As if American Apparel (OTC:APPCQ) doesn't have enough on its plate, the quirky retailer might be running short of cash.
Still stumbling badly from the upheaval caused by the firing of founder and former CEO Dov Charney, American Apparel is now delaying payments to its suppliers, the New York Post reported last week.
Bet you didn't factor in this
The company is supposedly taking upward of 60 days to pay vendors, which has made factoring firms -- private finance companies that purchase unpaid invoices at a discount so the companies they're buying them from get an immediate influx of cash -- wary of extending too much additional credit.
As a result, American Apparel's suppliers are seeing their financing opportunities diminished. That could hurt the retailer's ability to get the fabric it needs to make its clothing, creating product shortages. It could ultimately hurt revenue at a time when teen retail is already under pressure.
Delia's filed for bankruptcy protection last month, Aeropostale's (OTC:AROPQ) CEO stepped down after yet another quarter of lousy performance, Abercrombie & Fitch's (NYSE:ANF) CEO just jumped ship, and Wet Seal (OTC:WTSLQ) is facing its own liquidity crisis and might file for bankruptcy protection.
American Apparel is hardly doing any better. After alleging unspecified charges of misconduct, the board of directors in June suspended Charney with the intent to terminate him after a 30-day "cure period," setting in motion a series of events that brought about a game of financial brinksmanship that almost toppled the retailer.
Exhibiting a bit of resilience, however, the ex-CEO partnered with hedge fund Standard General and in exchange for the firm loaning Charney its 27 million shares in the retailer, thus giving the ousted executive a 44% stake in the company, Charney turned over to the firm his voting rights on all of his stock unless he got its approval of his votes. That bought Charney some time as Standard General kept him around as a creative consultant while a new board appointed by the private equity firm conducted its own investigation into the allegations.
In the end, following a six-month inquiry, and after attempts at offering Charney a continuing role as a consultant went nowhere, the board in mid-December fired him over what were reported to be allegations of sexual harassment and misuse of corporate funds.
Reprising his role as savior
Now, according to some reports, Charney is trying to buy back his company with the help of another private equity firm, Irving Place Capital, which reportedly has offered to purchase American Apparel for as much as $1.40 per share. Given its financial straits, Bloomberg News said the retailer is considering the offer even though it may herald Charney's return in some form or another.
The New York Post reported that American Apparel said its liquidity is "better than it has been in a very long time." But the company also supposedly initiated a slowdown at its factories several weeks ago to save money, and the fast-fashion retailer has recorded losses for several years running. It's on track to do so again for 2014 as the legal wrangling cost the company over $6.6 million as of the third quarter, according to its earnings report for that period. Considering it had just under $9.4 million of cash in the bank at the end of September, these are expenses American Apparel can ill afford.
Over the first nine months of 2014, the company generated $3.3 million in operating cash flow, a reversal from the year-ago period when it burned through $8.8 million, primarily by paying less money to suppliers and employees. It also cut capital expenditures by more than half, which slowed the rate at which it consumes cash. Even so, American Apparel recorded negative free cash flow of $5.4 million during the first three quarters.
Comparable-store sales were down 7% in the third quarter, and online sales were off 5%, continuing a trend the company had suffered throughout 2014 as more business moved toward its lower-margin wholesale business.
It reportedly had to resort to heavy promotions during the holidays, but critics contend that strategy did not pan out as planned, resulting in the cutting of factory hours. Again, American Apparel said nothing is amiss, just the normal ebb and flow of the holiday season. It also maintains its inventory remains well-stocked.
But if suppliers are not getting paid and financiers are not willing to extend credit, that could create a shortage of clothes just as the spring fashion season kicks in. With a declining business, a distracted management team, mounting losses, and a possible looming cash crunch, American Apparel's future doesn't look bright.
Even if a takeover is engineered and Charney returns, there's nothing to suggest any of the overall trends will reverse themselves. An influx of cash might stave off the inevitable, but there's only so much cash that can be put into a deepening hole.