Rumors We Would Like To Hear: American Apparel To Shutter 50 Stores

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American Apparel has too many stores.

The company (AMEX: AAP) raised $14.9 million through a sale of shares on April 25 to save itself from what was a likely bankruptcy. The shares were sold at a 43% discount to the market value at that time. The lead investors were Canadian financier Michael Serruya and Delavaco Capital.

Investors have sold off the stock since the arrangement was announced. The shares spiked up to $1.58 on the deal news. Shares are now under $1 – it’s dropped 6% today. Wall St. either thinks that the terms of the financing were unfavorable or that American Apparel will get into financial trouble again. Some investors may believe both. The firm’s auditor for the period which included the latest 10-K, Marcum, said in its audit letter that “the Company has minimal availability for additional borrowings from its existing credit facilities, which could result in the Company not having sufficient liquidity or minimum cash levels to operate its business. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.”

On May 10, the firm released results for its quarter which ended on March 31, 2011. Revenue fell from $121.8 million in the 2010 period to $116.1 million this year. American Apparel lost $20.7 million compared to $42.8 million loss in the same period last year. The company said same-store sales dropped 7.9% for the period. American Apparel ended the quarter with 258 stores, a reduction of 15 stores in the first quarter.

Same store sales are not American Apparel’s only problem. The high price of cotton has and will almost certain hurt margins.

American Apparel competes with several larger and more well-financed retailers. These include Abercrombie & Fitch (NYSE: ANF), American Eagle Outfitters (NYSE: AOE), and Urban Outfitters (NASDAQ: URBN). Wall St. does not like any of these operations now. Most sell at or near 52-week lows. American Eagle may close 100 of its stores soon to offset slow sales and increased costs. It has 929 locations.

The headwinds which face clothing retailers are growing. Unemployment levels in the US are no longer improving. The rising price of gas has damaged consumer spending and probably hurt traffic to malls and stores. High commodities prices currently drive the prices people must pay for clothing higher.

American Apparel needs to review its store portfolio and close the 20% that have the poorest performance. Investors would finally have something to cheer about.

Douglas A. McIntyre

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