American Apparel Floats on Debt; Some of It From CEO Charney

Last Updated Mar 17, 2009 11:09 AM EDT

Porn-based advertising/clothing empire American Apparel released its Q4 2008 results yesterday, and the news on the top and bottom lines looked good: Sales were up 30 percent to $146 million and net income was up 30 percent to $3.9 million.

Less well-publicized, however, was the $4 million loan that AA CEO Dov Charney gave the company from his own money. (Charney is allegedly pictured, at right, in one of his own ads.) That loan occured last month, according to a filing with the SEC. That's a small sum in AA's terms. Shortly after, the company took $80 million from Lion Capital in the form of long-term debt. Why would Charney loan his own company chump change if he knew that significant new financing was on its way?

Here's two speculative theories: The first is that he didn't know that Lion would cough up the money, and as his company flirted with bankruptcy over Xmas that $4 million may have been the difference between staying afloat and going under.

The second is that Charney wants to turn AA into his own personal bank account. The interest rate on his $4 million loan is 6 percent. You can still find high-rate savings accounts or CDs in banks at 2.5 percent, but you can't find 6 percent anywhere else on the market -- even in stocks. The loan may be repaid anytime before 2013. As Charney is the CEO, it's his call. So basically, AA is now a 6 percent savings vehicle for Charney's personal cash.

UPDATE: An AA rep says there was nothing "nefarious" about Charney's loan, and it has since all been paid back following the Lion injection. See comments section below. Talking of cash, AA's position there also showed some improvement. Cash declined from $19 million to $11 million, but current liabilities also went down due to the Lion financing, to $74 million. That gives AA long-term debts of $100 million.

Just to underline that, AA must eventually pay off $100 million in debt from a business that makes only $3.8 million in profits per quarter. Its interest expenses alone are $3.2 million per quarter. WWD:
Asked why he was confident the company would be able to pay down debts, including its new $80 million Lion Capital loan, when it already ran into trouble with its previous $51 million debt with SOF, Slater pointed to the strong fundamentals at American Apparel and the long-term nature of the new debt. "The company is one of a select few in retail generating both top- and bottom-line growth. They are generating a ton of cash flow -- its estimated 2008 EBITDA [earnings before interest, taxes, deprecation and amortization] is $71.5 million and for 2009 will be $89 million," he noted.

Careful planning is foremost in Charney's mind this year. "We plan to run the business for cash flow this year," Charney noted, adding the company has a "restrained" plan for store openings to add to its current 260-unit base
Correction: This item originally contained some out of date information on Charney's salary, based on AA's most recent proxy filing. That information has since been removed from the post. See comments section below.

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