American Apparel running out of time and money

New York - Things continue to get progressively worse for American Apparel. On Wednesday, share of the company dropped 37.4 percent to close at 13 cents. Their market capitalization is now just 23.7 million dollars representing a 14.1 million dollar loss from 37.8 million dollar loss.

According to a report American Apparel filed with the Securities and Exchanges Commission last Friday, they are currently working with shareholders to consider "strategic and financial alternatives." They also said that they will be late in filing their quarterly report because they might be in "noncompliance" with certain financial convenants in their Capital One facility. They are planning to request a waiver from Capital One.

American Apparel's financial situation becoming more dismal

Kevin Starke, credit analyst at CRT Capital Group, said to WWD that “given the demonstrated inaccessibility of capital markets, it would seem to us that a company of this size in the midst of an operational restructuring with only 13 million dollars in liquidity might want to avail itself of the protections offered by Chapter 11 of the bankruptcy code.” Starke went on to explain how American Apparel burned through 18 million dollars in cash through the first quarter, while financing activities only added 2 million dollars in proceeds on the sale of four million shares. The company currently only has 7 million dollars in cash, compared to 21 million at the end of first quarter, and only 6 million dollars in borrowing availability.

The financial reports for the company are not promising. Sales have fallen 17 percent to 134 million, comps dropped 14 percent in the quarter, and store closures and volatile exchange rates cut revenues by 9 million dollars. Starke pointed out that adjusted earnings before taxes, depreciation, and amoritization was down 74 percent to 4.1 million dollars, down from 15.9 million dollars for the same quarter a year ago.

It is not unclear if American Apparel will be able to obtain a waiver. The hedgefund that is the sponsor, Standard General, entered a deal to acquire Capital One's 34 million dollar facility, however, that acquistion hasn't been completed yet. That currently seems like the only hope the company has of receiving a waiver.

While it was necessary for Dov Charney to go amidst the sexual harassment controversy, he seemed to have a better plan for holding the company together financially. As Charney has tried to fight his way back into the company, American Apparel routinely found ways to keep him out. The lawsuits between American Apparel and Charney are still an ongoing legal battle, one that is surely doing nothing to help American Apparel's financial situation given the legal fees.

The company has long been attempting an operational restructure under new CEO Paula Schneider, but restructuring is a costly endeavor, and with American Apparel running out of cash that seems to be a losing option at this point. Usual fixes like store closures and laying off employees to cut costs still have not worked up until this point, and it doesn't look like they will anytime soon. American Apparel's days might be numbered, and given their limited cash flow they have to act soon.

The company is in their darkest hour, and it is up in the air as to how they could turn out. It's not out of the realm of possibility that American Apparel may cease all operations entirely. It's a game of wait and see with a very short waiting clock.

photo:zimbio.com