List down some qualitative issues and challenges faced by the company (not reflected in the financial statements)

AMERICAN APPAREL: BROWNING IN DEBT?1 On April 3, 2014, the cash-crunched American retailer, American Apparel, lnc., needed to pay $13.4 million2 in interest and other debt repayments. With a net loss of $ 106 million in 2013, a substantial increase over its net loss of $37 million in 2012, the company had been struggling for survival. It had not been protable since 2009. Its net sales increased marginally in 2013, but the company still ended up with a bigger loss than ever before. During the same period, the shares of the company plummeted from $15 per share to $0.56 per share, losing 95 per cent of its share value (see Exhibit 1). The company's controversial chief executive ofcer [CEO], Dov Chamey, had been able to sustain the business with continued borrowing at an exorbitant rate {as high as 13 per cent interest) and additional capital. In March 2014, the company raised $28.5 million by selling more than 61 million shares at 50 cents each? American Apparel also renegotiated with its existing lenders. As a result, the company acquired some relief from its credit payments. What actions could save the company? The CEO and founder Dov Charney stated: We invested substantially in our infrastructure in 2012 and 2013, and almost all of these projects have been implemented. We expect 2014 to be a year where we return our full focus to exploiting the strength of our brand and delivering exceptional service to our retail and wholesale customers. We are committed to delivering a return on the investments we have made in our business.4 ABOUT THE COMPANY \"American Apparel is about vision, passion, intensity, brand-free, sustainable, fair wages, solar power, recycling, creativity and the can-do spirit,\" according to CEO Dov Charney.\" Based in downtown Los Angeles, American Apparel was a vertically integrated manufacturer, distributor, and retailer of branded basic fashion apparel and accessories for women, men, children, and babies. As of February 28, 2014, the company had approximately 10,000 employees and operated 246 retail stores in 20 countries. The company had businesses in the United States, Canada, Mexico, Brazil, United Kingdom, Ireland, Austria, Belgium, France, Germany, Italy, Netherlands, Spain, Sweden, Switzerland, Israel, Australia, Japan, South Korea, and China. The company operated an ecommerce website, www.americanapparel.com, with 12 localized online stores in seven languages that served customers from 30 countries worldwide. The company had four operating segments: wholesale, US. retail, Canada, and international. \"American Apparel" was a registered trademark of American Apparel [USA], LLC.\" Since 2006, the company had been listed on the New York Stock Exchange. The apparel manufacturing operations were spread across the 300,000 squarefoot facilities in the warehouse district of downtown Los Angeles, California. Business Model American Apparel's mission was to make great quality clothing without using cheap \"sweatshop\" labour and exploiting workers: We are trying to rediscover the essence of classic products like the basic T-shirt, once an icon of Western culture and freedom. Our goal is to make garments that people love to wear without having to rely on cheap labor. Every aspect of the production of our garments, from the knitting of the fabric to the photography of the product, is done inhouse. By consolidating this entire process, we are able to pursue efficiencies that other companies cannot because of their overreliance on outsourcing} Growth Strategy The company focused on growing by enhancing the number of stores, building a good online sales platform, buying new merchandise for consumers, and creating strong information systems to support its operations. The company had the core business strengths of unique designs, advertising and branding, speed to market, quality products, and broad appeal to consumers of various demographics} About the CEO and Founder Dov Charney founded the garment business in 1993.9 Charney had been focused on high-quality and trendsetting clothes. He also had a strong business sense, and his vertically integrated business model provided the company with an extra advantage of responding quickly to market changes and consumer needs. Ernst 8: Young named Chamey Entrepreneur of the Year in 2004. Apparel Magazine, the Fashion Industries Guild, and the Advertisement Specialty Industry each awarded him the title \"Man of the Year.