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International Research Journal of Applied Finance
ISSN 2229 – 6891
January 2013
Case Study Series

American Apparel, Inc. – Saved from Bankruptcy but can it Sustain?

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Dr Anupam Mehta
Assistant Professor
Institute of Management Technology
Dubai, UAE
anupam@imtdubai.ac.ae

This case has been compiled from published sources. It is intended for class room discussiona ratherthan to
illustrate either effective or ineffective handling of a management situation.
Dr Anupam Mehta, Institute of Management Technology, anupam@imtdubai.ac.ae

Case ID 040102

International Research Journal of Applied Finance
ISSN 2229 – 6891
January 2013
Case Study Series
Abstract
American Apparel, Inc, which was once the fastest growing retailer of America, is now striving
tosave its bleeding bottom line. With the possible bankruptcy looming on the American Apparel
heads and huge pile of loans to pay, it is battling to get on the operating profits necessary for its
very existence. The present case depicts the struggle of founder and CEO Dov Charney to revive
the company with his recovery mechanism, inventory management, strengthening online &
offline sales andcrushing operating expenses to fight against the quarter by quarter losses,
negative EPS and decreasing margins. This case gives an opportunity to the students to analyze
and evaluate the financially troubled company’s performance along with applying the Altman’s
Z score. At the end of the case students need to decide: whether the CEO Dov Charney’s
recovery plan is able to improve the financialperformance of the company? What are the trends
of growth and earnings? Does the company have sufficient liquidity and profitability to meet the
requirements of massive debt and gather refinance options? Does the company survive
bankruptcy?
Keywords: American Apparel, Bankruptcy, Z score, Profitability, Retails sector, financial
performance, Ratio analysis

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Introduction
Witha cumulative loss of $41 million for the first three quarters in 2012, American Apparel,
once the “Label of the Year: American Apparel”, “The fashion sensation of 2008” (The
Guardian, 2008) is struggling to stay afloat, after going into deep financial troubles in 2009 and
was on the verge of bankruptcy in 2011. The company’s net profit slipped to $1 million in 2009
from $15 million in 2007and down to annual net losses of $86 million & $39 millions in 2010
and 2011 respectively. Dov Charney, the CEO and Founder of American Apparel, who built the
company from a small retailer to a massive vertically integrated manufacturer, distributor and
retailer, is now burdened with massive debt load, falling share prices and decreasing margins.
Till now, Dov Charney’s efforts have been ableto sustain the company in spite of losses and pull
up the investors for its sinking company, while enhancing the sales from $533 million in 2010 to
$547 million in 2011 and further building up to $444 million (first three quarters in 2012) with
effective inventory management and expansion plans. But, continuous losses pressurized him to
improve the profitability and deliver the financialresults or it will run out of options soon.
Figure 1 Stock Performance for 2006-2011

(Source: American Apparel, Inc., 2011)
Dr Anupam Mehta, Institute of Management Technology, anupam@imtdubai.ac.ae

Case ID 040102

International Research Journal of Applied Finance
ISSN 2229 – 6891
January 2013
Case Study Series
Company background
As of July 31, 2012, American Apparel had approximately10,000 employees and operated 251
retail stores in 20 countries, including the United States, Canada, Mexico, Brazil, United
Kingdom, Ireland, Austria, Belgium, France, Germany, Italy, Netherlands, Spain, Sweden,
Switzerland, Australia, Japan, South Korea and China. American Apparel operates a global ecommerce site that serves over 60 countries worldwide at http://www.americanapparel.net. In...