American Apparel Reports Third Quarter 2009 Financial Results
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- American Apparel Reports Third Quarter 2009 Financial Results
-- Third quarter net sales of $150.3 million, a decrease of 2.9% from the
third quarter of 2008.
-- Third quarter diluted earnings per share of $0.05 vs. $0.03 in the prior
year third quarter ($0.16 before merger related share based compensation
expense of $13.2 million, or $0.13 per share)
LOS ANGELES--(BUSINESS WIRE)-- American Apparel, Inc. (NYSE Amex: APP), a vertically integrated manufacturer, distributor, and retailer of branded fashion basic apparel, today announced its financial results for the third quarter of 2009 and for the nine months ended September 30, 2009.
American Apparel reported net sales for the third quarter of 2009 of $150.3 million, a 2.9% decrease from net sales of $154.8 million for the quarter ended September 30, 2008. Total retail sales increased 3.7% to $101.0 million for the third quarter of 2009 from $97.4 million for the prior year third quarter, with comparable store sales for stores open at least 12 months decreasing 16% on a constant currency basis. American Apparel ended the third quarter of 2009 with 276 stores, having opened 4 net new stores in the quarter, and 50 net new stores during the last twelve months. Total wholesale sales declined 14.5% to $40.2 million for the third quarter of 2009 from $47.0 million in the third quarter of 2008. Online consumer sales declined to $9.1 million from $10.4 million in the prior year third quarter, a decrease of 12.5%.
Gross margin for the third quarter of 2009 was 58.1% as compared to 49.1% for the prior year third quarter. The gross margin in the third quarter of 2008 was negatively impacted by $13.2 million in share based compensation expense relating to the award of approximately 1.9 million shares of stock to manufacturing employees during the third quarter of 2008, granted pursuant to the 2007 merger between American Apparel, Inc. (formerly Endeavor Acquisition Corp.) and American Apparel, Inc., a California corporation ("Old American Apparel"). The net impact of the share based compensation expense was to negatively impact gross margin by 850 basis points in the period. The balance of the increase in gross margin was driven by the favorable shift in mix towards greater retail sales, as wholesale sales declined to 26.7% from 30.4% of total net sales a year ago. The improvement in gross margin was somewhat offset by unfavorable currency shifts due to the appreciation of the US dollar against foreign currencies compared to the third quarter last year.
Operating expenses, including selling, warehouse and distribution, and general and administrative expenses, increased to 50.6% of net sales for the third quarter of 2009, compared to 44.7% for the third quarter of 2008. Operating expenses increased due to higher payroll, rent, occupancy, and depreciation expenses related to the greater number of retail stores in operation in the period versus the same period last year. Operating expenses as a percentage of net sales increased given the negative comparable store sales performance for the quarter, and the decreases in wholesale and online consumer sales. Pre-opening expenses for retail stores were $0.4 million in the third quarter of 2009, versus $4.3 million in the prior year third quarter.
Operating income for the third quarter of 2009 was $11.2 million. This compares to $6.8 million in the third quarter of 2008, which included the merger related share based compensation expense of $13.2 million. Operating margin for the third quarter of 2009 was 7.5% versus 4.4% for the third quarter of 2008.
Interest expense for the third quarter of 2009 increased to $5.4 million versus $3.2 million for the same period last year. The increase in interest expense was largely due to the amortization of debt discount and deferred financing costs, and a higher weighted average interest rate on outstanding borrowings by the Company, as compared to in the third quarter of 2008.
The Company's income tax provision for the third quarter of 2009 was $3.3 million, as compared to $0.9 million in the third quarter of 2008. The Company's effective tax rate increased to 44.5%, compared to 26.9% in the third quarter of 2008.
Net income for the third quarter of 2009 was $4.2 million, or $0.05 per diluted common share. This compares to $2.3 million, or $0.03 per diluted common share, for the third quarter of 2008. Last year's earnings per diluted share was negatively impacted by $0.13 due to the after-tax impact of the $13.2 million merger related share based compensation expense. Please see Table B for more background on the impact of the merger related share based compensation expense on the 2008 results.
During the third quarter, the Company reduced the drawn balance on its revolving credit facilities by approximately $18.5 million, to $32.7 million at the end of the period from $51.2 million at the end of the second quarter, primarily from cash flow from operations. As of September 30, 2009, the Company had $23.0 million of availability under its U.S. revolving credit facility. Total debt decreased by $14.7 million, to $104.6 million at the end of the third quarter, down from $119.3 million at the end of the second quarter. Total inventories were $152.6 million at the end of the third quarter, a reduction of $6.6 million from $159.3 million at the end of the second quarter.
