,288 Other assets
(1,816 ) (235 ) Accounts payable (1,636 ) 2,424 Accrued expenses
and other liabilities 4,701 4,349 Income taxes receivable / payable
79 71 Net cash provided by operating activities $
3,082 $ 3,915
AMERICAN
APPAREL, INC. AND SUBSIDIARIES BUSINESS SEGMENT
INFORMATION
(in thousands)
(unaudited)
The following table presents key financial
information for our reportable segments before unallocated
corporate expenses:
Three Months Ended March 31, 2015 U.S.
Wholesale U.S. Retail
Canada International
Consolidated Total net sales $ 49,037 $ 37,302
$ 9,311 $ 28,613 $ 124,263 Gross profit 9,318 20,098
2,821 15,225 47,462 Income (loss) from segment operations 2,749
(7,288 ) (2,231 ) (2,789 ) (9,559 ) Depreciation and amortization
2,190 2,243 289 610 5,332 Capital expenditures 570 227 269 54 1,120
Retail store impairment 0 58 0 0 58 Deferred rent expense (benefit)
14 (547 ) (33 ) (346 ) (912 )
Three Months Ended March
31, 2014 U.S. Wholesale U.S. Retail
Canada International
Consolidated Total net sales $ 48,737 $ 42,465 $ 10,460 $
35,434 $ 137,096 Gross profit 17,305 26,766 5,609 22,294 71,974
Income (loss) from segment operations 9,720 (4,714 ) (345 ) (899 )
3,762 Depreciation and amortization 2,178 3,114 401 1,022 6,715
Capital expenditures 1,205 1,139 112 1,502 3,958 Retail store
impairment 0 49 0 450 499 Deferred rent benefit (447 ) (1,632 ) (48
) (95 ) (2,222 )
AMERICAN APPAREL, INC. AND
SUBSIDIARIES
BUSINESS SEGMENT INFORMATION
(continued)
(in thousands)
(unaudited)
Three Months Ended March 31, Reconciliation to
Loss before Income Taxes 2015 2014
Consolidated (loss) income from operations of reportable
segments $ (9,559 ) $ 3,762 Unallocated corporate expenses (13,371
) (11,258 ) Interest expense (9,781 ) (10,039 ) Foreign currency
transaction loss (625 ) (132 ) Unrealized gain on change in fair
value of warrants 7,508 12,667 Other income 141
8 Consolidated loss before income taxes $
(25,687 ) $ (4,992 )
Three Months Ended March
31, Total net sales 2015 2014
U.S. Wholesale Wholesale $ 37,710 $ 38,237 Online consumer
11,327 10,500 Total $ 49,037 $
48,737
U.S. Retail $ 37,302 $ 42,465
Canada Wholesale $ 1,793 $ 1,909 Retail 6,506
7,759 Online consumer 1,012 792 Total $
9,311 $ 10,460
International Wholesale
$ 1,401 $ 1,800 Retail 23,081 29,678 Online consumer 4,131
3,956 Total $ 28,613 $ 35,434
Consolidated Wholesale $ 40,904 $ 41,946 Retail
66,889 79,902 Online consumer 16,470 15,248
Total $ 124,263 $ 137,096
Calculation and Reconciliation of Consolidated Adjusted
EBITDA
(in thousands)
(unaudited)
Three Months Ended March 31,
2015 2014 Net Loss $ (26,424 )
$ (5,466 ) Income tax provision 737 474 Interest expense
9,781 10,039 Depreciation and amortization 5,332 6,715 Unrealized
gain on change in fair value of warrants (7,508 ) (12,667 )
Share-based compensation expense 103 1,125 Foreign currency
transaction loss and other expense 484 124 Retail store impairment
58 499 Legal, Litigation and Consulting fees incurred for various
lawsuits and claims 1,466 0 Effect of sales discounting on slow
moving inventory 8,045 0
Consolidated Adjusted EBITDA $ (7,926 ) $ 843
Significant Charges
The table below summarizes the impact to our earnings of certain
costs which we consider to be significant and presents gross
profit, operating expenses and income from operations an
as-adjusted basis, together with the reconciliation to the most
directly comparable GAAP measure (in thousands, except for
percentages; unaudited):
Three Months Ended March 31, 2015
% of Net Sales 2014
% of Net Sales Gross profit $ 47,462 38.2 % $
71,974 52.5 % Sales of slow moving inventory 8,045 0
Gross profit - adjusted (Non-GAAP) $ 55,507
42.0 % $ 71,974 52.5 % Operating expenses $ 70,334
56.6 % $ 78,971 57.6 %
Internal investigation, litigation and
professional fees
(1,466 ) 0 Operating expenses - adjusted
(Non-GAAP) $ 68,868 55.4 % $ 78,971 57.6 %
Loss from operations $ (22,930 ) (18.5 )% $ (7,496 ) (5.5 )%
Sales discounting on slow moving
inventory
8,045 0
Internal investigation, litigation and
professional fees
1,466 0 Loss from operations - adjusted
(Non-GAAP) $ (13,419 ) (11.1 )% $ (7,496 ) (5.5 )%
ICRJohn Rouleau(203) 682-8342orAmerican Apparel, Inc.Hassan
NathaExecutive Vice President and Chief Financial Officer(213)
488-0226orMedia Contact:ICRAlecia Pullman(203) 682-8200