AMERICAN APPAREL: DROWNING IN DEBTS?

GROUP 2

NO NAMES MATRIC NO.

.
1. LAILATUL QADRIL HAZAM MOHAMED NASIR PBS20101057
2. MOHD SYAIFUL AKHWAN ARMAN PBS20101105
3. NOREEN NATASHA BINTI MOHD ZAWAWI PBS20101053
4. NUR AIMAN ADHA AHMAD PEIRUZ PBS20101050
5. NUR ZAHRAH ZULKIFLI PBS20101059
6. PRITIKA GUNASEGARAN PBS20101010

ACC 7101 ACCOUNTING FOR DECISION MAKING

ASSOC. PROF. DR. AHMED RAZMAN ABDUL LATIFF
PUTRA BUSINESS SCHOOL
24 OCTOBER 2020
(i)
 AMERICAN APPAREL: DROWNING IN DEBT? 202
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TABLE OF CONTENT

NO. CONTENT PAGE NO.

1. Template of Submission of Assignment (Group) (i)
2. Table of Content (ii)
3. List of Graphs (iii)
4. Introduction 1
5. Case Analysis 2-6
6. Possible Solutions 7-9
7. Recommendations 10
8. Conclusion 11
9. References 12 - 13
10. Appendix Section 14 - 16

(ii)
 LIST OF GRAPHS

NO. GRAPHS PAGE NO.

1. Gross Margin 2

2. Net Margin 3

3. Number of days in inventory 3

4. Inventory Turnover 4

5. Debt to Asset Ratio 4

6. Debt to Equity ratio 5

7. Return on Assets (ROA) 6

(iii)
 INTRODUCTION

According to The Fashion Law or also known as TFL (2017), American Apparel was
founded in 1989 by Dov Charney, who had the business idea of selling American-made
cotton t-shirt. This business idea was eventually started as a wholesale business in 1997
(TFL,2017) and was vertically integrated by Charney to become one of the most substantial
clothing manufacturers in the United States of America (USA), where their competitive
advantage is producing their own garments (Vallecha, 2017). Even though Charney was
young, he had managed to expand a wholesale business to hundreds of retail chains, as it
became one of the internationally famous brands (Howland, 2017). Referring to the case, they
had ventured into e-commerce, which made them well-known internationally.

American Apparel produces basic apparel for men, women, kids, including underwear,
swimwear, shoes, and vintage accessories; however, Charney had focused on selling basic
high-quality t-shirts. Vallecha (2017) had stated that in 2005, American Apparel was ranked
308th in the list of 500 fastest growing US companies. With Charney’s leadership, American
Apparel was listed on the New York Stock Exchange (NYSE) by 2007, as it rapidly became
the leading supplier of t-shirts in the United States (Grant et. al., 2012).

The main objective of Charney for American Apparel was to become the largest clothing
manufacturer in the current era (Romero, 2007 as cited by Baker, 2004). It seems that the
goal set by Charney was not able to be achieved as the company started to have some
challenges. From the case study, we can see that American Apparel had faced some corporate
issues, which had affected its performance despite their success in the past years. Some of the
issues faced was the provocative advertisement, sexual harassment accusation on Charney,
and the high number of debts borrowed by American Apparel.

From the case, we can clearly describe that American Apparel is in a very bad condition,
where the debt of the organization is high and struggling to make the repayment. Based on
the solvency analysis on the financial statement of the American Apparel (refer to the
Appendix Section at page 12), the gearing ratio is very significant, which is at -5.312% in the
year 2013 as compared to 1.08% in the year 2009. The initial downfall of American Apparel,
from profit making to a debt-ridden company, was because of the termination of unauthorized
and illegal staff, which was found out by the local authority. Due to the termination of labors,
the production had been disrupted and hence the demand from their market was not met. The
company’s production line was majorly relying on the immigrant workers and the termination
had caused major impact and opened all the floodgates for the company's entire series of
catastrophe.

We will further discuss on the case in detail and proceed to provide advice on helping
American Apparel to conquer and overcome their debt issue in the following sections
accordingly.