Dov Charney, Chairman and Chief Executive Officer, stated: "While we are pleased that we were able to deliver a profit in the third quarter in spite of the difficult environment, I believe the successes we had in terms of streamlining our inventories and significantly reducing our indebtedness will prove particularly valuable as we move forward. While it is still very early, we are encouraged by some indications pointing to the beginning of momentum in our sales. We believe that for the long term, our business remains on track as we continue to expand our brand's presence both in the U.S. and internationally."
Outlook
As of October 31, 2009, American Apparel had opened 23 new store locations since the beginning of the year and closed 5 locations. The Company currently has 4 signed leases for new retail stores in its store pipeline, with 3 of those locations likely to open before the end of 2009.
Management continues to expect the previously communicated financial guidance for 2009: net sales in the range of $540 to $555 million, income from operations in the range of $25 to $30 million, and a net (loss) income in the range of ($1) to $4 million. These estimates are before any non-cash share based compensation expense from any equity awards that may be made to employees under the Company's 2007 Performance Equity Plan.
A conference call will be held today at 9:00 a.m. ET to discuss the third quarter results. A live webcast of the conference call will be accessible through the company's website under the investor relations section at http://investors.americanapparel.net.
Please refer to the tables attached to this press release:
-- Table A presents a calculation and reconciliation of consolidated net
income (loss) to unaudited Consolidated Adjusted EBITDA for American
Apparel, Inc. and Subsidiaries for the three months ended September 30,
2009 and 2008 and for the nine months ended September 30, 2009 and 2008.
-- Table B presents certain financial information that excludes the impact
of the third quarter 2008 stock award of approximately 1.9 million
shares of stock to manufacturing employees and the related share based
compensation expense, with reconciliations to the most directly
comparable GAAP measure for the three and nine months ended September
30, 2008.
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, 2009, American Apparel employed approximately 9,700 people and operated over 275 retail stores in 20 countries, including the United States, Canada, Mexico, Brazil, United Kingdom, Austria, Belgium, France, Germany, Ireland, Italy, the Netherlands, Spain, Sweden, Switzerland, Israel, Australia, Japan, South Korea, and China. American Apparel also operates a leading wholesale business that supplies high quality T-shirts and other casual wear to distributors and screen printers. In addition to its retail stores and wholesale operations, American Apparel operates an online retail e-commerce website at http://www.americanapparel.com.
Safe Harbor Statement
This press release may contain forward-looking statements which are based upon the current beliefs and expectations of our 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: changes in the level of consumer spending or preferences or demand for our products; increasing competition; our ability to hire and retain key personnel and our relationship with our employees; suitable store locations and our ability to attract customers to our stores; effectively carrying out and managing our growth strategy; failure to maintain the value and image of our brand and protect our intellectual property rights; declines in comparable store sales; seasonality; consequences of our significant indebtedness, including our ability to comply with our debt agreements, generate cash flow to service our debt; our ability to extend, renew or refinance our existing debt; costs of materials and labor; location of our facilities in the same geographic area; manufacturing, supply or distribution difficulties or disruptions; risks of financial nonperformance by customers; investigations, enforcement actions and litigation; compliance with or changes in 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; our ability to upgrade our information technology infrastructure and other risks associated with the systems that operate our online retail operations; general economic and industry conditions, including worsening U.S. and foreign economic conditions and turmoil in the financial markets; and other risks detailed in our filings with the Securities and Exchange Commission, including our 2008 Annual Report on Form 10-K/A. Our 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
(Amounts in thousands, except per share amounts)
(unaudited)
Three Months Ended September 30, Nine Months Ended September
