American Apparel on Sale -- First the Merchandise, Next the Company
With the company teetering on the financial brink, American Apparel (APP) is taking a step that may seem crazy: It's holding a big summer-end sale. But giving up possible future revenue to get some cash in the door now is exactly what's needed at the distressed apparel retailer.
The company has some items marked down as much as 50 percent, and coupons floating around Internet discount sites offer another 15 percent on top of that through the end of the month. That's attention-getting, given that this chain doesn't usually do season-end discounting. While it may seem like financial suicide to slash prices this much, there's method to this madness.
Here are three reasons why American Apparel's sale is a positive step for the company:
- Clean up the balance sheet. With deep debts, American Apparel needs to show as much revenue as it can as it preps for a likely bankruptcy filing. That will help the company line up the debtor-in-possession financing it will need for running the company in bankruptcy. The sale does two things: It adds to the revenue line while reducing inventory levels. So the company looks healthier in terms of generating cash, and it helps the company avoid the perception that it's wrong on fashion trends and merchandise is sitting around collecting dust. (It may be wrong, but a positive inventory trend will make it look good for now.)
- Clear the way for the company's new looks. Not sure it's a great idea, but American Apparel is switching to a more preppy look. So likely a lot of the sheer buttless tights and mesh sleeveless tees that American Apparel has are on their way out anyway. Might as well clear the decks and get them out, or they'll be piling up in a warehouse somewhere and creating storage overhead costs.
- Appeal to recession-era discount shoppers. Many retailers have struggled in the past two years because they refused to drop their prices. The fact is, many American consumers are on a massive bargain-hunt these days. By offering discounts, American Apparel may draw some new shoppers who hadn't tried the chain before.
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