Difficult Times For American Apparel Inc (APP)

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It appears that American Apparel Inc (NYSEMKT:APP)‘s turnaround efforts have not been fruitful. It seems that only a few things separate between its existence and survival for the apparel retailer. As a result of a steep drop in sales, the company is finding  cash management tough. Therefore, in a filing with the SEC, the retailer raised the alarm bell that it does not have sufficient liquidity to run the operations for the next 12-month period.

Expresses Doubts Over Continuation

American Apparel Inc (NYSEMKT:APP) seems to have lost all the confidence in running the company as a going concern. The retailer’s warning came after reporting a 17% drop in sales to $134 million. The net loss also widened to $19.4 million or 11 cents a share in the second quarter.

The company’s warning and the shrinking cash position is also a signal that the retailer is preparing to file for bankruptcy protection under the Chapter 11. That will pave the way for getting out of the leases wherever its stores were under-performing since that is key to reducing its costs. Only then, it could think of turning around the business, some analysts feel.

Exiting Leases Is Important

According to Customer Growth Partners’ Craig Johnson, it is difficult to think about saving the company without exiting several or most of the leases. He said that there was no alternative but to exit leases. Since its chairman and CEO, Dov Charney, was ousted, the retailer was on a rollicking journey.

Though the successor CEO, Paula Schneider, took some concrete efforts after he assumed the position in January, American Apparel Inc (NYSEMKT:APP) could not come out of its numerous troubles. The company should have resorted to drastic restructuring after Charney left. That included divesting of some of its assets and look at alternative distribution channels like carrying its clothes in overseas departmental stores. Johnson said that though it is not an impossible task of saving the Titanic ship, which is already ten feet under the water, it is a big job to do.

Amendment In Agreement

For the immediate term, the company disclosed that it was amending its agreement with Capital One, a lender. Also, a group of creditors, which will include hedge fund Standard General, will replace the Capital One credit line. That will mean the retailer getting $90 million funds instead of $50 million. However, observers are not convinced that the situation will improve for the retailer.

There are numerous lawsuits filed by American Apparel Inc (NYSEMKT:APP)’s former CEO, Dov Charney, and his allies. At the end of the June quarter, the company’s cash position was $6.9 million while its long-term debt remained close to $235 million. The company should also get prepared to pay $13.9 million due for bond payment in October.

Viraj Shah

Viraj Shah has completed M.Com (Finance) and is currently pursuing his CFP. He tracks US markets along with other global markets like India very closely. He is very passionate about stocks, real estate, and technology. He also believes that money can always be made in the market.

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