30,
2009 2008 2009 2008
NET SALES $ 150,318 $ 154,801 $ 400,663 $ 399,406
COST OF SALES 63,033 78,725 167,768 184,395
GROSS PROFIT 87,285 76,076 232,895 215,011
OPERATING 76,071 69,234 218,277 188,176
EXPENSES
INCOME FROM 11,214 6,842 14,618 26,835
OPERATIONS
INTEREST AND
OTHER (INCOME)
EXPENSE
Interest 5,371 3,237 17,846 10,274
expense
Foreign
currency (1,844 ) 1,049 (2,684 ) 1,047
transaction
(gain) loss
Other (income) 195 (636 ) (291 ) 133
expense
TOTAL INTEREST
AND OTHER 3,722 3,650 14,871 11,454
(INCOME)
EXPENSE
INCOME BEFORE 7,492 3,192 (253 ) 15,381
INCOME TAXES
INCOME TAX 3,332 859 1,684 5,153
PROVISION
NET INCOME $ 4,160 $ 2,333 $ (1,937 ) $ 10,228
Earnings per
common share - $ 0.06 $ 0.03 $ (0.03 ) $ 0.15
basic
Earnings per
common share - $ 0.05 $ 0.03 $ (0.03 ) $ 0.15
diluted
Weighted
average common
shares 71,034 70,257 71,024 69,055
outstanding -
basic
Weighted
average common
shares 78,465 70,257 71,024 70,157
outstanding -
diluted
AMERICAN APPAREL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
(unaudited)
September 30, December 31,
2009 2008
ASSETS
CURRENT ASSETS
Cash $ 6,100 $ 11,368
Trade accounts receivable, net of allowances of
$1,678 and $1,441 at September 30, 2009 and 18,685 16,439
December 31, 2008, respectively
Prepaid expenses and other current assets 6,637 5,369
Inventories 152,639 148,154
Income taxes receivable 4,436 604
Deferred income taxes 2,891 3,935
Total current assets 191,388 185,869
PROPERTY AND EQUIPMENT,net 106,514 112,408
DEFERRED INCOME TAXES 9,824 10,137
OTHER ASSETS, NET 27,006 25,195
TOTAL ASSETS $ 334,732 $ 333,609
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Cash overdraft $ - $ 2,413
Revolving credit facilities and current portion of 32,735 34,318
long-term debt
Accounts payable 15,302 32,731
Accrued expenses 29,306 22,140
Income taxes payable 1,522 8,582
Current portion of capital lease obligations 2,047 2,616
Total current liabilities 80,912 102,800
LONG-TERM DEBT,net of unamortized discount of
$21,387 and none at September 30, 2009 and December 64,750 67,050
31, 2008, respectively
SUBORDINATED NOTES PAYABLE TO RELATED PARTY 4,273 3,292
CAPITAL LEASE OBLIGATIONS,net of current portion 829 1,986
DEFERRED RENT 21,184 16,011
OTHER LONG TERM LIABILITIES 7,364 6,058
TOTAL LIABILITIES 179,312 197,197
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.0001 par value, authorized 1,000 -- --
shares; none issued
Common stock, $.0001 par value, authorized 120,000
shares; 72,467 shares issued and 71,034 shares
outstanding at September 30, 2009 and 72,221 shares 7 7
issued and 70,787 shares outstanding at December
31, 2008
Additional paid-in capital 150,449 131,252
Accumulated other comprehensive loss (955) (2,703)
Retained earnings 15,963 17,900
Treasury stock, 1,434 shares at cost (10,044) (10,044)
TOTAL STOCKHOLDERS' EQUITY 155,420 136,412
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 334,732 $ 333,609
AMERICAN APPAREL, INC. AND SUBSIDIARIES
BUSINESS SEGMENT INFORMATION
(Amounts in thousands)
(unaudited)
The following table presents key financial information for the Company's
business segments before unallocated corporate expenses:
Three Months Ended September 30, 2009
U.S. U.S. Retail Canada International Consolidated
Wholesale
Net sales to
external $ 40,087 $ 50,546 $ 18,742 $ 40,943 $ 150,318
customers
Gross profit 10,058 36,364 12,517 28,346 87,285
Income from 5,559 6,167 4,554 4,060 20,340
operations
Depreciation
and 2,324 2,591 599 1,896 7,410
amortization
Capital 737 1,182 441 1,197 3,557
expenditures
Deferred rent 103 819 163 34 1,119
expense
Three Months Ended September 30, 2008
U.S. U.S. Retail Canada International Consolidated
Wholesale
Net sales to
external $ 46,219 $ 46,675 $ 19,874 $ 42,033 $ 154,801
customers
Gross (loss) (4,927 ) 35,561 13,882 31,560 76,076
profit
(Loss) income (11,172 ) 10,640 6,383 10,409 16,260
from operations
Depreciation
and 1,912 1,810 355 1,346 5,423
amortization
Capital 1,713 8,203 1,339 5,938 17,193
expenditures
Deferred rent 168 1,032 107 173 1,480
expense
Nine Months Ended September 30, 2009
U.S. U.S. Retail Canada International Consolidated
Wholesale
Net sales to
external $ 101,702 $ 134,901 $ 48,136 $ 115,924 $ 400,663
customers
Gross profit 25,878 98,673 29,785 78,559 232,895
Income from 10,003 11,320 9,520 13,029 43,872
operations
Depreciation
and 6,664 8,706 529 5,109 21,008
amortization
Capital 4,290 8,794 786 3,234 17,104
expenditures
Deferred rent 233 2,919 365 1,359 4,876
expense
Nine Months Ended September 30, 2008
U.S. U.S. Retail Canada International Consolidated
Wholesale
Net sales to
external $ 124,665 $ 118,838 $ 48,549 $ 107,354 $ 399,406
customers
Gross profit 12,559 90,043 33,861 78,548 215,011
(Loss) income (4,953 ) 24,330 12,300 23,654 55,331
from operations
Depreciation
and 5,090 4,688 1,409 3,127 14,314
