American Apparel case study

Question 1:

After reviewing the available financial statements from 2007 – present as well as past articles, it seems that American Apparel started to decline in 2009. They had an operating income of -50.05 and a net loss of $86.3 million for 2010. In August 2010, their shares were trading at an all-time low of 75 cents, forcing them to admit that it now has $120m of debts and losing money at around $30m a year. Even though they have increases in their net sales, their selling expense and cost of goods sold increased too. They lost a lot of money because their operating expenses increased significantly and their inventory increases almost every quarter. Their sales are down by 16% in its 279 shops around the world and their clothes that were worn by kids everywhere are now at risk.

Question 2:

With 14 million injected into the company, the company now has enough funds to revive its manufacturing and distribution operations. Since they have debts from various companies like Lion Capital, they could try to repay those debts first. It would provide them with freedom and help them get rid of financial risk. After repaying their debts, their financial statements would look better and they could maybe use some of that money on marketing and research and development to attract more customers. Also, since their inventory increases almost every quarter, they could then get rid of their inventory. Nonetheless, the money that the Canadian investors invested have rescued American Apparel from going bankrupt and will be extremely useful for them in the near future.

http://ozsoapbox.com/personal/american-apparel-about-to-go-bankrupt-oh-crap/

http://articles.latimes.com/2011/apr/01/business/la-fi-american-apparel-20110401

http://investors.americanapparel.net/releasedetail.cfm?ReleaseID=499798

Lululemon drops 6% on cost, inventory pressures

http://www.financialpost.com/news/Lululemon+drops+cost+inventory+pressures/4454940/story.html

Summary:

The shares of the Vancouver-based yoga and running wear retailer, Lululemon Athletica, fell 6% after a retailer said this quarter left it lean on inventory for the current period. Their profit almost doubled in the fourth quarter to $55-million while revenue rose 53% to $245.4-million. Their issue with inventory has left retailers very constrained within the first half of the year. Although this problem could be complicated, it is seen as a short-term issue and it will not affect basic items since sales are strong. It is more of if they ordered enough of the new. Lululemon Athletica’s profit for 2010 fiscal year doubled compared with a year ago. They also plan to open six new North American stores this quarter and are working on boosting its international presence.

Connection:

For Lululemon Athletica’s indirect cash flow statement, their first account would be the net income and they would record a net income of $55-million. They had a revenue growth of 53% or $245.4million. They had earnings of $55million (76¢) per share compared to $28.5million (40¢) a year ago, beating analyst expectations. Although their profit has almost doubled in Q4 to $55million, their inventory issue which happened before during a surprising and quick post-recession recovery will probably leave retailers very inventory constrained throughout the first 6 months of the year. This will affect the whole company because they will need to prepare for the next quarter and think about putting more money in their inventory, which will make them have a lower cash flow. Since they plan to improve shipping for its international markets and they plan to open 6 new stores in North America, their cash flow will also decrease. They might not be doing so well right now so maybe that's why they've decided to decrease their investments.

Reflection:

In the last 12 months, this company's stock price has more than doubled, making it to the top. It has been one of the hottest things in the yoga world and people are really craving it. This company also has 137 stores in both North America and Australia. Recently in March, Lululemon Athletica breaks to a new all-time high and they also announced a two for one stock split. This company went public at an unsuitable time in the middle of 2007, where they struggled with financial crisis, but luckily this company has thrived during the recovery. Even though they are currently having some problems with inventory, their strong sales will continue to keep them up. Also, since so many people want the new, they could probably cut back on advertisements and spend that money on inventory instead.

BlackBerry sales expected to tie iPhone

http://www.nationalpost.com/BlackBerry+sales+expected+iPhone/3978698/story.html

http://www.youtube.com/watch?v=s72rGDUn2uo&feature=player_embedded

^video comparing BlackBerry's PlayBook and the iPad

Summary

BlackBerry sales  are expected to be tied to iPhone sales in its last quarter, with the help of its new Torch smartphone. Many factors contribuled to the sales which includes their great success with their BlackBerry Torch, a touchscreen phone with an improved browser and a revised operating system. Although the smartphone market explodes, RIM has lost four percentage points of global smartphone market share in a year. During their third quarter to Nov. 27, about 14.1 million BlackBerry phones have been shipped out and that would be tied with the amount of iPhones that were shipped out in its quarter. It is also predicted that RIM will earn US$1.64 per share and revenues at $5.40 billion, with gross margin slipping to 42%. When RIM made forecasts for the quarter to Nov. 27, net additions were slow and behind, where analysts predicted to record 5.1 million net subscriber additions. Apple and Google, who are BlackBerry's rivals, have had huge successes with their touchscreen devices filled with applications. During the three months to the end of November, RIM's share price raised 30% after leaking details about its PlayBook tablet computer. Investors and technophiles are anxious to try it out to compare it to Apple's iPad.

