American Apparel, Inc. Reports Fourth Quarter 2014 Financial Results

LOS ANGELES

American Apparel, Inc. (the “Company”) (NYSE MKT: APP), a vertically-integrated manufacturer, distributor, and retailer of branded fashion basic apparel, announced financial results for its fourth quarter and year ended December 31, 2014.

Financial Highlights for the Fourth Quarter of 2014

• Loss per share was $0.16 compared to $0.19 in the fourth quarter of 2013
• Adjusted EBITDA was $10.3 million compared to $0.4 million in the fourth quarter of 2013
• Operating expenses, excluding significant charges, decreased $10.9 million or 12% for the quarter, compared to the same period in 2013
• Inventories decreased $21.8 million or 13%, compared to the same period in 2013

Paula Schneider, Chief Executive Officer, commented, “Our fourth quarter year-over-year growth in adjusted EBITDA and reduction in operating expenses position us for a solid turnaround of this business. We remain focused on putting the right processes and systems in place-such as a rigorous forecasting process and disciplined bottom-up budgeting-so that we can better leverage American Apparel’s strong brand.”

Operating Results – Fourth Quarter 2014

Net sales for the fourth quarter of 2014 decreased $15.6 million, or 9%, compared to the same period in 2013 due to lower sales in all three sales channels compared to the same period in 2013.

Gross profit for the fourth quarter of 2014 decreased 9% to $72.2 million from $79.5 million for the same period in 2013, primarily due to the lower retail and wholesale sales volume. Gross profit, excluding significant charges, increased to 52.2% of net sales in the fourth quarter of 2014 from 47.5% in the fourth quarter of 2013.

Operating expense for the fourth quarter of 2014 was $84.0 million, compared to $90.7 million for the same period in 2013. Excluding the effects of significant charges related to customs settlement and contingencies, the internal investigation of Dov Charney, and employment settlement and severance costs, operating expenses for the fourth quarter decreased $10.9 million or 12%, compared to the same period in 2013. The decrease in costs was due to lower payroll and lower costs related to our advertising and promotional activities from our ongoing cost reduction initiatives.

Net loss for the fourth quarter of 2014 was $28.0 million or $0.16 per share, compared to net loss of $20.8 million, or $0.19 per share for the fourth quarter of 2013. Results for the fourth quarter of 2014 include $15.4 million, or $0.09 per share, related to significant charges. Results for the fourth quarter of 2013 include $4.2 million, or $0.04 per share, related to significant charges.

Significant Charges

Customs settlements and contingencies – We wrote off $3.3 million of duty receivables for our European subsidiaries based on a recoverability analysis and probability of collection. These duty receivables related to changes in transfer costs for product sold to the European entities.

Internal investigation – On June 18, 2014, the Board of Directors (the “Board”) voted to replace Dov Charney as Chairman of the Board, suspended him, and notified him of its intent to terminate his employment as President and CEO for cause. In connection with the Nomination, Standstill and Support agreement, dated July 9, 2014, with Standard General and Mr. Charney, the Board formed a new special committee for the purpose of overseeing the investigation into alleged misconduct by Mr. Charney. We incurred investigation related legal and consulting fees of $3.8 million in the fourth quarter of 2014.

Employment settlements – In the fourth quarter of 2014, we entered into settlements of certain previously disclosed employment-related claims. The settlements resulted in additional charges totaling $1.1 million during the fourth quarter of 2014.

Additional inventory reserves – In late 2014, we initiated activities to review and improve store merchandising, working capital and liquidity, and, as such, accelerated the sale of slow-moving inventory through our retail and online sales channels. As part of this process, we also identified certain slow-moving, second quality finished goods and raw materials that required additional reserves. Based on our review of the inventory on-hand, we increased our excess and obsolescence reserve by $4.5 million.

Unrealized Gain/Loss on Change in Fair Value of Warrants

As of December 31, 2014, Lion Capital LLP held warrants to purchase 24.5 million shares of our common stock, with an exercise price of $0.66 per share. As the share price of our stock increases, the fair value of warrant liability recorded on the balance sheet increases, and we record an expense to recognize the increase in fair value of the warrant liability. Conversely, when the share price of our stock decreases, we record a gain to recognize the related reduction in the fair value of the warrant liability on the balance sheets. Although the income statement impacts associated with warrants are appropriate and required under GAAP, they do not impact our operating performance nor do the credits and charges have an impact on the cash balances since the liability recorded is not an obligation that will be settled with cash. Instead, these warrants will be reclassified to equity when they are exercised.