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CASE ANALYSIS
In this section, we will analyze in dept on the case given about the downfall of American
Apparel. With financial statement of American Apparel provided, we had computed some
relevant financial analysis (refer to the Appendix Section) to support our case analysis.

1. Immigration issues
Based upon the given case, in 2009, American Apparel experienced stock-out situation
when they were not able to complete orders on time and meet the demand of their market.
From the previous section, we had clearly stated that the initial downfall of the company
was due to the termination of the labors, as the company had to terminate the employment
of 2,000 workers from its factory. This shows that American Apparel did not do a
thorough due diligence on their labors and caused them to face stock-out in the aggressive
market.

2. Global Recession
The next issue faced by American Apparel following to the termination was the market in
USA facing recession. The global recession at that time had also become a major blow for
the company, where the sales of the company had declined for the first time, from $558
million in 2009 to $532 million in 2010. The company's operating income also declined
from $24 million in 2009 to negative $50 million in 2010. Furthermore, the net profit of
the company also plummeted from $1.11 million profit into $86 million of net loss
because of the global recession. Due to the economic crisis, American Apparel was
unable to recover from the losses and struggling with debts.

For point 1and 2, it will be detailed in the Graph 1 and 2 on the gross and net margin. The
decline in the graphs showed that the company’s profitability is continuously to decline
from year 2009 to 2013 (from right to left).

Gross Margin
58.00% Graph 1:

56.00%
Gross
Margin
54.00%

52.00%

50.00%

48.00%
Graph 2:
46.00%
2013 2012 2011 2010 2009 Net
Margin

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3. Distribution Problem
In 2013, the
Number of days in inventory company had
300.00 implemented
250.00
two strategic
initiatives in
200.00 inventory
150.00 management
and the new
100.00
distribution
50.00 centre in Los
Angeles.
0.00
2013 2012 2011 2010 2009 However, the
company had
difficulties to
make transition into its new distribution center, which caused a significant increase of its
operating costs and disruption of their deliveries. This also caused the increase of cost of
goods sold from $289 million in 2012 to $313 million in 2013. The net loss also had a
massive increase amounting to $106 million with sales growth at a marginal 3% from
$617 million in 2012 to $633 million in 2013. Thus, the changes had impacted their
efficiency ratio to be low (as per graph 3 and 4 below).

Graph 3: Number of days in inventory

Inventory Turnover Graph 4:

3.50 Inventory
Turnover
3.00

2.50 4. High Debt

2.00

1.50

1.00

0.50

0.00
2013 2012 2011 2010 2009

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American
Debt to Asset Ratio Apparel had
1.400 huge debt with
extremely high
1.200
interest rates
1.000 from Lion
0.800 Capital in
2013. This
0.600
situation had
0.400 caused
American
0.200
Apparel to be
0.000 struggling in
2013 2012 2011 2010 2009
repayment as
the company had only $8 million cash at the end of 2013. Due to the extremely low
liquidity and high gearing, Lion Capital had imposed strict terms and conditions for
American Apparel, where if the there is any changes on the top management, thus the
debt can be defaulted at any time. As stated in the introduction section, the gearing ratio
for American Apparel is very significant. From the graph 5 and 6, the debts shown are
high.

Graph 5: Debt to Asset Ratio

Debt to Equity Ratio

20.00

15.00

10.00

5.00

0.00
2013 2012 2011 2010 2009

-5.00

-10.00

Graph 6: Debt to Equity ratio

5. Apparel Industry
The nature of the apparel industry also does not help the American Apparel, where the
industry in general was highly competitive and aggressive. According to PEC Research

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(2012), the sales growth over the previous five years had been eroded. Besides that, the
levels of inventory of the business had been increasing consistently over the past five
years from 12% of sales in 2008 to 14% of sales in 2011 due to the expanded expense of
raw materials and inventory management. This had been influenced by the general
pricing of inventory, which is quite volatile due to the economy recession. The US market
around that time was also practically stale, where worldwide sales had developed by a
CAGR of 11.3% over a similar period. The CAGR for all sales joined with international
and domestic sales over that period was around 1.6%.