amortization
Capital 11,200 20,293 3,188 14,545 49,226
expenditures
Deferred rent 62 2,692 319 2,512 5,585
expense
Three Months Ended September 30, Nine Months Ended September 30,
2009 2008 2009 2008
Reconciliation
to Income
before Income
Taxes
Consolidated
income from
operations of $ 20,340 $ 16,260 $ 43,872 $ 55,331
reportable
segments
Unallocated
corporate (9,126 ) (9,418 ) (29,254 ) (28,496 )
expenses
Interest (5,371 ) (3,237 ) (17,846 ) (10,274 )
expense
Other
(expense) (195 ) 636 291 (133 )
income
Foreign
currency 1,844 (1,049 ) 2,684 (1,047 )
transaction
gain (loss)
Consolidated
Income (Loss) $ 7,492 $ 3,192 $ (253 ) $ 15,381
Before Income
Taxes
Three Months Ended September Nine Months Ended September 30,
30,
2009 2008 2009 2008
Net Sales by
Class of Customer
U.S. Wholesale
Wholesale $ 34,298 $ 39,624 $ 86,045 $ 106,806
Online consumer 5,789 6,595 15,657 17,859
Total $ 40,087 $ 46,219 $ 101,702 $ 124,665
U.S. Retail $ 50,546 $ 46,675 $ 134,901 $ 118,838
Canada
Wholesale $ 2,973 $ 3,574 $ 8,415 $ 9,751
Retail 15,418 15,818 38,643 37,531
Online consumer 351 482 1,078 1,267
Total $ 18,742 $ 19,874 $ 48,136 $ 48,549
International
Wholesale $ 2,907 $ 3,778 $ 9,089 $ 11,566
Retail 35,083 34,935 97,649 86,920
Online consumer 2,953 3,320 9,186 8,868
Total $ 40,943 $ 42,033 $ 115,924 $ 107,354
Consolidated
Wholesale $ 40,178 $ 46,976 $ 103,549 $ 128,123
Retail 101,047 97,428 271,193 243,289
Online consumer 9,093 10,397 25,921 27,994
Total $ 150,318 $ 154,801 $ 400,663 $ 399,406
Table A
American Apparel, Inc. and Subsidiaries
Calculation
and Reconciliation of Consolidated Adjusted EBITDA
(Amounts in
thousands)
(unaudited)
In addition to its financial results prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"), American Apparel considers non-GAAP measures of its performance. Adjusted EBITDA, as defined below, is an important supplemental financial measure of American Apparel's performance that is not required by, or presented in accordance with, GAAP. Adjusted EBITDA represents net income (loss) before income taxes, interest other expense, and depreciation and amortization. American Apparel's management uses Adjusted EBITDA as a financial measure to assess the ability of its assets to generate cash sufficient to pay interest on its indebtedness, meet capital expenditure and working capital requirements, pay taxes, and otherwise meet its obligations as they become due. American Apparel's management believes that the presentation of Adjusted EBITDA provides useful information regarding American Apparel's results of operations because it assists in analyzing and benchmarking the performance and value of American Apparel's business. American Apparel believes that Adjusted EBITDA is useful to stockholders as a measure of comparative operating performance, as it is less susceptible to variances in actual performance resulting from depreciation and amortization and more reflective of changes in pricing decisions, cost controls and other factors that affect operating performance.
Adjusted EBITDA is also used by American Apparel's management for multiple purposes, including:
-- to calculate and support various leverage and coverage ratios for
American Apparel's lenders
-- to allow lenders to calculate total proceeds they are willing to loan to
American Apparel based on its relative strength compared to its
competitors
-- to more accurately compare American Apparel's operating performance from
period to period and company to company by eliminating differences
caused by variations in capital structures (which affects relative
interest expense), tax positions and amortization of intangibles.
In addition, Adjusted EBITDA is an important valuation tool used by potential investors when assessing the relative performance of American Apparel in comparison to other companies in the same industry. Although American Apparel uses Adjusted EBITDA as a financial measure to assess the performance of its business, there are material limitations to using a measure such as Adjusted EBITDA, including the difficulty associated with using it as the sole measure to compare the results of one company to another and the inability to analyze significant items that directly affect a company's net income (loss) or operating income because it does not include certain material costs, such as interest and taxes, necessary to operate its business. In addition, American Apparel's calculation of Adjusted EBITDA may not be consistent with similarly titled measures of other companies and should be viewed in conjunction with measures that are computed in accordance with GAAP. American Apparel's management compensates for these limitations in considering Adjusted EBITDA in conjunction with its analysis of other GAAP financial measures, such as net income (loss).
