- Fourth quarter 2009 net sales of $158.1 million, an increase of 8.6 percent over the fourth quarter of 2008
- Fourth quarter 2009 diluted earnings per share of $0.04 vs. $0.05 for the fourth quarter of 2008
- 2009 net sales totaled $558.8 million, an increase of 2.5 percent over 2008
- 2009 diluted earnings per share of $0.01
- 2009 Adjusted EBITDA of $55.9 million
American Apparel Inc., Los Angeles, a vertically integrated manufacturer, distributor, and retailer of branded fashion basic apparel, announced its financial results for the fourth quarter and the year ended December 31, 2009.
American Apparel reported net sales for the fourth quarter ended December 31, 2009 of $158.1 million, an 8.6 percent increase over net sales of $145.6 million for the fourth quarter ended December 31, 2008. Total retail net sales increased 10.4 percent to $108.2 million for the fourth quarter of 2009 as compared to $98.0 million for the same period in 2008, with comparable store sales for stores open at least 12 months declining 7 percent on a constant currency basis. American Apparel ended the quarter with 281 stores, having added 21 net new stores during 2009. Total wholesale net sales, excluding online consumer sales, increased 6.1 percent to $38.5 million for the fourth quarter of 2009 compared to $36.3 million for the fourth quarter of 2008. Online consumer net sales remained relatively unchanged at $11.4 million for the fourth quarters of 2009 and 2008.
Gross margin for the fourth quarter of 2009 was 55.0 percent as compared to 54.5 percent for the prior year fourth quarter. Gross margin was favorably impacted by the depreciation of the U.S. dollar against foreign currencies in the fourth quarter of 2009 compared to the fourth quarter of 2008, and by a continuing shift in mix from wholesale to retail sales, which generate higher gross margins. These factors were largely offset by a substantial reduction in manufacturing efficiency at the company’s production facilities in the fourth quarter of 2009 compared to the prior year period. The reduction in manufacturing efficiency was principally a result of the forced termination of over 1,500 experienced manufacturing employees in the third and fourth quarters of 2009 following the completion of the previously disclosed I-9 inspection by U.S. Immigration and Customs Enforcement.
Operating expenses for the fourth quarter of 2009 were $77.2 million, or 48.8 percent of net sales, as compared to $70.2 million, or 48.2 percent of net sales for the prior year period. The increase in operating expenses was primarily caused by increased occupancy, payroll, and depreciation expenses from having an additional 21 stores in operation at the end of the fourth quarter of 2009, compared to at the end of the fourth quarter of 2008. Operating expenses were also higher in the fourth quarter of 2009 due to $1.5 million in non-cash retail store impairment charges recorded during the period. Pre-opening expenses for retail stores were $0.2 million in the fourth quarter of 2009, versus $3.6 million in the prior year fourth quarter.
Income from operations for the fourth quarter of 2009 was $9.8 million, or an operating margin of 6.2 percent, versus operating income of $9.2 million in the prior year fourth quarter, or an operating margin of 6.3 percent.
Interest expense for the fourth quarter of 2009 increased to $4.8 million from $3.6 million in the fourth quarter of 2008. The increase in interest expense was largely due to the amortization of debt discount on the company’s second lien credit facility and an increase in the related amortization of deferred financing costs, as well as a higher weighted average interest rate on outstanding borrowings in the fourth quarter of 2009 compared to in the fourth quarter of 2008.
The effective tax rate in the fourth quarter of 2009 was 41.2 percent.
Net income for the fourth quarter of 2009 was $3.0 million, or $0.04 per diluted share, compared to net income for the fourth quarter of 2008 of $3.9 million, or $0.05 per diluted share.
For the year ended December 31, 2009, American Apparel reported consolidated net sales of $558.8 million, a 2.5 percent increase over net sales of $545.1 million for the year ended December 31, 2008. Total net retail sales increased 11.2 percent to $379.4 million for 2009 as compared to $341.3 million for 2008. Comparable store sales for stores open more than 12 months decreased 10 percent for the year on a constant currency basis. Total wholesale net sales, excluding online consumer sales, decreased 13.6 percent to $142.1 million for 2009 compared to $164.4 million for 2008. Online consumer net sales decreased 5.2 percent to $37.3 million for 2009 versus $39.4 million for 2008.
Gross margin for 2009 was 57.3 percent as compared to 54.0 percent in 2008. The gross margin for 2008 was negatively impacted by $13.2 million in stock based compensation expense relating to the award of approximately 1.9 million shares of stock to manufacturing employees during the third quarter of 2008, granted pursuant to the 2007 merger between American Apparel, Inc. (formerly Endeavor Acquisition Corp.) and American Apparel Inc., a California corporation (“Old American Apparel”). The net impact of the stock based compensation expense was to negatively impact gross margin in 2008 by approximately 240 basis points. Gross margin for 2009 was favorably impacted by a shift in mix from wholesale to retail sales, as retail increased from 62.6 percent of total net sales in 2008 to 67.9 percent of total net sales in 2009. The favorable impact from the shift in mix was partially offset by the negative impact of the appreciation of the U.S. dollar versus foreign currencies for the full year 2009 relative to the full year 2008. Additionally, gross margin was also negatively impacted by lower capacity utilization of the company’s manufacturing facilities in the first half of 2009, and the substantial reduction in manufacturing efficiency experienced in the fourth quarter of 2009 at the company’s production facilities.
