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LOS ANGELES, Nov 10, 2008 (BUSINESS WIRE) -- --EPS of $0.03, or $0.16 before merger related stock based compensation expense of $13.2 million ($0.13 per share)
--Company reaffirms 2008 EPS guidance of $0.32 to $0.36 before merger related stock based compensation expense
--Company expects to finish 2008 with approximately 80 new store openings for the year
American Apparel, Inc. (NYSE Alternext US: APP), a vertically integrated manufacturer, distributor, and retailer of branded fashion basic apparel, today announced its financial results for the third quarter of 2008 and for the nine month period ended September 30, 2008.
American Apparel reported net sales for the quarter ended September 30, 2008 of $154.8 million, a 45.2% increase over net sales of $106.6 million for the quarter ended September 30, 2007. Total retail sales increased 65.3% to $97.4 million from $58.9 million for the prior year third quarter, with comparable store sales for stores open at least 12 months rising 24%. American Apparel ended the third quarter of 2008 with 228 stores, having opened 33 stores in the period. The Company operated 163 stores at the end of the third quarter of 2007. Total wholesale sales increased to $46.4 million for the third quarter of 2008, as compared to $41.3 million for the third quarter of 2007, an increase of 12.3%. Online consumer sales increased to $11.0 million from $6.4 million for the prior year third quarter, an increase of 72.0%.
In the third quarter of 2008, American Apparel awarded approximately 1.9 million shares of common stock to eligible manufacturing employees, which shares were granted pursuant to the merger agreement between American Apparel, Inc. (formerly Endeavor Acquisition Corp.) and American Apparel, Inc., a California corporation. To provide greater clarity about the Company's operating performance for the third quarter of 2008, the impact of the related $13.2 million stock based compensation expense on the results is discussed in the paragraphs below and in Table A. This stock award resulted in the recording of $12.1 million of stock based compensation expense and $1.1 million of employer related payroll taxes in the Company's financial statements for the third quarter of 2008.
Gross margin for the third quarter of 2008 was 50.1% versus 55.2% for the prior year third quarter, including the impact of the merger related stock based compensation expense. The stock based compensation expense of $13.2 million negatively impacted gross margin by 850 basis points. The gross margin was favorably impacted by a reduction in inventory obsolescence reserves of $1.1 million, for an improvement of 70 basis points. Gross margin was also favorably impacted by the growth in retail sales from the expansion of the U.S. Retail, Canada and International business segments, which generate a higher gross margin than the company's U.S. Wholesale business segment.
Operating expenses for the third quarter of 2008 increased to 45.7% of net sales, versus 44.2% for the third quarter of 2007. Operating expenses increased due to higher payroll, rent and occupancy expense related to the growth in the number of retail stores from 163 as of September 30, 2007 to 228 as of September 30, 2008. Pre-opening expenses for retail stores were $4.4 million in the third quarter of 2008, versus $0.9 million in the prior year third quarter. Operating expenses were also higher due to an increase in corporate expense of approximately $2.9 million versus the year ago period, related primarily to an increase in accounting and professional fees as a result of American Apparel operating as a public company in 2008.
Operating income for the third quarter of 2008 was $6.8 million, after the impact of the $13.2 million stock based compensation expense, versus $11.7 million in the prior year third quarter Operating margin for the third quarter of 2008 was 4.4%, versus 11.0% in the quarter a year ago. The impact of the share based compensation expense reduced the third quarter 2008 operating margin by 850 basis points.
Interest expense for the third quarter of 2008 decreased to $3.2 million from $4.4 million in the third quarter of 2007. The decrease in interest expense was due to a decrease in the LIBOR rate on which the company's floating rate debt is based.
The company's effective tax rate in the third quarter declined to 26.9%, reflecting the benefit of federal and state enterprise zone tax credits related to the company's expanded hiring and manufacturing activity in the downtown Los Angeles area. The effective tax rate for the nine months ended September 30, 2008 was 33.5%.
Net income for the third quarter of 2008 was $2.3 million, or $0.03 per diluted share. Excluding the impact of the merger related stock compensation expense, net income would have been $11.1 million, or $0.16 per share. This compares to $6.0 million in net income, or $0.10 per share, for the third quarter of 2007.
