CUTTING IT CLOSE

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American Apparel Inc. may be known for problems few other companies face, such as lawsuits alleging controversial behavior by its chief executive, Dov Charney.

But lately the company has faced the same problems many other companies are struggling with: a slowdown in growth, layoffs, a sagging stock price and hardball loan negotiations.

On the one hand, American Apparel is doing relatively well. Its revenues totaled $155 million in third quarter 2008, a 45 percent increase versus the same period the prior year. Indeed, Charney pointed out last week that sales have been better than many retailers. November sales were up 6 percent, and American Apparel did no discounting over the Christmas shopping season.

“We had a strong fourth quarter,” he said. However, the company’s stock price has sunk more than 85 percent since going public a little more than 12 months ago. And it has slid 18 percent since Dec. 19 to close at $1.88 on Wednesday.

Dec. 19 is the day that the company reported that it had negotiated its debt on tougher terms. The company, which has between $100 million and $120 million in total debt, extended the maturity of a $51 million loan as it was coming due. But the company must make amortization payments of $16 million in March plus three other payments of $5 million each spread out over the year, and it must get additional approvals from lenders.

As a result of those and some other new terms, one analyst trimmed the company’s earnings outlook, which likely accounts for a good portion of the recent stock drop.

But there was an odd twist in the aftermath of the negotiations. A Christmas Eve e-mail string between American Apparel executives was intercepted and sent to reporters, including some at national newspapers.

In those e-mails, one executive asked the newly appointed chief financial officer, Adrian Kowalewski, to talk to a reporter with the Business Journal for this article. Kowalewski responded that he was unable to do so because he’d been sick, he was boarding a plane for the holiday and he had been swamped with the company’s financial situation.

“We almost went bankrupt last Friday,” Kowalewski wrote in the e-mail. “I’m sorry but I was busy with that for the last several weeks.”

The company privately pooh-poohed the use of the b-word, saying it was an overstatement from an overworked executive in what was supposed to be a private message. If the company had failed to renegotiate the loan, it could have triggered a default, but bankruptcy was not a serious likelihood.

“We have a lot of options as to how we can satisfy our lenders,” Charney said last week, although he did not comment directly on the e-mail string.

Instead, the company was more troubled by the fact the e-mails were intercepted and distributed to reporters. The company has made no secret that it feels at times besieged by short sellers and by one lawyer in particular, Keith Fink of Los Angeles. Fink has represented two women who allege outrageous sexually charged behavior by Charney, and two men who allege financial impropriety.

American Apparel’s lawyers and executives have said Fink’s lawsuits are fiction and they claim that he’s angry because American Apparel has refused to pay settlements to Fink and his clients on the lawyer’s terms. (An article about the fight, headlined “Fink v. Charney” is in the Dec. 8 issue.)

Charney admits the lawsuits and articles that followed have had an effect, including on the company’s stock price.

“I do think it’s been a distraction,” Charney said. “And I think the media has been complicit because it’s good copy.”


Core strength

Charney believes the strength of the company is that it successfully connects with urban customers “whether they’re in London, Tokyo or L.A.”

American Apparel makes and sells trendy T-shirts and other garb. Everything’s done in-house, from dying yarn to producing the company’s trademark sexy ads. And it’s become the largest clothing manufacturer in the United States, now that most other companies have off-shored production.

In addition, since it started selling retail in 2003, the company has opened 240 stores on four continents, which Charney said may be the fastest rollout of a new apparel retailer in American history. It opened 80 stores last year alone.

But that fast growth is set to slow. As part of its loan renegotiation, American Apparel is restricted in how much it can spend on such things. The company now plans only 16 openings in 2009.

Also, last month the company laid off several hundred employees, or less than 6 percent of its more than 10,000 employees. Charney said some of the layoffs were due to slowing growth, but some were attributable to the normal seasonal slowdown.

While retailers have been roughed up generally in today’s tough economy, American Apparel, Urban Outfitters and other youth-oriented brands are still looking relatively strong, said Todd Slater, an analyst with Lazard Capital Markets LLC in New York. That’s because the downturn hasn’t hurt their customers much.

“American Apparel has a favorable demographic,” Slater said. Speaking of those youthful buyers, he said, “Your assets aren’t deflating because you don’t own a home. You probably don’t own a car unless you’re in Los Angeles. And you don’t own stock.”

Nevertheless, Slater is the analyst who lowered the company’s 2009 earnings expectations from 60 cents per share to 51 cents. Analysts polled by Thomson Reuters Financial predicted a profit of 52 cents on average.

Slater said a fair chunk of the company’s stock, along with the shares of other apparel companies, is being sold short, meaning sellers are betting the stock price will go down.

“A lot of companies have had significant increases in short-sell stock during a recession,” he said. “The question is who will survive and who will not. I think American Apparel is a clear survivor. They’re outperforming the good old boy retail network and outplaying much larger competitors.”


Vertical integration

One way American Apparel has been outplaying rivals is through its speed to market, that’s to say the short time it takes to capture a fashion trend and get it to the stores. The speed comes from the company’s vertical integration: The only functions performed outside the seven-story pink headquarters building in downtown Los Angeles is fabric storage, which is only a few blocks away, and fabric and garment dying in recently acquired Garden Grove facilities. Even ads and store signs are produced and printed in the main building.

The clothes are designed on the seventh floor, just a few doors down from Charney’s office. An American Apparel product can go from concept to shelf in just one week. The average for the industry is three months.

Because American Apparel manufactures domestically, its production costs are higher, which leads to a higher retail cost. Short-sleeve solid-color T-shirts start at $17, whereas similar shirts start at $14 at the Gap, which manufactures abroad.

The higher price doesn’t seem to matter to American Apparel’s customers, who appreciate that the clothes aren’t made in an overseas sweatshop.

“They’re willing to pay a little bit more for higher-quality nonsweatshop products,” Slater said. “The prices aren’t egregious. What you lose on price you more than gain in cachet, quality and speed.”

The company pays workers a living wage with benefits that aren’t common in the rag trade health insurance, exercise classes, an on-site medical clinic, English classes, no-fee long-distance calls and free use of company-owned bicycles.

Those kinds of things play well with the company’s urban customer, along with the fact that American Apparel focuses on logo-free clothes that are trendy but basic enough they don’t quickly go out of style.

“Companies that stick with their focus do well,” said Slater. “It’s the companies that try to branch out too much that tend to miss. Most retail companies want to do high fashion and have walked away from basics. I think American Apparel offers clothes that people want. They tuned in to what this demographic is interested in.”

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