American Apparel, Inc. Reports Second Quarter 2013 Financial Results and Updates Outlook for Full Ye

American Apparel, Inc. Reports Second Quarter 2013 Financial Results and Updates Outlook for Full Year 2013

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 second quarter ended June 30, 2013.

Financial Performance Highlights for the Second Quarter 2013

• Net sales increased 9% to $162.2 million on a 7% increase in comparable store sales and a 16% increase in wholesale net sales

• Adjusted EBITDA improved by $0.3 million to $7.9 million from $7.6 million in the second quarter 2012

• The Company is updating its 2013 Adjusted EBITDA outlook to a range of $46 million to $51 million

John Luttrell, Chief Financial Officer of American Apparel, Inc. stated, "Today we reported Adjusted EBITDA of $7.9 million vs. $7.6 million reported in the second quarter of 2012. We saw a healthy increase in sales across all three business channels, but our second quarter Adjusted EBITDA performance was negatively affected by approximately $2.9 million of costs associated with the transition to a new distribution center and other performance measures we took to improve our distribution operations (see "Changes in Supply Chain Operations"). As a result, we have adjusted our outlook for the year to reflect these factors and now estimate Adjusted EBITDA to be in the range of $46 million to $51 million as compared to our prior estimate of $47 million to $54 million."

Dov Charney, Chairman and CEO of American Apparel, Inc. stated: "We are pleased with the continued strong sales performance in all three business channels, particularly in light of the sales we believe we lost as a result of the supply chain issues we faced this quarter. We are, however, executing at the store level and in our manufacturing facility, and customer demand of our offering remains strong. While the transition to a new distribution center and other supply chain initiatives negatively impacted the quarter, we are committed to making the necessary investments to reduce costs and improve our operating efficiency over the longer-term. These initiatives will strengthen our supply chain and better position us to achieve our long-term objective of a double-digit EBITDA margin. Finally, for the first week of August we have seen positive comparable store sales momentum in our stores."

Changes in Supply Chain Operation

During the second quarter, we implemented several supply chain initiatives designed to reduce costs and improve distribution over the longer-term. These initiatives include the following: i) we are currently in the process of transitioning our distribution activities to an automated facility located in La Mirada, California, ii) we closed our distribution center in Montreal, Canada and, iii) we closed an ancillary warehouse location in Los Angeles, CA. These activities are scheduled to be complete in the third quarter of 2013, and have resulted in additional costs charged to cost of sales and selling expenses in our statements of operations for both the second quarter and first six months of 2013. In addition, we believe resulting shipping disruptions to both our stores and customers may have negatively impacted sales.

We estimate the incremental costs incurred in connection with these activities were as follows for the periods indicated ($ in Millions):

Although we anticipate a third quarter completion date, no assurance can be given that the implementation will not be delayed and if so, there will also be additional transition costs.

John Luttrell continued, "Information systems integration issues related to our new distribution facility were the primary causes for the added costs incurred in the second quarter. Start-up integration issues with the various information systems supporting the supply chain operation prevented our cut-over to the new facility and forced us to maintain added staffing. We also incurred added shipping and related costs, as a result of the delays. We believe that these issues will be corrected in the third quarter, when the transition process is expected to be completed. However, in the event there are further integration issues or if there are systems related disruptions in the future, we will most likely incur additional costs and reduced sales. Our updated 2013 Adjusted EBITDA outlook includes additional transition costs in the third quarter and it assumes completion of the transition in the same quarter. When this program is fully operational, we continue to expect to see cost reductions of $3.5 million to $4.5 million on an annual basis from the costs we incurred for these activities in 2012."

Explanation of Two Significant Non Operating Items

There were two non-operating items that substantially impacted our net loss for the second quarter.

These items were the following:

(1) Lion Capital holds 21.6 million warrants at $0.75 per share and as our share price increases the warrants become more valuable and we have to book an expense to recognize the increase in value of warrants. Conversely, when our share price decreases we have to book a gain to recognize a decrease in the value of warrants. Therefore, as our share price decreased during the second quarter of 2013, we booked a non-cash gain of $5.5 million as a result of a mark-to-market adjustment to our warrants. 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. Also, they do not represent obligations that will be settled with cash. Instead, these warrants will be reclassified to equity when exercised.

(2) We recorded a charge of $32.1 million due to our April 2013 refinancing activities, whereby we used the net proceeds from the private offering of $206 million in senior secured notes, along with borrowings from our new revolving credit facility with Capital One Leverage Finance Corp. to repay and terminate our existing loan and credit agreements with Lion Capital LLP and Crystal Financial LLC, respectively. In connection with this transaction, we wrote off deferred financing costs and debt discounts on the loans that were retired and we paid a termination fee of $2.4 million to Crystal Financial LLC for the early termination of their loan commitment. Thus, of the $32.1 million charge, $29.7 million did not represent a cash requirement to the Company.

Excluding these non-operating items from both periods, our net loss would have been $10.9 million in the second quarter 2013 compared to $13.9 million in the second quarter 2012.