According to IndustryWeek (2013), the apparel industry in the United States had lost
more than 80% of its jobs, and the post-recession recovery was extremely slow. To
survive at during this time, the company must depend on its capability to capture
domestic and international sales, where the company needs to be aware and respond
quickly to consumers preferences and needs. It also became harder for American Apparel
when they had to compete with big competitors such as GAP, Urban Outfitters, American
Eagle and Express, where some of them had better financial capabilities, and good
strategy to reduce costs because of their outsourcing model.

6. Lawsuit and negative publicity

From the case, we can see that American Apparel was using sexually provocative
advertisement to market their products, which it is their marketing strategy to attract
younger generation to purchase their products. Besides that, with Dov Charney’s fashion
sense and quick to respond to the demand had made the company to be successful before
their downfall in the year 2013. Due to their aggressive strategy, the company had made
tremendous sales and fabricated strong brand recognition domestically as well globally.
Despite their critical success factors, it seems that the leader, Dov Charney was associated
with several lawsuits for sexual assaults and harassment due to the provocative
advertisement.

7. Share price plummeted

According to the case, the share price of American Apparel had plummeted quite rapidly
from $15 per shares in the year 2008 to $0.56 per shares in 2013, which resulted in
96.27% dropped in share price. This shows that the company only able to provide 56
cents to their shareholders on the capital they had invested in American Apparel. Even
though the company had tried to improve their performance by way of selling more
shares in the market at 50 cents each, it is still unable to help American Apparel in paying
off their debts and improve their financial performance.

From our computation, the earnings per share (EPS) of the investors are negative, where
it is align to the losses generated by American Apparel. In the year 2013, the EPS is
negative 0.55, which shows that the loss borne by the investor for each share they hold.
The negative P/E ratio had proven that American Apparel is making losses.

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Based on the case, Dov Charney had made a comment on providing return on investment
(ROI) to their shareholders as American Apparel had heavily invested in their
infrastructure, which will be strengthening the brand as well as delivering exceptional
services to their customers. However, continual borrowing with high interest rate had led
American Apparel to be debt-ridden in the end. From the graph below, it shows that the
ROA had been declined in the year 2013 as it is in negative percentage.

Graph 7: ROA
Return on Assets (%)
5.00%

0.00%
2013 2012 2011 2010 2009
-5.00%

-10.00%

-15.00%

-20.00%

-25.00%

-30.00%

-35.00%

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POSSIBLE SOLUTIONS

Based on the analysis done on the given case, we had come up with several recommendations
and actions for American Apparel to turn around their company’s performance. The
following section will discuss the possible course of actions and hence choosing the most
suitable solution for American Apparel.

1. Rebranding- Positive Image 

Referring to the case, American Apparel was known for sexually provocative
advertising. Garcia (2015) stated that American Apparel market their products
featuring inappropriately dressed models in provocative poses, which had induced
many negative publicities for the company. From this scandalous publicity, it had
initiated and contributed to many legal suits filed against the company as well as on
Charney even though it was not proven in the court.

Since the provocative publicity had generated many negativities from the society,
American Apparel should go for rebranding strategy to give some fresh vibe, which
will provide socially conscious mindset (Garcia, 2015). According to the Cambridge
Dictionary (2020), rebrand means that the view of the society on the products will be
changed. This is a very useful marketing strategy, whereby new design, name, or
even concept could come in handy, which will provide different identity or mindset
when presenting to the existing customers, investors, stakeholders, as well as
competitors. 