Liquidity and Capital Resources

As of December 31, 2014, we had $8.3 million in cash, $34.3 million outstanding on our asset-backed revolving credit facility and $13.1 million of availability for additional borrowing under the facility. As of March 13, 2015, we had $5.8 million of availability for additional borrowings under the facility.

On March 25, 2015, we entered into the Sixth Amendment to the Capital One Credit Facility (“the Sixth Amendment”) which (i) waived any defaults under the Capital One Credit Facility due to failure to meet the obligation to maintain the the obligation to maintain the maximum leverage ratio and minimum adjusted EBITDA for the measurement periods ended December 31, 2014, as defined by the credit agreement, (ii) waived the obligation to maintain the minimum fixed charge coverage ratio, the maximum leverage ratio and minimum adjusted EBITDA required for the twelve months ended March 31, 2015, (iii) included provisions to permit us to enter into the Standard General Credit Agreement (as defined below), (iv) reset financial covenants relating to maintaining minimum fixed charge coverage ratios, maximum leverage ratios, maximum capital expenditures and minimum adjusted EBITDA, and (v) permitted us to borrow $15 million under the Standard General Credit Agreement.

As of December 31, 2014, we were not in compliance with the maximum leverage ratio and the minimum adjusted EBITDA covenants under the Capital One Credit Facility. For the April 1, 2014 through December 31, 2014 covenant reference period, the maximum leverage ratio was 6.70 to 1.00 as compared with the covenant maximum of 5.10 to 1.00 and the minimum adjusted EBITDA was $38.2 million as compared with the covenant minimum of $41.1 million. However, these covenant violations were waived by the Sixth Amendment. For the year ended December 31, 2014, we were required to maintain a minimum fixed charge coverage ratio of not less than 1.00 to 1.00 and a maximum capital expenditure of not more than $8 million. We were in compliance with these covenants at December 31, 2014.

On March 25, 2015, one of our subsidiaries borrowed $15 million under an unsecured credit agreement with Standard General, dated as of March 25, 2015 (the “Standard General Credit Agreement”). The Standard General Credit Agreement is guaranteed by us, bears interest at 14% per annum, and will mature on October 15, 2020. The proceeds of such loan are intended to provide additional liquidity to the Company as contemplated by the Standstill and Support Agreement.

We believe that we have sufficient financing commitments to make the April 15, 2015 interest payment as well as meet other funding requirements for the next twelve months.

Definitions and Disclosures Regarding Non-GAAP Financial Information

The Company reports and discusses its operating results using financial measures consistent with generally accepted accounting principles (GAAP) and believes that this should be the primary basis for evaluating the Company’s performance.

The preceding discussion of the Company’s results of operations includes a discussion of non-GAAP financial measures including the following: Adjusted Earnings before Interest, Taxes, Depreciation and Amortization (Adjusted EBITDA); gross profit, excluding significant charges; operating expenses, excluding significant charges; and income from operations, excluding significant charges. These non-GAAP measures should not be viewed as alternatives or substitutes for GAAP reporting.

The Company believes the presentation of these non-GAAP measures is useful to investors because they are used by lenders to measure its ability to service debt, by industry analysts to determine the market value of the Company and by management to identify cash available to service debt, make investments, maintain capital assets and fund ongoing operations and working capital needs. Additionally, these measures allow management to gauge company operating performance by isolating the effects of significant charges.

Adjusted EBITDA is calculated as income or loss from operations plus income tax provision, interest expense, depreciation and amortization, share based compensation expense, retail store impairment, and the effects of significant charges (including changes to the supply chain operations, certain customs settlements and contingencies, additional inventory reserves, internal investigation, and employment settlements and severance), plus or minus unrealized gain or loss on change in fair value of warrants and foreign currency transaction gain or loss.

Gross profit, excluding significant charges, is calculated as gross profit less significant charges related to changes to the supply chain operations – our transition to the La Mirada warehouse in 2013, additional inventory reserves, and certain custom settlements and contingencies.

Operating expenses excluding significant charges is calculated as operating expenses less significant charges related to certain customs settlements and contingencies, internal investigation, employment settlements and severance and changes to the supply chain operations.

Loss from operations excluding significant charges is calculated as loss from operations less significant charges related to certain customs settlements and contingencies, additional inventory reserves, internal investigation, employment settlement and severance and changes to the supply chain operations.

