American Apparel Continues to Fall Apart

The departure of founder and CEO Dov Charney has not helped the financial results of American Apparel Inc. (NYSE: APP), although it may be too early to say. Regardless, the retailer’s fortunes continue to dissolve quickly, raising the question of whether it is beyond repair, particularly in an extremely competitive environment.

The best indicator of the health of most retailers — same-store sales — was particularly poor for America Apparel in its most recently reported quarter. For the period that ended June 30, this measure dropped 6%. And online sales, which virtually all retailers need to cement their futures, dropped 3%. This follows improvements for each metric in the second quarter of 2013.

American Apparel’s loss improved, but not enough to make Wall Street believe the retailer is likely to be viable. Revenue was flat at $162.3 million. The loss moved from $37.5 million in the second quarter a year ago to $16.2 million in this year’s second quarter. Cash on the company’s balance sheet was only $10.2 million. A balance sheet improvement is possible, but not assured:

As of June 30, 2014, the Company had $10.2 million in cash, $30.6 million outstanding on its $50 million asset-backed revolving credit facility and $16.9 million of availability for additional borrowings under the facility. As of August 1, 2014, the Company had $22.9 million available for borrowing.

The Company and Standard General are in the process of negotiating an unsecured credit agreement between one or more entities affiliated with Standard General and one or more foreign subsidiaries of the Company as borrowers. The Company expects to enter into this credit agreement as soon as practicable.

Another reason to be anxious about the future of America Apparel is the number of retailers with similar models and demographics. At the smaller end of the industry, as measured by sales, sit American Eagle Outfitters Inc. (NASDAQ: (NYSE: AEO) and Aeropostale Inc. (NYSE: ARO). Among its larger competitors are Urban Outfitters Inc. (NASDAQ: URBN) and Abercrombie & Fitch Co. (NYSE: ANF). None of these is likely to give up any ground.

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There is no single reason to think American Apparel can recover.

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