By rebranding, American Apparel might be able to reduce the negative sentiments,

which had been embedded in its brand due to the inappropriate advertising, and thus
will contribute to the increase in trust and reliability. In short, it will help to improve
their image and help to generate more sales. Some of the advantages and
disadvantages of rebranding had been stated below: -

Advantages : Improve the reputation of the company

: Improve sales – ability to gain market shares
: Increase trust and reliability of their stakeholders

Disadvantages : Increase in cost and expenses, especially for innovation

: Existing stakeholders may switch to their competitors

2. Outsourcing
According to the case, most of American Apparel’s competitors had outsourced their
operations of their products, thus American Apparel can opt for outsourcing method
to cheaper countries to manufacture their clothing line; however, their mission will be
in contradict for relying on cheap labor and hence lose their competitive advantage,
which is manufacturing each of their garments in-house. It seems that American

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Apparel wanted to remain ethical, where they do not want to discriminate and rely
upon cheap labors. Even though outsourcing some departments or operations could
help them to reduce cost, the management should be careful about not jeopardizing
their products at a lesser cost as it will have effect on the quality.

Advantages : Cheaper raw materials

: Reduction in overhead costs of the operations

Disadvantages : Quality of the products produced may be jeopardized

: Losing their competitive advantages
: Contradict with their mission statement

3. Closing the non-profit making retail stores

Closing those retail stores that are not making profit will help American Apparel to
reduce their losses. This way, they will have the extra monies to enhance the profit-
making retail stores and thus increase their sales. According to the case, the retail
industry in USA had been aggressive and stagnant, thus inability to make profit will
jeopardize the sustainability of the organization in the long run.

Besides that, American Apparel can also use those extra monies to enhance and focus
to improve their online presence instead of investing in enhancing its retail stores.
This can be their competitive advantage as they can strengthen their customer’s
loyalty and retention through e-commerce. Based on the case given, American
Apparel had completed the radio-frequency identification system for its website, thus
it will be helpful for them to generate sales that will lead them to improve their
performance.

Advantages : Reduce costs and losses

: Strengthen the e-commerce platform
: Can be a competitive advantage for them

Disadvantages : Market shares will reduce as the retail stores are closed

4. Debt Management Strategy

According to the given case, the rapid and massive expansion of stores and retails
centers made American Apparel as one of the fastest growing retail companies in the
USA and globally across 18 countries. However, the company was facing pressure for
inability to pay the interest and loan as they continue to face losses. From the case, we
can see that American Apparel had continually investing in production facilities and
enhancing their retails stores as well as implementing two strategic capabilities
despite all the debts, lack of liquidity and losses made. This shows that the
management of American Apparel was not efficient in managing their debts as well as
budget, which had led them to file for bankruptcy. The decision made by Dov

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Charney to invest in the infrastructure had caused American Apparel to be debt-

ridden.

In general, American Apparel should try to strengthen and improve their financial
health before trying to explore on their expansion plan or even investing in the
projects. The best possible solution is to hold all the expansion plan till they had
resolve their debt issues and have enough cash and liquidity to proceed with the plan.
One of the ways to manage their debt can be factoring their debts. According to
MarketFinance (2020), debt factoring is defined as selling their invoices or
receivables at discounted price. This will help American Apparel to improve their
cash flows temporarily and they can have instant capital to pay off their debts.

5. Employment Management 
Referring to the case, the initial downfall of American Apparel is when they could not
meet their consumers’ demands when approximately 2,000 employees were laid off
due to wrongful documentation. Thus, to deter this issue from happening again, hiring
local and domestic employees will be a strategy to overcome their staff limitations. If
hiring foreigners are essential, then proper documentation could have saved this
company from facing the consequences, which triggered the avalanche of misfortune. 

Advantages : Ability to improve their productions and meet the demands

: Reduce stock-out issues
: Reduce labor limitation issues

Disadvantages : Additional cost on recruiting employees

: Training cost will increase

From the case, we can clearly state that American Apparel should manage the
employment strategy well without relying so much on immigrant workers as the
backbone of their production team. The company should be prepared and get ready
with contingency plans, a team of backup labors for example in the event of any
foreseen or unforeseen mishap. In short, they should always take precautions when
hiring immigrants. Due to their negligence, the company is unable to recover from the
downfall.