The company continues to expect diluted earnings per share in the range of $0.32 to $0.36 for 2008, before giving effect to the stock based compensation expense resulting from the 2.71 million share employee stock grant pursuant to the merger agreement between Endeavor Acquisition Corp. and American Apparel, Inc. The company has approximately 800,000 shares remaining pursuant to the merger which it expects to grant in the fourth quarter of 2008 to eligible retail and administrative employees.
As of October 31, 2008, American Apparel had opened 55 new store locations since the beginning of the year and closed 3 locations. The company had 40 signed leases for retail stores in its pipeline, including stores in new markets such as Yokohama, Japan; Toulouse, France; and Adelaide, Australia. The company plans to have opened approximately 80 stores by the end of 2008, up from its previously stated guidance of 50 to 55 stores.
Dov Charney, Chairman and Chief Executive Officer, stated: "We are very pleased with our financial performance in the third quarter, and the momentum our business has had while we have expanded in so many new markets this year. While we are cognizant of the economic difficulties worldwide, particularly in retail, we remain cautiously optimistic that our products represent a unique value to consumers even in a weak economy. As we look at 2009, having already experienced so much growth in 2008, we plan to tailor our expansion plans accordingly with an eye on the overall economic environment and our goal to generate significant free cash next year."
About American Apparel
American Apparel is a vertically integrated manufacturer, distributor, and retailer of branded fashion basic apparel based in downtown Los Angeles, California. As of October 31, 2008, American Apparel employed over 10,000 people and operated over 230 retail stores in 19 countries, including the United States, Canada, Mexico, United Kingdom, Belgium, France, Germany, Italy, the Netherlands, Spain, Sweden, Switzerland, Israel, Australia, Japan, South Korea, Austria, China, and Brazil. American Apparel also operates a leading wholesale business that supplies T-shirts and other casual wear to distributors and screen printers. In addition to its retail stores and wholesale operations, American Apparel operates an online retail e-commerce website at http://store.americanapparel.net.
Safe Harbor Statement
This press release may contain forward-looking statements which are based upon the current beliefs and expectations of our management, but are subject to risks and uncertainties, which could cause actual results and/or the timing of events to differ materially from those set forth in the forward-looking statements, including, among others: changes in the level of consumer spending or preferences or demand for our products; increasing competition; our ability to hire and retain key personnel and our relationship with our employees; suitable store locations and our ability to attract customers to our stores; effectively carrying out and managing our growth strategy; failure to maintain the value and image of our brand and protect our intellectual property rights; declines in comparable store sales; seasonality; consequences of our significant indebtedness, including our ability to comply with our debt agreements, generate cash flow to service our debt; our ability to extend, renew or refinance our existing debt; costs of materials and labor; location of our facilities in the same geographic area; manufacturing, supply or distribution difficulties or disruptions; risks of financial nonperformance by customers; investigations, enforcement actions and litigation; compliance with or changes in laws and regulations; costs as a result of operating as a public company; material weaknesses in internal controls; interest rate and foreign currency risks; loss of U.S. import protections or changes in duties, tariffs and quotas and other risks associated with international business; our ability to upgrade our information technology infrastructure and other risks associated with the systems that operate our online retail operations; general economic and industry conditions, including worsening U.S. and foreign economic conditions and turmoil in the financial markets; and other risks detailed in our filings with the Securities and Exchange Commission, including our 2007 Annual Report on Form 10-K. Our filings with the SEC are available at www.sec.gov. You are urged to consider these factors carefully in evaluating the forward-looking statements herein and are cautioned not to place undue reliance on such forward-looking statements, which are qualified in their entirety by this cautionary statement. The forward-looking statements speak only as of the date on which they are made and the company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.
