Uh-Oh: American Apparel Hanging On By A Fiscal Thread
Story UPDATED with information from a Deloitte and Touche insider.
Dov Charney haters rejoice: the numbers at American Apparel are not looking that great.
Actually, “not looking that great” is a generous approximation of what’s going at the Los Angeles-based clothing company. While most other apparel houses are getting ready to report their second quarter earnings to the Securities and Exchange Commission, WWD reports that American Apparel has told the SEC its second-quarter report won’t be pretty or on time. The company said in a filing late Tuesday that Marcum, its independent auditing firm, needs more time to make sense of its books.
“The company offered a summary of what it expects its second-quarter figures to look like, and it contained little in the way of encouraging news. The firm anticipates a second-quarter loss against a net profit from the year-ago quarter. Net sales are expected to drop as declines in its retail business were only partially offset by increases in its sales with wholesale customers. Furthermore, the shift in its business towards wholesale, coupled with higher production costs, is expected to produce lower gross margins for the second quarter against its 2009 counterpart.”
In a nutshell, consumers have finally conceded that $38 really is too much to pay for a striped t-shirt and that Charney does not deserve any more of their money. Sales to companies that put prints on American Apparel’s stock t-shirts, a la Johnny Cupcakes, aren’t going to make up for a loss of regular customers.
None of this is made easier by the fact that Marcum is relatively new to the AA accounting scene. It had been American Apparel’s auditor in 2008 and “issued an adverse opinion about the company’s financial reporting in early 2009,” WWD says. After that, Deloitte and Touche took over the account. But that firm quit last month after identifying “material weaknesses in internal control” with closing and reporting American Apparel’s numbers. Our insider further explained that “a material weakness in internal controls opens up the possibility of serious errors or fraud … The fact that ‘new information’ was uncovered probably means that American Apparel was hiding something to begin with.”
Deloitte and Touche also had to hold back AA’s first quarter earnings report because, well, it wasn’t ready. And they have yet to be reported.
So, is this the final nail in American Apparel’s financial coffin? Two teams of accountants working on two quarters worth of miserable-looking financial data, half of which is already way behind schedule to be reported to the government. We’re not math people, but even we can calculate that this situation does not look good.