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RECOMMENDATION

From the previous section, there is few possible solutions that can be taken by American
Apparel to turnaround their company’s performance. However, it is up to the management of
American Apparel to make the decision, which will prevent the company to file for
bankruptcy and sustain in the market.

For a start, American Apparel should hold all their expansion plan and try to reduce the
existing costs in their financial statement, such as general and administrative cost. This can be
due to the expansion plan and the implementation of those strategic initiatives taken by
American Apparel. Even though the revenue had increased in the year 2013, they still report
high losses due to the costs.

Since American Apparel was expanded through organic growth, thus the company will not
become a target acquisition; however, they should not merely borrow money for the sake of
expansion. American Apparel’s management should take loan with appropriate interest rate.
Unlike Dov Charney, to sustain the company in the market, they just borrowed money with
high interest rate. A proper forecast and payback period should be done, so that the
investment on the infrastructure will be able to provide benefits in the long run.

Factoring their debts will also help American Apparel to generate temporary cash inflows and
help them to have capitals to pay their interests and debts. Besides that, negotiating and
consulting with the lenders on providing more time on the debt repayment as well as on the
interest rate will be helpful for American Apparel as their pressure for the debt repayment
will be reduced. This will be helpful for American Apparel to have the time to improve their
sales performance and thus generate profits in the near future.

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 CONCLUSION

From the case analysis, we can conclude that unsettle of debt issue was the major contributor
for American Apparel’s downfall. The root cause for this catastrophe to happen was the
termination of their labor for not possessing legal documentation. This had led the company
to faced production challenges due to the staff limitation and hence the production was
disrupted, which caused demand from their market was not met as the demand was more than
supply.

On top of that disaster, the company was faced with the global recession that was happening
during that period caused the company to struggle even more and unable to rebound. Due to
the issues and problems, it had caused the company to suffer very high losses with severe
liquidity problems, thus forcing the company to take loans with extremely high interest to
survive. This had led them to an even larger struggle according to our analysis as their share
price had plummeted and their cash on hand had reduced significantly.

In conclusion, debt management strategy should be implemented and restructuring their debt
plans and negotiates with those lenders to provide more time to repay the loans and the
interest rate. By doing so, American Apparel will have the opportunity to generate sales and
manage their costs and thus improve their financial health.

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 REFERENCES

Bland, B. (2013). A New, Sustainable Model for Apparel Manufacturing in the U.S.
Retrieved October 23, 2020, from,
www.industryweek.com/leadership/new-sustainable-model-apparel-manufacturing-us

Branch, J. (2017, June 22). Dov Charney’s American Dream: the rise, fall and comeback of
an apparel empire. Retrieved October 23, 2020, from,
https://www.retaildive.com/news/dov-charney-american-apparel-rise-fall-
comeback/445631/

Garcia, T. (2015, October 05). 5 Reasons American Apparel is Now Bankrupt. Retrieved
October 23, 2020, from
https://www.marketwatch.com/story/5-reasons-american-apparel-is-bankrupt-2015-
10-05

Grant, R., Drost, A. & J. S (2012). Case 16 American Apparel: Vertically Integrated in
Downtown LA. Retrieved October 23, 2020, from
https://edisciplinas.usp.br/pluginfile.php/3423944/mod_resource/content/1/American
%20Apparel.pdf

Home. (n.d.). American Apparel, Company Information. Retrieved October 23, 2020, from,
www.americanapparel.net/presscenter/pressCompanyInfo.html

Preston, J. (2009, September 29). Immigration Crackdown with Firings, Not Raids. Retrieved
October 23, 2020, from, www.nytimes.com/2009/09/30/us/30factory.html?_r=0

REBRAND: Meaning in the Cambridge English Dictionary (2020). Retrieved October 23,
2020, from https://dictionary.cambridge.org/dictionary/english/rebrand

Romero, B. (2007). A Singular Case in Global Apparel Industry: Strategic Analysis of

American Apparel. Retrieved October 23, 2020, from
http://biblos.hec.ca/biblio/memoires/m2007no156.pdf