About American Apparel

American Apparel, Inc. (the “Company,” “we,” “us,” and “our”) is a vertically-integrated manufacturer, distributor, and retailer of branded fashion basic apparel based in downtown Los Angeles, California. As of December 31, 2014, the Company had approximately 10,000 employees and operated 242 retail stores in 20 countries including the United States and Canada. The Company also operates a global e-commerce site that serves over 50 countries worldwide at http://www.americanapparel.com. In addition, the Company operates a leading wholesale business that supplies high quality T-shirts and other casual wear to distributors and screen printers.

This press release, and other statements that the Company may make, may contain forward-looking statements. Forward-looking statements are statements that are not historical facts and include statements regarding, among other things, the Company’s future financial condition and liquidity including the impact of compliance with, and availability under, our debt instruments, results of operations, and future business plans and expectations, including statements related to the effect of, and our expectations with respect to, the operation of our business, inventory and sales impacts related thereto. Such forward-looking statements are based upon the current beliefs and expectations of the Company’s management, but are subject to risks and uncertainties, which could cause actual results and/or the timing of events to differ materially from those set forth in the forward-looking statements, including, among others: consequences of the termination of Dov Charney, our former chief executive officer (or the internal investigation related thereto), including any litigation or regulatory investigations, or any impact on our sales or brand related thereto; changes in key personnel, our ability to hire and retain key personnel, and our relationship with our employees; voting control by our directors, lenders and other affiliates, including Standard General and Dov Charney; ability to successfully implement our strategic, operating, financial and personnel initiatives; ability to effectively carry out and manage our strategy; ability to maintain the value and image of our brand and protect our intellectual property rights; general economic conditions, geopolitical events, other regulatory changes, and inflation or deflation; disruptions in the global financial markets; the highly competitive and evolving nature of our industry in the U.S. and internationally; risks associated with fluctuations and trends of consumer apparel spending in the U.S.; changes in consumer preferences or demand for our products; our ability to attract customers to our retail and online stores; loss or reduction in sales to wholesale or retail customers or financial nonperformance by our wholesale customers; seasonality and fluctuations in comparable store sales and wholesale net sales and associated margins; ability to improve manufacturing efficiency at our production facilities; changes in the price of materials and labor, including increases in the price of raw materials in the global market and minimum wages; ability to pass on the added cost of raw materials and labor to customers; ability to effectively manage inventory levels; risks that our suppliers or distributors may not timely produce or deliver products; ability to renew leases on economic terms; risks associated with our facilities being concentrated in one geographic area; ability to identify new store locations and the availability of store locations at appropriate terms; ability to negotiate new store leases effectively; and ability to open new stores and expand internationally; ability to generate or obtain from external sources sufficient liquidity for operations and debt service; consequences of our significant indebtedness, including our relationship with lenders, ability to comply with debt agreements, ability to generate cash flow to service our debt, and the risk of acceleration of borrowings thereunder as a result of noncompliance; adverse changes in our credit ratings and any related impact on financial costs and structure; continued compliance with U.S. and foreign government regulations and legislation, including environmental, immigration, labor, and occupational health and safety laws and regulations; loss of U.S. import protections or changes in duties, tariffs and quotas, risks associated with our foreign operations and supply sources such as market disruption, changes in import and export laws, and currency restrictions and exchange rate fluctuations; litigation and other inquiries and investigations, including the risks that we, our officers or directors in cases where indemnification applies, will not be successful in defending any proceedings, lawsuits, disputes, claims or audits, and that exposure could exceed expectations or insurance coverage; tax assessments by domestic or foreign governmental authorities, including import or export duties on our products and the applicable rates for any such taxes or duties; ability to maintain compliance with the exchange rules of the NYSE MKT LLC; the adoption of new accounting standards or changes in interpretations of accounting principles; adverse weather conditions or natural disaster, including those which may be related to climate change; technological changes in manufacturing, wholesaling, or retailing; the risk, including costs and timely delivery issues associated therewith, that information technology systems changes may disrupt our supply chain or operations and could impact cash flow and liquidity, and ability to upgrade information technology infrastructure and other risks associated with the systems that operate our online retail operations; the risk of failure to protect the integrity and security of our information systems and customers’ information; and other risks detailed in the Company’s filings with the Securities and Exchange Commission, including the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. The Company’s filings with the SEC are available at www.sec.gov. You are urged to consider these factors carefully in evaluating the forward-looking statements herein and are cautioned not to place undue reliance on such forward-looking statements, which are qualified in their entirety by this cautionary statement. The forward-looking statements speak only as of the date on which they are made and the Company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.

Weber Shandwick
John Dillard and Liz Cohen
(212) 445-8044