Table A (cont.)
American Apparel, Inc. and Subsidiaries
Calculation and Reconciliation of Consolidated Adjusted EBITDA
(Amounts in thousands)
(unaudited)
Three Months Ended September Nine Months Ended September 30,
30,
2009 2008 2009 2008
Net income (loss) $ 4,160 $ 2,333 $ (1,937 ) $ 10,228
Income tax 3,332 859 1,684 4,294
provision
Interest expense
and other income, 5,566 2,601 17,555 10,407
net
Depreciation and 7,410 5,423 21,008 14,314
amortization
EBITDA $ 20,468 $ 11,216 $ 38,310 $ 40,102
Foreign currency
transaction (1,844 ) 1,049 (2,684 ) 1,047
(gain) loss
Consolidated $ 18,624 $ 12,265 $ 35,626 $ 41,149
Adjusted EBITDA
Table B
Impact of Merger Related Stock Based Compensation
Expense
(Amounts in thousands, except per share amounts)
(unaudited)
In the third quarter of 2008, American Apparel awarded approximately 1.9 million shares of common stock to eligible manufacturing employees in accordance with the terms of the merger agreement between American Apparel, Inc. (formerly Endeavor Acquisition Corp.) and Old American Apparel, resulting in $13.2 million of share based compensation expense, consisting of $12.1 million of share based compensation expense and $1.1 million of employer related payroll taxes, in the Consolidated Financial Statements for the three and nine months ended September 30, 2008. Set forth below is certain financial information about our operating performance that excludes the impact of the stock award and the related share based compensation expense. This information is not calculated in accordance with accounting principles generally accepted in the United States (GAAP) and should be considered in addition to, and not as a substitute for, the related GAAP measurements. We use these non-GAAP measures, along with GAAP measures, as a measure of profitability and operating performance because the adjustments allow us to compare our performance on a consistent basis by removing from our operating results the effect of the non-cash share based compensation expense, which may vary from period to period due to a number of factors. We believe that the presentation of the non-GAAP financial information provides investors with useful additional information regarding our financial condition and results of operations because it allows a consistent basis of comparison against our historical operating performance and guidance as well as against the operating performance of our competitors. The following reconciles each non-GAAP measure, which excludes the expenses related to the stock award, to the most directly comparable GAAP measure for the three and nine months ended September 30, 2008:
Table B (cont'd)
Impact of Merger Related Stock Based Compensation Expense
(Amounts in thousands, except per share amounts)
(unaudited)
Three Months Ended September 30, 2008
Stock Based
Compensation Non-GAAP
As Reported Expense Measurement
Net sales $ 154,801 $ 154,801
Cost of sales 78,725 (13,197 ) 65,528
Gross profit 76,076 13,197 89,273
Operating expense 69,234 69,234
INCOME FROM OPERATIONS 6,842 13,197 20,039
INTEREST AND OTHER (INCOME) EXPENSE
Interest expense 3,237 3,237
Foreign currency transaction loss 1,049 1,049
Other (income) expense (636 ) (636 )
INCOME BEFORE INCOME TAXES 3,192 13,197 16,389
Income Tax Provision 859 4,421 5,280
NET INCOME $ 2,333 $ 8,776 $ 11,109
Basic earnings per common share $ .03 $ .13 $ .16
Diluted earnings per common share $ .03 $ .13 $ .16
Nine Months Ended September 30, 2008
Stock Based
Compensation Non-GAAP
As Reported Expense Measurement
Net sales $ 399,406 $ 399,406
Cost of sales 183,395 (13,197 ) 171,198
Gross profit 215,011 13,197 228,208
Operating expense 188,176 188,176
INCOME FROM OPERATIONS 26,835 13,197 40,032
INTEREST AND OTHER (INCOME) EXPENSE
Interest expense 10,274 10,274
Foreign currency transaction loss 1,047 1,047
Other (income) expense 133 133
INCOME BEFORE INCOME TAXES 15,381 13,197 28,578
Income Tax Provision 5,153 4,421 9,574
NET INCOME $ 10,228 $ 8,776 $ 19,004
Basic earnings per common share $ .15 $ .13 $ .28
Diluted earnings per common share $ .15 $ .13 $ .27
Source: American Apparel, Inc.
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