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AMERICAN APPAREL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share amounts)
(unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
2008 2007 2008 2007
NET SALES $ 154,801 $ 106,620 $ 399,406 $ 275,853
COST OF SALES (including share-based compensation of $12,102 77,179 47,760 180,965 120,435
for the three and nine months ended September 30, 2008)
GROSS PROFIT 77,622 58,860 218,441 155,418
OPERATING EXPENSES (including share-based compensation of 70,780 47,148 191,606 124,932
$432 for the nine months ended September 30, 2008 and related party
charges of $155 and $1,111 for the three months ended September 30,
2008 and 2007, respectively, and $464 and $3,217 for the nine months
ended September 30, 2008 and 2007, respectively)
INCOME FROM OPERATIONS 6,842 11,712 26,835 30,486
INTEREST AND OTHER (INCOME) EXPENSE
Interest expense (including related party interest expense of $90 3,237 4,397 10,274 13,149
and $479 for the three months ended September 30, 2008 and 2007,
respectively, and $271 and $1,291 for the nine months ended
September 30, 2008 and 2007, respectively)
Foreign currency transaction loss (gain) 1,049 (271 ) 1,047 453
Other (income) expense (636 ) (539 ) 133 (1,081 )
TOTAL INTEREST AND OTHER (INCOME) EXPENSE 3,650 3,587 11,454 12,521
INCOME BEFORE INCOME TAXES 3,192 8,125 15,381 17,965
INCOME TAX PROVISION 859 2,118 5,153 5,482
NET INCOME $ 2,333 $ 6,007 $ 10,228 $ 12,483
Basic earnings per share $ .03 $ .12 $ .15 $ .26
Diluted earnings per share $ .03 $ .12 $ .15 $ .26
Weighted average basic shares outstanding 70,257 48,390 69,055 48,390
Weighted average diluted shares outstanding 70,257 48,390 70,157 48,390
PRO FORMA COMPUTATION RELATED TO CONVERSION TO C CORPORATION FOR
INCOME TAX PURPOSES
Historical income before income taxes $ 8,125 $ 17,965
Pro forma provision for income taxes 3,097 6,848
Pro forma net income $ 5,028 $ 11,117
Pro forma basic earnings per share $ .10 $ .23
Pro forma diluted earnings per share $ .10 $ .23
AMERICAN APPAREL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
September 30, 2008 December 31,
(unaudited) 2007
ASSETS
CURRENT ASSETS
Cash $ 13,889 $ 19,292
Trade accounts receivable, net of allowances of $1,293 and $1,876 at 19,941 16,602
September 30, 2008 and December 31, 2007, respectively
Other receivables 1,813 1,120
Prepaid expenses and other current assets 6,555 4,498
Inventories, net 153,537 106,434
Deferred taxes, current portion 5,659 4,894
Total Current Assets 201,394 152,840
PROPERTY AND EQUIPMENT, net 104,179 64,868
INTANGIBLE ASSETS, net 4,088 2,286
GOODWILL 1,906 950
DEFERRED TAXES 5,489 3,146
OTHER ASSETS 11,983 9,260
TOTAL ASSETS $ 329,039 $ 233,350
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Cash overdraft $ 4,191 $ 2,778
Current portion of long-term debt 101,527 99,930
Accounts payable 35,576 15,451
Accrued expenses 22,155 21,877
Income taxes payable 6,321 7,300
Current portion of capital lease obligations 2,393 3,384
Total Current Liabilities 172,163 150,720
LONG-TERM DEBT, net of current portion 485 642
SUBORDINATED NOTES PAYABLE TO RELATED PARTIES 5,923 6,036
CAPITAL LEASE OBLIGATIONS, net of current portion 2,239 4,066
DEFERRED RENT 15,531 10,065
TOTAL LIABILITIES 196,341 171,529
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.0001 par value, authorized 1,000 shares; none -- --
issued
Common stock, $.0001 par value, authorized 120,000 shares; 72,221 7 6
issued and 70,787 outstanding at September 30, 2008 and 57,595
issued and outstanding at December 31, 2007
Additional paid-in capital 130,231 57,162
Accumulated other comprehensive income (1,512 ) 865
Retained earnings 14,016 3,788
