American Apparel Now Has Less Skin in the Game: Ad Budget Slashed as Debt Piles Up

While we're waiting for American Apparel (APP) to file its official Q1 2010 earnings report with the SEC (it failed to and had to ask the NYSE Amex stock exchange for permission to come back into compliance), it's worth looking at the company's existing filings to see if there any clues to the future of the nation's best-known fashion advertiser. There are three -- its advertising budget, its sales cannibalization, and its new store openings -- and they're all on a collision course with each other.

The company blew an end-of-June deadline to file a recent earnings report. Its agreement with NYSE gives it until August 16 -- four and a half months late! -- to do its accounts for the first quarter. (I guess we'll get Q2 around Christmas.)

Here are the three things going wrong at AA before it stopped telling investors what its numbers are:

AA cut its ad budget by $9.4 million, or 38 percent, in 2009 as it struggled to fend off its debt crisis, the company said in its 10-K annual report. It currently spends only $15.4 million annually on ads, a tiny sum for an advertiser of its prominence, one which made its name almost entirely through its sexy, controversial advertising.
Total sales in 2009 increased 2.5 percent to $558.7 million, but "same-store" sales -- a crucial gauge of a fashion brand's "heat" with shoppers -- decreased by $24.8 million, or 16 percent. The company admits that new stores are cannibalizing sales from both existing stores and online sales, which also declined by 8.6 percent to $23.3 million.
At the same time, the company continues to open new stores. In the U.S., "Since December 31, 2008 we opened 15 new retail stores, while closing three and the number of stores in operation increased from 148 to 160." That's madness.

These three factors are all pulling the company in different directions. AA needs to advertise in order to convince us that its clothes are worth checking out, and that they're trendy. The ad problem is doubly acute at AA because a large chunk of its offerings only looks "good" -- shiny leggings? -- if we all agree that they're trendy and not ridiculous. Advertising is one way to secure that public agreement; otherwise you're just walking down the street looking like a trapeze artist from the Soviet Union who defected in 1975.

But, as AA's finances indicate, increasing its ad budget is suicide: AA now has to pay 17 percent interest, up from 15 percent, on its corporate debt. (That's a worse rate than I'm getting on my Visa card.)

One way out of this would be to cut back store openings, reduce cannibalization, and drive more shoppers to the web, which is a cheaper way of doing business. But AA's strategy (as described in its most recent, months-old filings) is the opposite of this. It's choosing the most expensive way to run a retail chain that it can, and cutting the advertising it would normally need to support such expansion. (Its most recent bare-bones 8-k preliminary filing doesn't contain any information to naysay this.)

These trends do not bode well. The question is whether the company -- and its new creditors -- can see this.

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