Diversity & equality in business
American Apparel runs out of cash
American Apparel faces a federal investigation over its change in accounting firms
American Apparel shop in Curtain Road, London. Photograph: Sarah Lee for the Guardian
Julia Kollewe
Wed 18 Aug 2010 12.33 EDT
American Apparel, the US fashion chain known for its brightly coloured leggings and T-shirts, has warned it is close to running out of cash and may not be able to continue. To add to its woes, it also faces a federal investigation over its change in accounting firms.
The retailer, run by Canadian Dov Charney, who owns 53% of the company, is in talks with its lenders but has warned that it may not meet its debt obligations by the end of next month. It risks breaching the terms of an $80m (£51m) rescue loan provided by the British private equity firm Lion Capital in March 2009. In return, Lion received an 18% stake and two seats on the board.
American Apparel predicts it will make a big loss for the first half of 2010, and "may not have sufficient liquidity necessary to sustain operations for the next 12 months". Its debt climbed by 32% to $120.3m during the second quarter. It estimates it will make an operational loss of $5m-$7m for the quarter to 30 June, compared with a profit of $7.3m in the same period a year ago. Like-for-like sales slumped by 16%.
Since Charney, 41, opened the first branch in 2003, American Apparel has opened 279 stores in 20 countries, including 15 in the UK. It sells an eclectic mix of clothing, from a wide range of spandex leggings and mini dresses to babywear featuring Sesame Street characters. The company prides itself on doing all its own design, dyeing, knitting, sewing and distribution from downtown Los Angeles.
The chain has come under fire for its provocative advertising campaigns, with Charney sometimes wielding the camera himself in raunchy photo shoots. He has faced a string of sexual harassment lawsuits and a number of other allegations.
The company said the US attorney's office for the southern district of New York was investigating the resignation of its former auditors, Deloitte & Touche, last month. The securities and exchange commission is also looking into the matter. American Apparel has rehired Marcum, its auditing firm from 2005 to 2008. It revealed last month that Deloitte had raised concerns about "material weaknesses" in its financial controls going back to last year.
The retailer, which floated in 2006, said it could be delisted from the New York Stock Exchange Amex because it would not be able to file its official second-quarter results in time, following the change in auditors.
Last year American Apparel had to fire 1,500 immigrant workers who had invalid or suspect papers and is still trying to cope with the impact on the business. It has scaled down store openings.
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