Operating expenses for 2009 were $295.5 million, or 52.9 percent of net sales, as compared to $258.4 million, or 47.4 percent for 2008. The increase in operating expenses was primarily caused by increased occupancy, payroll, and depreciation expenses incurred as a result of operating an additional 21 net stores at the end of 2009 compared to the end of 2008, as well as due to the full year impact of increased operating expenses from the additional 78 net stores opened in 2008. Operating expenses were also higher in 2009 due to $3.3 million in non-cash retail store impairment charges recorded in 2009 compared to $0.6 million in 2008. Pre-opening expenses for retail stores were $2.4 million in 2009 versus $10.3 million in 2008.
Income from operations for 2009 was $24.4 million, or an operating margin of 4.4 percent, versus income from operations of $36.1 million for 2008, or an operating margin of 6.6 percent.
Interest expense for 2009 increased to $22.6 million from $13.9 million for 2009. The increase in interest expense was largely due the amortization of debt discount on the company’s second lien credit facility and an increase in the related amortization of deferred financing costs, as well as a higher weighted average interest rate on outstanding borrowings for 2009 as compared to for 2008.
The effective tax rate for the year ended December 31, 2009 was 77.4 percent. The company’s tax provision for 2009 included, among other items, charges in respect of the company’s FIN 48 liability, and valuation allowances against net operating loss carry-forwards in certain international subsidiaries. The company expects that its effective tax rate in future periods will be between 30 percent to 40 percent, which is closer to the statutory corporate tax rates.
Net income for 2009 was $1.1 million, or $0.01 per diluted common share, compared to net income of $14.1 million, or $0.20 per diluted common share in 2008. Earnings per diluted share for 2008 were negatively impacted by $0.13 due to the after-tax impact of the $13.2 million merger related stock based compensation expense. Please see Table A for more background on the impact of the merger related stock based compensation expense on the 2008 results.
During the fourth quarter of 2009, the company reduced the drawn balance on its revolving credit facilities by approximately $26.0 million, to $6.2 million at December 31, 2009 from $32.3 million at the end of the third quarter of 2009, primarily through the use of cash flows generated from operations. As of December 31, 2009, the company had $41.2 million of availability under its U.S. revolving credit facility. Total debt decreased by $21.3 million, to $83.4 million at the end of the period from $104.6 million at the end of the third quarter of 2009. Total inventories were $141.2 million at the end of the period, a reduction of $11.4 million from $152.6 million at the end of the third quarter of 2009. For the full year of 2009, the company generated $45.2 million of cash flows from operations, and capital expenditures were $20.9 million.
Dov Charney, Chairman and Chief Executive Officer, stated: “Despite the many challenges our business faced in 2009, we delivered on our overall goal to generate significant cash flows from operations, resulting in a substantial reduction in debt in the second half of the year. I am pleased by the discipline that has been demonstrated in managing our inventory levels and by the focused capital expenditures made in 2009. Our main goals for 2010 are to enhance the productivity of our existing base of retail stores, re-establish our level of manufacturing efficiency at our production facilities, and to continue to broaden our management team to implement best practices throughout our organization. We continue to believe that the prospects for our brand remain bright and we look forward to bringing our products and our stores to many new potential customers in new neighborhoods and new cities in the decade ahead.”
For 2010, to date the company has opened one new store location and has two more locations under signed leases. Beyond these two store locations currently in development, due to financial covenant constraints under the company’s credit facilities, the company is not in a position at this time to provide reliable guidance on the number of additional stores it may open in 2010. Based on the performance to date in the first quarter of 2010, the company currently expects to report a decline in comparable store sales of approximately 10 percent for the first quarter of 2010.
Based on the substantial impact of the reduced manufacturing efficiency experienced at the company’s production facilities beginning in the fourth quarter of 2009, and the high level of uncertainty surrounding the duration of the reduction in efficiency, as well as due to uncertainty stemming from the company’s constrained ability to undertake additional investments in its business as a result of certain restrictive financial covenants under the company’s credit facilities, the company has determined to defer providing annual financial guidance for 2010 until it reports its first quarter 2010 financial results in early May. However, as in 2009, the company currently expects to be free cash flow positive in 2010 and plans to use free cash flow to continue to pay down debt and selectively reinvest in its business to drive improved productivity in its existing operations.
For more information on American Apparel, visit www.americanapparel.com.
