I conclude American Apparel - APP - is a candidate for bankruptcy because of its flawed marketing strategy.
I took a walk through a local American Apparel store after I noticed a major change in window displays, from the risqué and T-shirts to something more tame, more like a Kohls or a Sears. This was a major marketing shift. The bigger surprise was inside the store: the merchandise being sold was winter merchandise, full price.
Going into the store was like walking into a time warp, where the clock moved back a few months.
Retail tends to lead the seasons, sometimes too quickly, like JCPenney selling shorts in February's snowstorms, but we are in the mixed weather season here. 70 degrees one day, snow flurries the next. Spring is in the air. Most of the mall stores have cleared out their winter lines. I checked the men's department at the Macy's, across from APP. M had cleaned out its winter lines and pushed the remaining sale items to the back, giving its prime selling space over to spring shirts.
American Apparel is a penny stock ($0.95, to be exact) that is known for its racy ads and its controversial and litigation-prone founder.
-- It's had financial troubles in 2009 that forced it to borrow from an outside source, Lion Capital. The Lion loans, which are PIK's, are now coming due. APP is also drawning down its credit lines with BankAmerica. Interest expenses are projected to rise.
-- The company has had auditor problems, has missed its SEC filings and recently requested a filing extension.
-- Its March 17 extension filing with th SEC mentions liquidity problems and raises going concern risks. ("In addition, in its Form 10-Q for the quarter ended September 30, 2010, the Company noted that it may not have sufficient liquidity necessary to sustain operations for the next twelve months, raising substantial doubt that the Company will be able to continue as a going concern.")
-- The company is subject to litigation seeking substantial damages. IMHO, the risk is not the courts, but alienating its young customers.
-- Cash flow is low relative to debt.
-- It is having manufacturing problems ranging from inexperienced sewing operators to higher cotton costs.
-- Pros: the store I checked was bright, clean and well-stocked.
Just my opinion.