American Apparel Financial Analysis PDF

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American Apparel Financial Analysis for OL 501 Business Foundations...

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American Apparel is a fascinating example of a company who was at the top of its game and quickly fell to a case study of what not to do in business. American Apparel seemed to have everything going for it: a CEO that in the beginning was winning accolades across the industry, a vertically integrated business model, strong brand recognition and an ethically strong mission “to make great quality clothing without using cheap “sweatshop” labour and exploiting workers” (Meta, A 2016). A series of bad strategic and financial decisions led to American Apparel’s downfall. American Apparel was “the top trendsetting brand in 2008 to becoming a debt-ridden company” (Meta, A 2016). It was just one year later the descent into massive debt began and by 2014 the company was in massive debt and had large interest payments looming. Below is a financial analysis of American Apparel from 2012 to 2013 American Apparel

Most Current Year 2013

Current Assets

$215,296

-4.05%

$224,390

Total Assets

$333,752

1.69%

$328,212

Current Liabilities

$161,989

0.24%

$161,609

Total Debt

$411,156

34.31%

$306,128

Sales/Revenue

$633,941

2.69%

$617,310

Cost of Goods Sold

$313,056

7.98%

$289,927

Inventory

$169,378

-2.78%

$174,229

Net Income/Loss

$106,298

-185,20%

$37,272

% Chg

Previous Year 2012

Current Ratio Debt to Asset Ratio Inventory Turnover Return on Sales (Profit Margin)

1.33

1.23 1.85

-017

American Apparel’s financial statements do not show overall good financial and organizational health. For the analysis we will examine three important financial statements of the business including the income statement, the balance sheet and the cash flow statement. The income statement will look at American Apparel’s financial performance over a specific period of time. In this case from 2012 to 2013. An income statement looks at profitability and examining the American Apparel income statement it is noted that the company suffered a net loss of $106,298 that was down 185% from a net gain in 2012. Even though American Apparel did see a slight increase in revenues (2.69%) in 2013 from the previous year, the company saw their cost of sales and expenses increase. The expenses rose in part due to “difficulties transitioning to a new distribution centre, which led to a significant increase in operating costs, while deliveries were disrupted” (Meta, A 2016). This ultimately led to losses in gross and net profit. The return on profit ratio is negative as well. This means that American Apparel is not operating efficiently. In order to turn this number to a positive and turn sales into profits, American Apparel will need to look at reducing costs and increasing sales. The industry average for apparel turnover is 3.91 (Scilly, 2016). American Apparel had a turnover ratio of 1.85, that is well below industry averages. This may mean that American Apparel has a lot of inventory that is not selling which leads to costs associated with storage costs, inventory that goes out of style and forces sales of apparel at lower than anticipated rates. A review of American Apparel’s balance sheet indicates that it’s assets grew slightly from 2012 to 2013 by 1.69%. Unfortunately, the total liabilities grew from $306,128 in 2012 to $411,156 in

2013 far outpacing the growth in assets. Most of this increase came from long term liabilities. This resulted in a stockholder loss in equity. “In general, many investors look for a company to have a debt ratio between 0.3 and 0.6. From a pure risk perspective, debt ratios of 0.4 or lower are considered better, while a debt ratio of 0.6 or higher makes it more difficult to borrow money (Ross, 2021).” American Apparel debt to asset ratio is 1.23 making it a risky business for lenders to extend credit and investors to invest in. This ultimately resulted in American Apparel taking on high interest loans. Assessing American Apparel’s ability to pay its liabilities is shown in the current ratio. “The average current ratio for all industries is 2.0” (Pride et al. 2019 ), which makes 1.39 a low current ratio. “A low current ratio can be improved by repaying current liabilities, by reducing dividend payments to stockholders to increase the firm’s cash balance, or by obtaining additional cash from investors”(Pride et al. 2019 ) .

The income statement of American Apparel shows that revenues of American Apparel from 2012 to 2013 were negative. The income statement shows that operating activities (the money generated from selling clothes), financing activities (issuing debt), and exchange rates were all in the negative in 2013 while the only increase was in financing activities. American apparel cannot cover its obligations, pay shareholders or reinvest in the business. Because the cash statement does not show the long term liabilities that American Apparel took on it also does not show the full extent of how unhealthy the company is because they are not shown on the statement until the transaction occurs. American Apparel has many problems, 2012 to 2013 was a terrible financial year for American Apparel. The operating costs and cost of sales increased significantly and sales stayed almost flat. This led to massive debt and a net loss in profit. At the end of 2013, American Apparel liquidity was down to almost nothing and they had taken on huge debt at high interest rates. Banks don’t want to lend to the company and investors don’t want to invest due to its debt to asset ratio making it a risky investment. At the end of 2013, American Apparel was in trouble and it needed help fast.

Citations: Mehta, A. (2016) American Apparel: Drowning in Debt? Ivey Publishing, W16208 https://services.hbsp.harvard.edu/lti/links/content-launch Scilly, M. (2016, October 26). The average Merchandise turnover for clothing stores. Small Business - Chron.com. https://smallbusiness.chron.com/average-merchandise-turnover-clothing-stores-18292.html. Ross, S. (2021, August 10). What is a good debt ratio? Investopedia. https://www.investopedia.com/ask/answers/021215/what-good-debt-ratio-and-what-bad-debt-rati o.asp. Pride, W. M., Hughes, R. J., & Kapoor, J. R. (2019). Foundations of business. https://ng.cengage.com...