American Apparel reports preliminary Q2 financial results

18 Aug '10

5 min read

American Apparel, Inc., a vertically integrated manufacturer, distributor, and retailer of branded fashion basic apparel, announced preliminary financial results for the second quarter ended June 30, 2010. Final second quarter results, including net income and earnings per share will be included with the Form 10-Q for the second quarter ended June 30, 2010.

American Apparel expects to report net sales for the second quarter ended June 30, 2010 in the range of $132 million to $134 million, a decrease versus net sales of $136.1 million for the second quarter ended June 30, 2009. Comparable store sales for stores open at least 12 months declined 16% on a constant currency basis. American Apparel ended the quarter with 279 retail stores, having closed three retail stores and opened two during the second quarter of 2010, as compared to 272 retail stores at the end of the second quarter of 2009.

Gross margin for the second quarter of 2010 is expected to be in the range of 50% to 52%, as compared to 59.0% for the prior year second quarter. Gross margin was negatively impacted by a shift in mix from retail to wholesale net sales, which generate lower margins, and by lower labor efficiency at the Company's production facilities in the second quarter of 2010 compared to the prior year period. The lower labor efficiency was primarily a result of the hiring of over 1,600 net new manufacturing workers during the second quarter of 2010, as well as the impact of an increase in the mix of more complex retail styles produced.

Loss from operations for the second quarter of 2010 is expected to be in the range of $5 million to $7 million, as compared to income from operations of $7.3 million in the second quarter of 2009.

Total debt increased by $28.9 million, to $120.3 million at June 30, 2010 from $91.4 million at March 31, 2010. As of June 30, 2010, the company had approximately $22 million and $4 million of availability under its U.S. and Canadian revolving credit facilities, respectively. Inventory is expected to be in the range of $151 million to $154 million at June 30, 2010, an increase from $138.4 million at March 31, 2010. For the quarter ended June 30, 2010, capital expenditures are expected to be in the range of $4 million to $5 million.

Anticipated Covenant Non-Compliance Beginning September 30, 2010
On June 23, 2010, the Company entered into an amendment of its credit agreement with its second lien lender. The Company expects that as of June 30, 2010, based on the preliminary financial results for the second quarter, it was in compliance with all covenants under the second lien credit agreement.

However, based on the Company's preliminary financial results for the second quarter ended June 30, 2010 and trends occurring in the Company's business after the second quarter and projected for the remainder of 2010, the Company believes that it is probable that as of September 30, 2010, the Company will not be in compliance with the minimum Consolidated EBITDA covenant under the second lien credit agreement.

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