Operating Results - Second Quarter 2013

Comparing the second quarter 2013 to the corresponding period last year, net sales increased 9% to $162.2 million on a 7% increase in comparable store sales in the retail and online business and a 16% increase in net sales in the wholesale business. The following delineates the components of the increases for the quarterly periods ended June 30, 2013 and as compared to the corresponding quarter of the prior year:

⁽¹⁾ Comparable store sales have been adjusted to exclude impact of extra leap-year day in 2012.

Gross profit of $83.9 million for the second quarter 2013 represented an increase of 6% from $79.0 million reported for the second quarter 2012. Gross margin decreased from 52.9% for the quarter ended June 30, 2012 to 51.7% for the quarter ended June 2013. The decrease in the gross margin was primarily due to stronger growth in our wholesale business, which has lower margins than our retail and online channels, and transition costs associated with our supply chain improvement efforts as discussed above.

Operating expenses of $85.8 million for the second quarter 2013 represented an increase of 8% from $79.7 million for the second quarter 2012. As a percent of revenue, operating expenses decreased from 53.4% for the quarter ended June 2012 to 52.9% for the quarter ended June 2013. The fixed cost leverage as a result of increased sales was somewhat offset by higher distribution labor and associated costs estimated at $2.6 million due to the changes to our supply chain operations as discussed above. In addition, we incurred $0.7 million in higher share-based compensation expenses and $.5 million in higher travel and supply expenses related to store improvement activities.

Adjusted EBITDA in the second quarter of 2013 improved to $7.9 million from $7.6 million in the second quarter of 2012. For a reconciliation of consolidated Adjusted EBITDA, a non-GAAP financial measure, to consolidated net income or loss, as applicable, please refer to the Table A.

Other expense for the second quarter 2013 was $35.0 million as compared with $13.4 million in the prior year quarter. The $21.6 million change in non-operating expenses was primarily the result of a loss on extinguishment of debt of $32.1 million as a result of our April 2013 refinancing. This was offset by an unrealized gain on the change in fair value of our warrants of $5.5 million for the quarter ended June 2013 as compared with an unrealized loss of $1.4 million in the prior year quarter.

Income tax provision in the second quarter 2013 was $0.6 million versus $1.1 million in the 2012 second quarter. In accordance with U.S. GAAP, we have discontinued recognizing potential tax benefits associated with current operating losses. As of June 30, 2013, we had available federal net operating loss carry forwards of approximately $95.6 million and unused federal and state tax credits of $24.5 million.

Net loss for the second quarter of 2013 was $37.5 million, or $0.34 per common share, compared to net loss for the second quarter of 2012 of $15.3 million, or $0.14 per common share. The 2013 second quarter includes a non-cash/non-operating gain of $5.5 million ($0.05 per common share) associated with a decrease in the fair value of outstanding warrants and non-operating loss of $32.1 million ($0.29 per common share) associated with the extinguishment of debt. Of the $32.1 million debt extinguishment charge, $29.7 million was a non-cash expense and $2.4 million was a cash expense. The 2012 second quarter includes a non-cash/non-operating charge of $1.4 million ($0.01 per common share) for the increase in the fair value of warrants. Excluding the non-cash and non-operating items from both periods, the adjusted net loss for the second quarter 2013 would have been $10.9 million, or $0.10 per share, compared to $13.9 million, or $0.13 per share, in the second quarter 2012.

Fully-diluted weighted average shares outstanding were 110.2 million in the second quarter of 2013 versus 105.9 million for the second quarter of 2012. As of August 1, 2013 there were approximately 110.3 million shares outstanding.

Capital expenditures during the second quarter of 2013 increased by $2.4 million to $6.3 million as compared with $3.9 million in the 2012 quarter as we substantially completed our RFID implementation activities and continued to invest in equipment for our new distribution center.

2013 EBITDA and Sales Guidance

For 2013, we updated our Adjusted EBITDA guidance to be in the range of $46 million to $51 million. This outlook assumes net sales between $652 million and $664 million. Raw material costs are estimated at current prices and foreign currency exchange rates are estimated to remain at current levels.

For a reconciliation of the forecasted guidance range of adjusted EBITDA to net loss, please refer to Table A.

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 August 1, 2013 American Apparel had approximately 10,000 employees and operated 245 retail stores in 20 countries, including the United States, Canada, Mexico, Brazil, United Kingdom, Ireland, Austria, Belgium, France, Germany, Israel, 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, expectations, goals and strategies for future growth, operating improvements and cost savings, including the costs and benefits of supply chain improvement efforts. Also statements regarding the timing of any of the foregoing efforts are forward looking statements including the timing of the transition to the Company's new supply chain operation. 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 and the transition of supply chain activities to the Company's new facility; 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 including those associated with its supply chain; 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 including those associated with transition activities related to the Company's new distribution center; 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; 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 Report on Form 10-K for the year ended December 31, 2012 and Form 10-Q for the quarter ended June 30, 2013. 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.