\" Chamey was included in the Les Angefes Timer' \"100 Most Powerful People of Southern California" list, and Details Magazine inducted him into its \"Power 50." For the first annual Los Angeles Fashion Awards, lC'harney was recognized for Excellence in Marketing. In 2008, an independent research report placed American Apparel as the Top Trendsetting Brand, second only to Nike. '0 In 2003, the company's CEO was named \"Retailer ofthe Year" at the l5th Annual Michael Awards for the Fashion Industry, following Calvin Klein and Oscar de la Renta. In contrast to his achievements, Chamey was also known for the use of sexually provocative advertisements in the marketing of the company's products. Chamcy was associated with several controversial lawsuits, although none had been proven in court.ll AMERICAN APPAREL'S PAST PERFORMANCE From being the top trendsetting brand in 2008 to becoming a debt-ridden company, the journey oi'American Apparel had been very diffmult. The aggressive expansion of the company, the explicit use of sexually provocative advertising, and goodquality products had paid well in terms of the profitability of the company. The company created strong brand recognition and its products appealed to the young, with its trendsetting designs and Chamey's unique fashion sense. Based on the company's growth strategy, American Apparel continued to expand through organic growth, internal initiatives, and acquisitions. The company grew from 14';' stores in 2006 to 260 stores in 2008, while expanding both domestically and internationally. Sales increased by a massive 40 per cent compared with the previous year. The rapid expansion of stores and retail centres made American Apparel one of the fastest growing companies in the retail sector. Year 2005 and Afterwards: A Struggle for Survival American Apparel's success story continued until 2009. During 2009, a federal investigation uncovered irregularities in the identity documents of workers when they had been hired by American Apparel.\" Because of the immigration issues, the company was required to terminate the employment of 2,000 American Apparel workers from its factory, leading to its inability to both complete orders on time and meet demand. As a result, production was badly hit, which led to stockouts. The operating prolit decreased from $36 million in 2003 to $3 million in 2009, a massive decrease of 92 per cent. The company's net prot fell dramatically from SM- million in 2008 to $1 million in 2009, a decline of 93 per cent {see Exhibit 2, which contains the details of the company's income statements; also see Ivey product 13168008}. The impact oi'the labour termination ol'employment was so severe that the company could not fully recover. The global recession made the recovery all the more difcult. For the rst time, the company's sales declined (from $558 million in 2009 to $532 million in 2010). The operating income fell from $24 million in the year 2009 to negative $50 million in 2010. American Apparel went from a net prot of$l .l 1 million to a net loss ofSS million. Shattered by the losses and lack of liquidity, American Apparel's money situation worsened by the rst quarter of 20] I, and the company stated that it might le for protection against bankruptcy under Chapter 1]. Desperate for funds, Charney was able to bring in investors for the company at the last moment and saved it from default. However, the loan taken by the company was excessively costly. Despite all of this debt, the company kept enhancing its stores. Because of significant efforts, the net loss declined in 201 1 to 539 million compared with $86 million the previous year. In 2012, the company undertook efforts to upgrade its production trecasting and allocation system, which would enhance the logistics using a demand planning solution. At the same time, it continued building stores. The total net loss decreased from $39 million in 201 l to $37 million in 2012. Sales had also started increasing; net sales of the company increased from 554? million in 2011 to Stil'r' million in 2012 [see Exhibits 2 and 3). Financial Results in 2013 [n 2013, American Apparel experienced its worst nancial year. In this year, the company implemented two important strategic initiatives in the area of inventory management and the new distribution centre in Los Angeles. The company also completed its radio-frequency identication system and implementation of the Oracle Web Commerce application for its ecommerce platform. The company had difculties transitioning to a new distribution centre, which led to a signicant increase in operating costs, while deliveries were disrupted.