Press Release:
American Apparel, Inc. Reports Third Quarter Financial Results
LOS ANGELES–(BUSINESS WIRE)–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 third quarter ended September 30, 2014.
Financial Highlights for the Third Quarter of 2014
- Loss per share was $0.11 compared to $0.01 in the third quarter of 2013
- Adjusted EBITDA was $13.5 million, an increase of 38% against $9.8 million for the same period in 2013
- Income from operations, excluding unusual and non-recurring expenses, was $4.8 million, compared to $1.6 million in the same period for 2013
- Operating expenses, excluding unusual and non-recurring expenses, decreased $5.7 million, or 7%, for the quarter, compared to the same period in 2013
- Inventories decreased $18.4 million, or 11%, from December 31, 2013
Scott Brubaker, Interim Chief Executive Officer, commented, “The strength of American Apparel’s operating model is evident in the 38% year-over-year improvement in adjusted EBITDA. We are proud to have achieved this growth during a period of company-wide operational restructuring and in a challenging macro-economic environment for retailers. I am encouraged by these results, and am optimistic about the future prospects of the business.”
Operating Results
Net sales for the third quarter of 2014 decreased $8.7 million, or 5%, compared to the same period in 2013. Lower retail and online sales were partially offset by increased wholesale sales. Comparable retail and online sales decreased by 7% and 5%, respectively, while wholesale sales increased by 2% over the same period in 2013.
Gross profit for the third quarter of 2014 decreased 2% to $82.5 million from $84.6 million for the same period in 2013, primarily due to the lower retail and online sales volume. Gross profit, excluding unusual and non-recurring expenses increased to 53.5% of net sales in the third quarter of 2014 from 52.2% in the third quarter of 2013, primarily due to a decrease in freight costs associated with the completion of our transition to the La Mirada distribution center in late 2013, partially offset by an increase in retail store sales discounts.
Operating expense for the third quarter of 2014 was $92.6 million, compared to $89.1 million for the same period in 2013. Excluding the effects of unusual and non-recurring costs related to the settlement of certain customs duties assessments and contingencies, the internal investigation of Dov Charney and employment settlement and severance costs, operating expenses decreased $5.7 million, or 7%, over the same period in 2013. The decrease in costs was due to lower payroll and lower costs related to our advertising and promotional activities from our ongoing cost reduction initiatives.
Net loss for the third quarter of 2014 was $19.2 million or $0.11 per share, compared to net loss of $1.5 million, or $0.01 per share for the third quarter of 2013. Results for the third quarter of 2014 include approximately $14.9 million, or $0.09 per share, related to unusual and non-recurring costs. Results for the third quarter of 2013 include approximately $6.1 million, or $0.05 per share, related to unusual and non-recurring costs.
Unusual and Non-Recurring Costs
Customs settlements and contingencies – In 2012, German customs issued retroactive punitive customs duty assessments of $5.4 million on certain containers of goods imported from 2009-2011, including interest and penalties. Although the Company has continued to dispute the special assessments with the German authorities and the European Commission, during the third quarter of 2014, the German authorities demanded, and we paid, $4.4 million in the third quarter of 2014 and the final balance of $85,000 in the fourth quarter of 2014. Additionally, during the third quarter of 2014 we incurred additional costs related to other customs settlements and contingencies.
Internal Investigation – On June 18, 2014, the Board of Directors (the “Board”) voted to replace Mr. Charney as Chairman of the Board, suspended him, and notified him of its intent to terminate his employment as our President and CEO for cause. In connection with the Nomination, Standstill and Support agreement, dated July 9, 2014, with Standard General and Mr. Charney, the Board formed a new special committee for the purpose of overseeing the continuing investigation into the alleged misconduct by Mr. Charney. The suspension and subsequent internal investigation resulted in substantial legal and consulting fees of $5.3 million in the third quarter of 2014.
Employment Settlements and Severance – In the third quarter of 2014, we entered into settlements of certain previously disclosed employment-related claims. Additionally, during 2014, we experienced unusually high employee severance costs. These settlements and severance accruals resulted in additional charges totaling approximately $3.1 million during the third quarter of 2014.
Unrealized Gain on Change in Fair Value of Warrants
As of September 30, 2014, Lion Capital LLP held warrants to purchase 24.5 million shares of the Company’s common stock, with an exercise price of $0.66 per share. As the share price of the Company’s stock increases, the fair value of the warrant liability recorded on the balance sheets increases, and it records an expense to recognize the increase in the fair value of the warrant liability. Conversely, when the share price of the Company’s stock decreases, the Company records 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 the warrants are appropriate and required under GAAP, they do not impact the operating performance of the Company nor do the credits and charges have an impact on 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 September 30, 2014, we had $9.4 million in cash, $27.0 million outstanding on our $50.0 million asset-backed revolving credit facility and $20.4 million of availability for additional borrowings under the facility. As of November 3, 2014, we had $8.4 million of availability for additional borrowings under the facility.
We and Standard General Group (“Standard General”) are in the process of negotiating a $15 million unsecured credit agreement between one or more entities affiliated with Standard General and one or more of our foreign subsidiaries as borrowers. We expect to enter into this credit agreement in the fourth quarter of 2014.
Company Outlook
The Company reaffirms previously issued guidance that Adjusted EBITDA will be in the range of $40 million to $45 million for the twelve months ending December 31, 2014.
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 our 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 unusual and non-recurring expenses; operating expenses, excluding unusual and non-recurring expenses; and income from operations, excluding unusual and non-recurring expenses. 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 the Company’s 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 one-time unusual and non-recurring revenues or expenses.
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 unusual and non-recurring charges and costs (including unusual and non-recurring charges related to certain customs settlements and contingencies, Mr. Charney’s suspension and internal investigation, and employment settlements and severance), plus or minus unrealized gain or loss on change in fair value of warrants and foreign currency transaction gain or loss.
Gross profit, excluding unusual and non-recurring expenses, is calculated as gross profit less unusual and non-recurring charges and costs such as changes to supply chain operations, relating to costs in our transition to the La Mirada warehouse in 2013, and certain custom settlements and contingencies.
Operating expenses excluding unusual and non-recurring costs is calculated as operating expenses less unusual and non-recurring charges and costs, such as certain customs settlements and contingencies, internal investigation costs, employment settlement and severance costs and costs related to changes to the supply chain operations.
Income from operations excluding unusual and non-recurring expenses is calculated as loss from operations less unusual and non-recurring charges and costs, such as certain customs settlements and contingencies, internal investigation costs, employment settlement and severance costs and costs related to changes to the supply chain operations.
About American Apparel
American Apparel is a vertically-integrated manufacturer, distributor, and retailer of branded fashion basic apparel based in downtown Los Angeles, California. As of September 30, 2014, American Apparel had approximately 10,000 employees and operated 245 retail stores in 20 countries including the United States and Canada. American Apparel also operates a global e-commerce site that serves over 60 countries worldwide at https://www.americanapparel.com. In addition, American Apparel operates a leading wholesale business that supplies high quality T-shirts and other casual wear to distributors and screen printers.