142,742 61,821
Less: Treasury stock, 1,433 shares at cost (10,044 ) --
TOTAL STOCKHOLDERS' EQUITY 132,698 61,821
TOTAL LIABILITIES AND STOCKHOLDERS' $ 329,039 $ 233,350
EQUITY
AMERICAN APPAREL, INC. AND SUBSIDIARIES
BUSINESS SEGMENT INFORMATION
(Amounts in thousands)
(unaudited)
The following table presents key financial information for the
Company's business segments:
Three Months Ended September 30, 2008
U.S. U.S. Retail Canada International Consolidated
Wholesale
Net sales to external customers $ 46,219 $ 46,675 $ 19,874 $ 42,033 $ 154,801
Gross (loss) profit (3,381 ) 35,561 13,882 31,560 77,622
Income (loss) from operations (11,172 ) 10,640 6,383 10,409 16,260
Inter-segment sales (eliminated in consolidation) 41,697 -- -- -- --
Depreciation and amortization 1,912 1,810 355 1,346 5,423
Capital expenditures 3,502 10,225 1,339 5,938 21,004
Deferred rent expense 168 1,032 107 173 1,480
Three Months Ended September 30, 2007
U.S. U.S. Retail Canada International Consolidated
Wholesale
Net sales to external customers $ 40,092 $ 31,432 $ 12,195 $ 22,901 $ 106,620
Gross profit 11,438 23,967 7,307 16,148 58,860
Income from operations 5,568 7,237 1,262 4,143 18,210
Inter-segment sales (eliminated in consolidation) 20,017 -- -- -- --
Depreciation and amortization 1,271 1,132 454 365 3,222
Capital expenditures 1,204 3,010 571 1,226 6,011
Deferred rent (benefit) expense (38 ) 235 41 (13 ) 225
Nine Months Ended September 30, 2008
U.S. U.S. Retail Canada International Consolidated
Wholesale
Net sales to external customers $ 124,665 $ 118,838 $ 48,549 $ 107,354 $ 399,406
Gross profit 15,989 90,043 33,861 78,548 218,441
Income (loss) from operations (4,953 ) 24,330 12,300 23,654 55,331
Inter-segment sales (eliminated in consolidation) 101,071 -- -- -- --
Depreciation and amortization 5,090 4,688 1,409 3,127 14,314
Capital expenditures 12,935 21,406 3,188 14,545 52,074
Deferred rent expense 62 2,692 319 2,512 5,585
Nine Months Ended September 30, 2007
U.S. U.S. Retail Canada International Consolidated
Wholesale
Net sales to external customers $ 106,466 $ 80,411 $ 30,234 $ 58,742 $ 275,853
Gross profit 32,256 62,363 19,688 41,111 155,418
Income from operations 18,049 16,397 3,026 11,408 48,880
Inter-segment sales (eliminated in consolidation) 52,881 -- -- -- --
Depreciation and amortization 3,655 3,192 1,245 1,210 9,302
Capital expenditures 2,350 5,154 819 3,386 11,709
Deferred rent (benefit) expense (112 ) 993 97 78 1,056
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
Reconciliation to Income before Income Taxes
Consolidated income from operations of reportable segments $ 16,260 $ 18,210 $ 55,331 $ 48,880
Corporate expenses (9,418 ) (6,498 ) (28,496 ) (18,394 )
Interest expense (3,237 ) (4,397 ) (10,274 ) (13,149 )
Other income (expense) 636 539 (133 ) 1,081
Foreign currency transaction gain (loss) (1,049 ) 271 (1,047 ) (453 )
Consolidated Income Before Income Taxes $ 3,192 $ 8,125 $ 15,381 $ 17,965
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
Net Sales by Class of Customer
U.S. Wholesale
Wholesale $ 39,064 $ 35,677 $ 106,806 $ 95,422
Online consumer 7,155 4,415 17,859 11,044
Total $ 46,219 $ 40,092 $ 124,665 $ 106,466
U.S Retail $ 46,675 $ 31,432 $ 118,838 $ 80,411
Canada
Wholesale $ 3,574 $ 3,193 $ 9,751 $ 8,720
Retail 15,818 8,729 37,531 20,927
Online consumer 482 273 1,267 587
Total $ 19,874 $ 12,195 $ 48,549 $ 30,234
International
Wholesale $ 3,778 $ 2,446 $ 11,566 $ 9,193
Retail 34,935 18,774 86,920 45,460
Online consumer 3,320 1,681 8,868 4,089
Total $ 42,033 $ 22,901 $ 107,354 $ 58,742
Consolidated
Wholesale $ 46,416 $ 41,316 $ 128,123 $ 113,335
Retail 97,428 58,935 243,289 146,798
