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Hookers and Losses: Just Another Q1 at American Apparel

Troubled fashion advertiser American Apparel (APP) reported another net loss on declining sales in Q1 2011, and CEO Dov Charney frittered away any morsels of goodwill he may have accrued during the company's turnaround by hosting a web conference in which his browser displayed bookmarks for two porn sites and something titled "good hookers."

The main points of interest in the 10-Q are:

  • Sales declined 7.9% to $116 million. Same-store sales -- a crucial measure of a company's "heat" -- were flat after the chain closed 15 stores. It now has 258 stores. This is actually good news because it shows the company is getting serious about reducing its real estate footprint and consolidating down to only those stores that actually attract new customers. Charney should have started cutting stores more than a year ago. Better late than never.
  • The company warned again it may not have enough cash to last another 12 months.
  • Advertising and marketing costs were down 4 percent. Finally, Charney seems to have realized that you cannot keep increasing your marketing outlay if your company is getting smaller. Last year, those costs were up. I suspect that the new management team brought in to supervise Charney is having the desired effect.
  • Wholesale and online sales are holding up far better than the rest of the company. U.S. wholesales are the only profitable segment of the entire company and online sales increased 28.3 percent to $10 million. Financially, the future of American Apparel might be as an online and wholesale provider that also operates a few trendy stores. Again, this is something Charney should have moved toward a long time ago.
  • The company has $3.7 million in advertising commitments, "which primarily relate to print advertisements in various newspapers and magazines during the remainder of 2011." Wow. Can Charney not read his own numbers? If AA is growing sales on the internet, why is it advertising in newspapers? Because young people read newspapers? Quite.
  • The SEC/FBI investigation into American Apparel's accounting is ongoing, but it's been joined by a new probe into "the Company's policies with respect to and accounting of foreign currency transactions and transfer pricing." To restate that in plain English, the allegation is that American Apparel may have used foreign currency transactions to cook its books. "Transfer pricing" -- in which one company division sells goods to another division of the same company, creating a problem as to how much ought to be charged for the sale -- is sometimes implicated in tax dodges. Oddly, the Department of Justice's May 9 subpoena stemmed from a complaint filed by a former employee with the Occupational Safety & Health Administration in November 2010. No explanation was given.
  • Charney is apparently a workplace procrasturbator. In an internal web conference Tuesday a member of Charney's staff took a screenshot (click to enlarge) of his browser, which showed 20,000+ unread email messages, bookmarks to porn sites and Kelly Kline, and a bookmark labeled "good hookers." (I'm sure that last one is just a bait and tackle shop.)
All in all, you could argue that AA is -- slowly -- getting its act together. Whether it's moving fast enough to avoid bankruptcy is another question. And whether Charney's one-handed typing in the CEO's office is distracting him from closing more stores and shifting his ad budget online is another.


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