American Apparel, Inc. Reports Third Quarter 2012 Financial Results

American Apparel, Inc. Reports Third Quarter 2012 Financial Results

LOS ANGELES--(BUSINESS WIRE)-- American Apparel, Inc. (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, 2012.

Dov Charney, Chairman and CEO of American Apparel, Inc., stated, "We are pleased with our third quarter results that again show solid growth and continuing momentum in all business segments and major geographies. Significant sales growth allowed us to more than double our EBITDA performance to $13 million for the third quarter of 2012 from $6 million for the third quarter of 2011. Year-to-date our EBITDA performance has improved to $19 million from $5 million for the corresponding period last year (See Graph 1). EBITDA performance for the twelve months ended September 30, 2012 was $28 million or double that reported for the full year in 2011 (See Graph 2). As we improve store productivity and aggressively grow our online and wholesale businesses we expect operating expense leverage will allow us to continue to significantly grow EBITDA performance.

"We continue to make meaningful progress in improving inventory efficiency with a 5% reduction in unit inventory in this quarter. This brings our total unit reduction to over 18% since we began this undertaking in 2011. Although our aggressive approach to reducing inventories has caused a modest amount of margin erosion, improving inventory turns by driving unit sales will improve inventory efficiency, lower carrying costs and reduce working capital requirements over the long-term. These efforts, together with other operating performance improvements will assist in our near-term refinancing efforts."

So far, through November 12, 2012, comparable sales for the Company's retail stores have increased 13%.

Operating Results

Comparing the third quarter 2012 to the corresponding period last year, net sales increased 15% to $162.2 million on a 20% increase in comparable store sales in the retail business, a 6% increase in net sales in the wholesale business and a 1% increase in the average number of stores.

The following delineates the components of the net sales increase for the quarterly period ended September 30, 2012 as compared to the corresponding quarter of the prior year:

Gross profit of $85.2 million for the third quarter of 2012 increased 14% from $75.0 million reported for the third quarter of 2011. Holding foreign currency rates constant to those last year, gross profit in the 2012 third quarter would have been $87.1 million or 16% higher than reported in the 2011 third quarter. Gross margin rate for the 2012 third quarter decreased to 52.5% from 53.2% for the 2011 third quarter. The gross margin reduction was due to planned promotional activities, the effect of "warehouse-type" clearance sales as a part of our overall inventory reduction strategy and the negative impact of the strengthening US dollar on margins from our international segment. Partially offsetting these impacts was a shift in mix to higher margin retail sales in the 2012 third quarter, lower inventory shrink reserves reflecting the benefits of our RFID implementation and lower costs of production in our manufacturing operations.

As a percent of revenue, operating expenses for the quarter decreased 540 basis points to 49.7% from 55.1% for the third quarter 2011. Included in operating expense in the 2012 third quarter was $5.5 million in depreciation expense versus a combined $6.9 million in depreciation expense and store impairment charges in the third quarter of 2011. After excluding the effects of store impairment and depreciation charges between the quarterly periods, there was a 390 basis point decrease in operating expenses as a percent of net revenues. The decrease was primarily due to a reduction in corporate overhead expenses and the fixed cost leverage as a result of increased sales.

Other expense for the third quarter of 2012 was $23.1 million versus $4.4 million in the comparable quarter last year. The $18.7 million increase was primarily due to the increase in the fair market value of our outstanding warrants at September 30, 2012 as compared with September 30, 2011, resulting in a net change in unrealized loss of $19.4 million. As our warrant liability is deemed to be a derivative financial instrument it is marked-to-market based primarily upon the change in our stock price between accounting periods. The warrant liability will not result in a future cash outflow by the Company and classified as equity when the warrants are exercised. Additionally, we incurred higher interest expense due to a higher average balance of debt outstanding and higher interest rates related to the Crystal Credit Agreement.

The third quarter 2012 net loss included an income tax provision of $0.5 million versus $0.2 million in the 2011 third quarter. In accordance with U.S. GAAP, we discontinued recognizing potential tax benefits associated with current operating losses. As of September 30, 2012, we had available federal net operating carry forwards of approximately $73.3 million and unused federal and state tax credits of $16.2 million.