Online consumer 10,957 6,369 27,994 15,720
Total $ 154,801 $ 106,620 $ 399,406 $ 275,853
As described above, in the third quarter of 2008, American Apparel awarded approximately 1.9 million shares of common stock to eligible manufacturing employees in accordance with the terms of the merger agreement between American Apparel, Inc. (formerly Endeavor Acquisition Corp.) and American Apparel, Inc., resulting in $13.2 million of stock based compensation expense, consisting of $12.1 million of stock based compensation expense and $1.1 million of employer related payroll taxes, in the Consolidated Financial Statements for the three and nine months ended September 30, 2008. Set forth below is certain financial information about our operating performance that excludes the impact of the stock award and the related stock based compensation expense. This information is not calculated in accordance with accounting principles generally accepted in the United States (GAAP) and should be considered in addition to, and not as a substitute for, the related GAAP measurements. We use these non-GAAP measures, along with GAAP measures, as a measure of profitability and operating performance because the adjustments allow us to compare our performance on a consistent basis by removing from our operating results the effect of the non-cash stock-based compensation expense, which may vary from period to period due to a number of factors. We believe that the presentation of the non-GAAP financial information provides investors with useful additional information regarding our financial condition and results of operations because it allows a consistent basis of comparison against our historical operating performance and guidance as well as against the operating performance of our competitors. The following reconciles each non-GAAP measure, which excludes the expenses related to the stock award, to the most directly comparable GAAP measure for the three and nine months ended September 30, 2008:
Table A
Impact of Merger Related Stock Based Compensation Expense
(Amounts in thousands, except per share amounts)
(unaudited)
Three Months Ended September 30, 2008
As Reported Stock Based Compensation Expense Non-GAAP Measurement
Net sales $ 154,801 $ 154,801
Cost of sales 77,179 (13,197 ) 63,9822
Gross profit 77,622 13,197 90,819
Operating expense 70,780 70,780
INCOME FROM OPERATIONS 6,842 13,197 20,039
INTEREST AND OTHER (INCOME) EXPENSE
Interest expense 3,237 3,237
Foreign currency transaction loss 1,049 1,049
Other (income) expense (636 ) (636 )
INCOME BEFORE INCOME TAXES 3,192 13,197 16,389
Income Tax Provision 859 4,421 5,280
NET INCOME $ 2,333 $ 8,776 $ 11,109
Basic earnings per share $ .03 $ .13 $ .16
Dilute earnings per share $ .03 $ .13 $ .16
Nine Months Ended September 30, 2008
As Reported Stock Based Compensation Expense Non-GAAP Measurement
Net sales $ 399,406 $ 399,406
Cost of sales 180,965 (13,197 ) 167,768
Gross profit 218,441 13,197 231,638
Operating expense 191,606 191,606
INCOME FROM OPERATIONS 26,835 13,197 40,032
INTEREST AND OTHER (INCOME) EXPENSE
Interest expense 10,274 10,274
Foreign currency transaction loss 1,047 1,047
Other (income) expense 133 133
INCOME BEFORE INCOME TAXES 15,381 13,197 28,578
Income Tax Provision 5,153 4,421 9,574
NET INCOME $ 10,228 $ 8,776 $ 19,004
Basic earnings per share $ .15 $ .13 $ .28
Dilute earnings per share $ .15 $ .13 $ .27
SOURCE: American Apparel, Inc.
Integrated Corporate Relations Joseph Teklits / Jean Fontana 203-682-8200 or American Apparel, Inc. Adrian Kowalewski, 213-488-0226 Director, Corporate Finance & Development
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