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.