Net loss for the third quarter of 2012 was $19.0 million, or $0.18 per common share, compared to net loss for the third quarter of 2011 of $7.2 million or $0.07 per common share. The 2012 third quarter net loss and net loss per common share includes $13.3 million of expense ($0.13 per common share) associated with a non-cash charge for an increase in the fair value of outstanding warrants. The 2011 third quarter includes an income statement credit of $6.1 million ($0.06 per common share) for a non-cash reduction in the fair value of the same warrant liability. Weighted average shares outstanding were 106.2 million in the third quarter of 2012 versus 102.3 million for the third quarter of 2011.

As of November 1, 2012 there were approximately 106.4 million shares outstanding.

For a reconciliation of consolidated net loss and consolidated adjusted EBITDA, a non-GAAP financial measure, please refer to the Table A attached to this press release.

2012 Outlook Update

For 2012, the Company is updating its adjusted EBITDA outlook to $36 to $40 million from the prior estimate of $36 million to $44 million. The adjustment to our estimate reflects in part a reduction to the business lost as a result of Hurricane Sandy, and additional investments in advertising and store technologies. This outlook assumes net sales of $604 million to $610 million and a gross profit margin of 53% to 54%. Capital expenditures are estimated at approximately $17 million for 2012.

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 October 31, 2012 American Apparel had approximately 10,000 employees and operated 251 retail stores in 20 countries, including the United States, Canada, Mexico, Brazil, United Kingdom, Ireland, Austria, Belgium, France, Germany, Italy, Netherlands, Spain, Sweden, Switzerland, Australia, Japan, South Korea and China. American Apparel also operates a global e-commerce site that serves over 60 countries worldwide at http://www.americanapparel.net. In addition, American Apparel also operates a leading wholesale business that supplies high quality T-shirts and other casual wear to distributors and screen printers.

Safe Harbor Statement

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, results of operations and plans and the Company's prospects and strategies for future growth and cost savings. Such forward-looking statements are based upon the current beliefs and expectations of American Apparel'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: the ability to generate sufficient liquidity for operations and debt service; changes in the level of consumer spending or preferences or demand for the Company's products; increasing competition, both in the U.S. and internationally; the evolving nature of the Company's business; the Company's ability to hire and retain key personnel and the Company's relationship with its employees; suitable store locations and the Company's ability to attract customers to its stores; the availability of store locations at appropriate terms and the Company's ability to identify and negotiate new store locations effectively and to open new stores and expand internationally; effectively carrying out and managing the Company's strategy, including growth and expansion both in the U.S. and internationally; disruptions in the global financial markets; failure to maintain the value and image of the Company's brand and protect its intellectual property rights; declines in comparable store sales and wholesale revenues; financial nonperformance by the Company's wholesale customers; the adoption of new accounting pronouncements or changes in interpretations of accounting principles; seasonality of the business; consequences of the Company's significant indebtedness, including the Company's relationships with its lenders and the Company's ability to comply with its debt agreements, including the risk of acceleration of borrowings thereunder as a result of noncompliance; the Company's ability to generate cash flow to service its debt; the Company's liquidity and losses from operations; the Company's ability to develop and implement plans to improve its operations and financial position; costs of materials and labor, including increases in the price of yarn and the cost of certain related fabrics; the Company's ability to pass on the added cost of raw materials to its wholesale and retail customers; the Company's ability to improve manufacturing efficiency at its production facilities; the Company's ability to effectively manage inventory and inventory reserves; location of the Company's facilities in the same geographic area; manufacturing, supply or distribution difficulties or disruptions; risks of financial nonperformance by customers; investigations, enforcement actions and litigation, including exposure from which could exceed expectations; compliance with or changes in U.S. and foreign government laws and regulations, legislation and regulatory environments, including environmental, immigration, labor and occupational health and safety laws and regulations; costs as a result of operating as a public company; material weaknesses in internal controls; interest rate and foreign currency risks; loss of U.S. import protections or changes in duties, tariffs and quotas and other risks associated with international business including disruption of markets and foreign supply sources and changes in import and export laws; technological changes in manufacturing, wholesaling, or retailing; the Company's ability to upgrade its information technology infrastructure and other risks associated with the systems that are used to operate the Company's online retail operations and manage the Company's other operations; adverse changes in its credit ratings and any related impact on financing costs and structure; general economic and industry conditions, including U.S. and worldwide economic conditions; disruptions due to severe weather or climate change; and other risks detailed in the Company's filings with the Securities and Exchange Commission, including the Company's Reports on Form 10-K for the year ended December 31, 2011. 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.