TFL (2020, March 27). American Apparel: The Rise, Fall and Rebirth of an All-American
Business. Retrieved October 23, 2020, from
https://www.thefashionlaw.com/the-rise-and-fall-of-american-apparel/

The Advantages and Disadvantages of Debt Factoring. (n.d.). Retrieved October 23, 2020,
from, https://marketfinance.com/business-finance/the-advantages-and-disadvantages-
of-debt-factoring

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Vellacha, B. (2017, January 9). How fashion retail giant American Apparel went bankrupt.
Retrieved October 22, 2020, from
https://www.indiaretailing.com/2017/01/09/fashion/how-fashion-retail-giant-
american-apparel-went-bankrupt/

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 APPENDIX SECTION

2013 2012 2011 2010 2009 2008

Net Sales $633,941 $617,310 $547,336 $532,989 $558,775 -
Gross Profit $320,885 $327,383 $294,900 $279,909 $319,912 -
Comprehensive
-$107,879 -$36,641 -$39,502 -$87,400 $1,732 -
Profit (Loss)
Current Asset $215,296 $224,390 $230,730 $216,537 $186,303 $185,869
Inventory $169,378 $174,229 $185,764 $178,052 $141,235 $148,154
Current Liability $161,989 $161,609 $143,350 $214,151 $64,880 $102,800
Total Liabilities $411,156 $306,128 $276,591 $252,926 $170,238 $197,197
Total Equity -$77,404 $22,084 $48,130 $75,024 $157,341 $136,412
Shares $11,000 $11,000 $11,000 $8,000 $7,000 $7,000
Additional Paid-in
$185,472 $177,081 $166,486 $153,881 $150,449 $131,252
Capital
Share Price $0.56 $15.00

Measure Formula 2013 2012 2011 2010 2009 2008

Gross Income
Gross Margin 50.62% 53.03% 53.88% 52.52% 57.25% -
Revenue
Net Income
Net Margin -17.02% -5.94% -7.22% -16.40% 0.31% -
Revenue
CA - Inv
Acid-Test Ratio 0.283 0.310 0.314 0.180 0.695 0.367
CL
CA
Current Ratio 1.329 1.388 1.610 1.011 2.872 1.808
CL
Total Liabilities
Gearing Ratio -5.312 13.862 5.747 3.371 1.082 1.446
Total Equity
Earnings Per Net income
-0.55 -0.19 -0.22 -0.54 0.01 -
Share (EPS) No of Shares
Share Price
P/E Ratio -1.02 -
EPS

14
Working
CA-CL $ 53,307 $ 62,781 $ 87,380 $ 2,386 $ 121,423
Capital

(cash
equivalent+
cash ratio 0.05 0.08 0.07 0.04 0.14
cash)/current
liablities

total
Debt to
liabilities/total 1.232 0.933 0.843 0.772 0.510
asset ratio
assets

interest earning before

coverage interest/intere -2.746 -0.882 -1.191 -3.680 0.077
ratio st

inventory cogs/ave
1.82 1.61 1.39 1.59 1.65
turnover inventory

365/(net
Receivable
rev/ave 30.62 26.88 26.14 31.94 33.05
turnover
receivable)

365/(net
purchase or
payable
cogs/ave $44.57 $45.37 $47.32 $36.95 $40.06
turnover
account
payable)

average days
net sales/365 1736.82 1691.26 1499.55 1460.24 1530.89
sales

number of
days sales in
account
the accounts
receivable/ave 11.92 13.58 13.96 11.43 11.04
receivable at
days sales
december
31

number of
inventory/ave
days in 197.48 219.34 268.60 256.79 215.82
days cogs
inventory

15
 operating
operating margin -4.62% 0.16% -4.26% -9.39% 2.98%
income/revenue

net income/ave total

ROA -32.59% -11.22% -12.10% -26.67% 0.52%
asset

net income/ave total

ROE 390.02% -99.78% -62.70% -73.44% 1.16%
stock

(Total Number of Word: 3,606)

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