\" The cost of goods sold increased from 3239 million in 2012 to $313 million in 2013, crushing both net and gross margins. The net loss increased to a massive $l06 million, with sales growth at a marginal 3 per cent from $61? million in 2012 to $633 million in 2013. Already pressurized by extremely high interest rates and debt repayments, the company had only $8 million in cash on December 3] (see Exhibit 4). (For information on stores in 20 [3, see Exhibit 5.) At the end ol'2013, the company had huge debt. Prominent lender Lion Capital had loaned funds at an extremely high rate and had maintained strict terms and conditions, which could be increased, and the debt could be called back in the event ol'any top management changes. APPAREL INDUSTRY The apparel industry in general was highly fragmented and highly volatile. According to PEC Research, the sales growth over the previous live years had been eroded (0.5 per cent compound annual growth rate [CAGR] domestically and 1.4 per cent CAGR overall)\" In addition, the industry inventory levels had been increasing steadily over the previous five years from approximately 12 per cent of sales in 2008 to [4 per cent of sales in 2011 because of the increased cost of raw materials and inventory management, which affected the overall pricing of inventory. The U.S market was almost stagnant; international sales had grown by a CAGR of l [.3 per cent over the same period. The CAGR for total sales [combining international and domestic sales] over this period was approximately L6 per cent. According to lndurtrylt"eelr, the apparel industry in the United States had lost more than 30 per cent of its jobs, and the postrecession recovery was extremely slow.\" Many US. companies were sustained by the vertical integration model because of their strong ability to move and respond quickly to consumers' preferences and needs. The ability of the company often depended on its capability to capture domestic and international sales. Any failure in predicting fashion trends could prove fatal for the company. [n the apparel industry, American Apparel faced stiff competition from Gap, Urban Outtters, American Eagle, and Express. Some ofthese competitors had better nancial power as well as good access to reduced costs because of an outsourcing model. FUTURE AHEAD: 2014 FIRST QUARTER RESULTS AND THE OUTLOOK FOR THE YEAR For the lirst quarter ended March 31, 2014, American Apparel's net sales decreased to $131.1 million, because of a reduction of both comparable stores and wholesale net sales. Gross prot reduced to $712 million in the first quarter. In the rst quarter report of 2014, the company reassured investors of its commitment to reducing costs by bringing down manufacturing and administrative costs. In that year, the company also halted its excessive capital expenditure and was more focused on removing inefliciencies associated with the production process while building up productivity for a protable future.\"' lC'harney indicated, \"We are encouraged by our rst quarter performance with our achieved results ahead of our 2014 business plan. The results ofour cost control efforts are being seen in all areas of the business, and we are now fully focused on measures to improve top line performance?\" Showing the way forward, he said, \"Its [American Apparel's] 24? stores could be 20% more productive with the right tweaks; the online business could double, wholesale could grow by 20% to 3lil%."\"3 Recent Happenings On March 25, 2014, to comply with the terms and conditions of debt renegotiation, the company raised more share capital. CEO Johannes Minho Roth, of FiveT, a Zurich-based rm, purchased 526 million of the shares and became the second largest outside shareholder, after CED Dov Charney. Roth believed that the company was grossly undervalued. Roth, regarding his investment in American Apparel, stated, \"We cannot believe how cheap it is," especially since, \"it's a lot further in the restructuring process than people think . . . he's a visionary. . . . Dov wants to make it his life goal to make American Apparel into a successful company. 1 have a very positive view on him.""' Although raising funds earned the company some time, which enabled it to pay off its debt, the danger of default had only subsided and not gone away, with the next big interest payment due in April 2(114. On April 14, 2014, the debtridden company Suffered one more blow. Based on an internal inquiry, the board accused and dismissed Charney because of \"willful misconduct" based on sexual assault and sexual harassment cases. The board clarified that the firing was based on personal misconduct rather than professional misbehaviour. The firing came at a time when the company was suffocating under its debt burden. An interest payment of$14 million had to be paid by the end ol'Apri1214. Analysts viewed this event as the last nail in the cofn, questioning whether lC'harney's exit from the company would trigger the default that the company had been avoiding for so long. Further questions remained regarding which performance areas had dragged the company down into debt and whether American Apparel had lost its appeal and Chamey had lost his charm