CASE STUDY 2: AMERICAN APPAREL DROWNING IN DEBT?

1. Use the Excel data (below) to conduct an analysis of the companys financial statements.
2. Address the following items/questions:
   1. Using a financial ratio analysis, evaluate American Apparels financial performance for the past five years.
   2. Analyze the companys financial statements on the basis of its common size statements. What additional insights do these statements provide?
   3. In your opinion, does American Apparel have an asset management problem? If so, what is the nature of the problem (for example, fixed assets, receivables, inventory, or other)?
   4. On the basis of the financial performance analysis, what actions do you recommend to prevent the company from falling further into debt?
3. In addition to a narrative explaining your answers, include charts or graphs that illustrate your conclusions.

American Apparel, Inc. and Subsidiaries Consolidated Balance Sheets December 31, 2013 2012 2011 2010 2009 $ 9,589 8,676 $ 12,853 $ 10,293 S 7,656 $ 9,046 20,701 22,962 20,939 16,688 16,907 3,733 15,636 7,631 9,401 9,994 169,378 174,229 185,764 178,052 141,235 306 530 5,955 4,114 4,494 599 494 148 626 4,627 215,296 224,390 230,730 216,537 186,303 69,303 67,778 67,438 85,400 103,310 2,426 1,261 1,529 1,695 12,033 46,727 34,783 25,024 24,318 25,933 333,752 $328,212 $324,721 $327,950 $327,579 $ $ 3,993 $ $ 1,921 $ 3,328 $ 3,741 (Amounts and shares in thousands, except per share amounts) ASSETS CURRENT ASSETS Cash Trade accounts receivable Restricted cash Prepaid expenses and other current assets Inventories, net Income taxes receivable and prepaid income taxes Deferred income taxes, net of valuation allowance Total current assets Property and equipment, net Deffered taxes Other assets, net TOTAL ASSETS LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY CURRENT LIABILITIES Cash overdraft Revolving credit facilities and current portion of long-term debt Accounts payable Accrued expenses and other current liabilities Fair value of warrant liability Income taxes payable Deferred income tax liability, current Current portion of capital lease obligations Total current liabilities LONG-TERM DEBT, net of unamortized discount of $5,779 and $27,929 at December 31, 2013 and 2012, respectively Subordinated notes payble to related party Capital lease obligations, net of current portion Deferred tax liability Deferred rent, net of current portion Other long-term liabilities Total long Term Liabilites TOTAL LIABILITIES STOCKHOLDERS' (DEFICIT) EQUITY shares outstanding at December 31, 2012 Additional paid-in capital Accumulated other comprehensive loss Accumulated deficit Less: Treasury stock, 304 shares at cost TOTAL STOCKHOLDERS' (DEFICIT) EQUITY TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY 44,042 38,290 50,018 20,954 1,742 1,241 1,709 161,989 6,346 19,705 30,573 2,608 60,556 38,160 41,516 17,241 2,137 296 1,703 161,609 50,375 33,920 43,725 9,633 2,445 150 1,181 143,350 138,478 31,534 39,028 993 230 560 214,151 1,907 64,880 213,468 5,453 97,142 110,012 2,844 536 18,225 11,485 249,167 411,156 262 20,706 10,695 144,519 306,128 1,726 96 22,231 12,046 133,241 276,591 444 4,611 65,997 542 4,355 260 1,020 24,924 22,052 7,994 11,934 38,775 105,358 252,926 $ 170,238 11 11 11 185,472 177,081 166,486 (4,306) (2,725) (3,356) (256,424) (150,126) (112,854) (2,157) (2,157) (2,157) (77,404) 22,084 48,130 333,752 $328,212 $324,721 8 7 153,881 150,449 (3,168) (2,083) (73,540) 19,012 (2,157) (10,044) 75,024 157,341 $327,950 $327,579 $ American Apparel, Inc. and Subsidiaries Consolidated Statements of Operations and Comprehensive Loss (Amounts and shares in thousands, except per share amounts) Years Ended December 31, 2013 2012 2011 2010 2009 Net sales $ 633,941 $ 617,310 $ 547,336 $ 532,989 $ 558,775 Cost of sales 313,056 289,927 252,436 253,080 238,863 Gross profit 320,885 327,383 294,900 279,909 319,912 Selling expenses 241,683 227,447 209,841 218,198 198,518 General and administrative expenses 106,957 97,327 104,085 103,167 93,636 2 Retail store impairment 1,540 1,647 4,267 8,597 3,343 (Loss) income from operations (29,295) 962 (23,293) (50,053) 24,415 1 Interest expense 39,286 41,559 33,167 23,752 22,627 5 Foreign currency transaction loss 1 120 1,679 (686) (2,920) Unrealized loss (gain) on change in fair value of warrants and purchase rights 3,713 4,126 (23,467) 993 Loss (gain) on extinguishment of debt 32,101 (11,588) 3,114 Other expense (income) 131 204 (193) 39 (220) Loss before income taxes (104,527) (33,459) (37,593) (74,151) 4,928 Income tax provision 1,771 3,813 1,721 12,164 3,816 2 Net loss $ (106,298) $ (37,272) $ (39,314) $ (86,315) $ 1,112 3 Basic and diluted loss per share $ (0.96) $ (0.35) $ (0.42) $ (1.21) $ 0.02 7 Weighted average basic and diluted shares $ (1.21) $ 0.01 5 outstanding 110,326 105,980 92,599 71,626 71,026 5 Net loss (from above) $ (106,298) $ (37,272) $ (39,314) $ (86,315) $ 1,112 Other comprehensive (loss) income item: B Foreign currency translation, net of tax (1,581) 631 (188) (1,085) 620 Other comprehensive (loss) income, net of tax (1,581) 631 (188) (1,085) 620 Comprehensive loss $ (107,879) $ (36,641) $ (39,502) $ (87,400) $ 1,732 Cash Flow Overview (dollars in thousands) 2013 2012 2011 2010 2009 Net cash (used in provided by: Operating activities $(12,723) $23,589 $2,305 $(32,370) $45,203 Investing activities (25,147) (24,853) (10,759) (15,662) (20,889) Financing activities 34,228 4,214 12,582 48,172 (25,471) Effect of foreign exchange rate changes on cash (535) (390) (1,491) (1,530) (1,165) Net (decrease) increase in cash $ (4,177) $ 2,560 $2,637 $ (1,390) $ (2,322)