Connection

The connection to chapter three is the income from operations, which is the gross profit or gross margin and revenues. Gross profit or gross margin is the sales minus cost of goods sold (the expense that is recorded to reflect the value of the inventory sold during the period). RIM's major source of revenues is selling goods, so it must make enough profit or margin from sales of its goods to cover all the other costs of operating the business. By looking at the gross margin of a company, users can assess the profitability of the company's products, in this case the BlackBerry. You can also find the gross margin percentage, which is the gross margin divided by the sales. You can then use this percentage to examine and evaluate a company's progress. You could determine how well they're doing by observing whether this percentage has been increasing, decreasing, or staying the same and by comparing this percentage with other companies within the same industry. 

Reflection

Research In Motion Ltd. and Apple Inc. rivalry has been heating up for some time and both companies have been extremely successful in advertising their products like the BlackBerry and the iPhone. Sales were nearly tied during the last quarter but RIM took it to the level by launching a new video comparing the BlackBerry PlayBook with the iPad. In the video, it shows that the PlayBook loads websites much faster, provides richer content because of their support for Flash, it's animated, supports open web standards, and many more. The PlayBook also has a 3-megapixel front-facing camera for videoconferencing and a 5-megapixel rear-facing camera. It is also said to have an "ultra portable design" and "breathtaking multimedia" on RIM's website. Shares will probably go up as BlackBerry gets ready to launch its new tablet early this year, which will create more competition with Apple Inc.

Enhance assets or reduce liabilities?

http://www.nationalpost.com/Enhance+assets+reduce+liabilities/3704770/story.html

Summary

A banker and CEO once told the writers of this article that the two words, assets and liabilities, were more than the fundamental building blocks of the basic accounting equation. Certain people approach asset enhancement as a way of providing value to organizations and those people usually see the world as full of opportunities. Their weakness though, is that they are likely to fall in love with their positive evaluation. On the other hand, liabilities reduction is also an important value because people who are influenced by this approach usually see the world as full of threats but their weakness is that they are concentrating too much on the threat. The banker's knowledge was based on the concepts of asset enhancement and liabilities reduction, where it was a framework to look at financial structure and power. The assets enhancement vs. liabilities reduction framework is extremely useful in business because it helps up-and-coming executives reach their potential. Not only does it provide staffing teams with strong advocates for both viewpoints, it also provides the executives with the ability to make multiple perspectives on the same problem.

Connection

The connections to chapter two is the the basic accounting equation and the recording of transactions in the accounting system. According to chapter two, the basic accounting equation- assets = liabilities + shareholders' equity- is the basis of all accounting systems, where it must always remain equal. Transactions are recorded in this accounting system and it provides readers with information about this equality at the beginning to the end of the current accounting period. Users of financial statements usually want to know how and why the company's financial position changed from the beginning of the year to the end of the year by analising. Certain people believe that recording a higher asset is better than recording a lower liabilty but other people think that recording a lower liability is better than recording a higher asset.

Reflection

This article shows how being an executive or heads of a strategic company requires the ability to view certain things from many different perspectives on the same problem because it is critical for their success. Although certain people have different opinions and different view on things, leadership in a complicated world usually starts from simple first principles. In my opinion, viewing situations with more than one perspective and looking at it simplistically is certainly an excellent stepping stone, where it is also a profound advice. Although there is a tension between the concepts of asset enhancement and liabilities reduction, it still brings out the potential of young executives while providing employees with strong advocates for both perspectives.

Leasing Market Affected By New Accounting Standards

http://www.nytimes.com/2010/06/23/realestate/commercial/23fasb.html
Summary

There are issues in the leasing market in the United States because of  new accounting standards that are currently taking shape. The Financial Accounting Standards Board (FASB) has been working with the International Accounting Standards Board (IASB) to bring together its generally accepted accounting principles (GAAPs). The FASB and the IASB have come up with new standards that will be completed next year and achieved in 2013. Companies usually list their leases as footnotes in their financial statements but the new standards requires companies to put leases as assets and liabilities on their balance sheets. Companies would be weakened in the eyes of investors and it could change the way tenants choose to lease space. Companies with these agreements are also required to estimate their sales numbers over the entire term of the lease to put it on their balance sheet.

Connection

The connection to chapter one is the accounting standards known as the Generally Accepted Accounting Principles (GAAPS). Mindy Berman, a managing director of corporate capital markets at a real estate services company says, "It is going to get ugly. On the day the standard gets implemented, all these companies will suddenly have to record much higher rent, and they are going to have to record this as a significant liability on their balance sheet." Canada has already changed its GAAPs to international standards and it'll take the U.S approximately 5 years to change too.

Reflection

The purpose for the FASB to merge its generally accepted accounting principles (GAAPs) is to increase the international comparability and the quality of standards used in the United States. There currently aren't any problems with the old GAAP's and that makes me wonder why they're merging with international standards. They believe that the outcome would be the worldwide use of a single set of high-quality accounting standards for both domestic and cross-border financial reporting. Companies that lease out space would also have a decrease in their leases and the length of time for the lease would also decrease.