American Apparel Warns of ‘Going Concern’


American Apparel Inc. on Tuesday admitted that slumping sales and continued fallout from an immigration raid last year had taken its toll. The clothing maker announced that it expected another quarterly loss and warned that it was again close to breaching a loan covenant.

Shares dived 36 cents, or 26 percent, to close at $1.03 on the New York Alternet, and were down another 2 percent in after-market trading.

The Los Angeles designer and manufacturer said it expects losses from operations to continue through at least the third quarter, and that it may not have enough liquidity to continue to operate for the next year.

“The (Bank of America) Credit Agreement contains certain cross-default provisions,” the company said in its late first-quarter 10-Q filing with the Securities and Exchange Commission. “These factors, among others, raise substantial doubt that we will be able to continue as a going concern.”

American Apparel said it will not be in compliance with the minimum consolidated EBITDA covenant under a second lien credit agreement as of Sept. 30. It plans to work with the second lien lender to obtain amendments that would prevent a covenant default.

In a separate press release, American Apparel said it expects a preliminary second-quarter loss between $5 million and $7 million on sales of $132 million to $134 million. Same-store sales fell 16 percent. In the second quarter last year, the company reported a profit of $7.3 million on revenue of $136 million.

The company last week said it would delay its final second quarter report after its accounting firm Deloitte & Touche resigned last month, citing “material weaknesses in internal control over financial reporting” and told American Apparel management about the problem. American Apparel hired Marcum LLP as a replacement auditor.

The company said it had received a subpoena from the U.S. attorney’s office for the Southern District of New York and an inquiry from the U.S. Securities and Exchange Commission

over the change in accounting firms.

The company earlier this year scrambled to staff up after it was forced to fire more than 1,500 immigrant employees – about one-third of its factory work force – last September after an investigation by federal immigration inspectors. About 1,000 additional employees quit soon after. A shortage of skilled workers significantly affected the company’s production process, Chief Executive Dov Charney told the Business Journal in an interview last month.

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