American Apparel, Inc., a vertically integrated manufacturer, distributor, and retailer of branded fashion-basic apparel, announced financial results for its first quarter ended March 31, 2014.
Financial Performance Summary for the First Quarter of 2014
-Net sales decreased 1% to $137.1 million on a 7% decrease in comparable store sales and a 7% increase in wholesale net sales.
-Gross profit declined 1% to $72.0 million in the first quarter of 2014.
-Operating expenses decreased 5% to $79.5 million in the first quarter of 2014.
-Adjusted EBITDA improved by $2.1 million to $1.4 million for the first quarter of 2014 versus loss of $0.7 million for the first quarter of 2013.
Dov Charney, CEO of American Apparel indicated, "We are encouraged by our first quarter performance with our achieved results ahead of our 2014 business plan. The results of our cost control efforts are being seen in all areas of the business and we are now fully focused on measures to improve top line performance."
Operating Results
Comparing the first quarter 2014 to the first quarter 2013, net sales decreased 1% to $137.1 million on a 7% decrease in comparable store sales in the retail and online business and a 7% increase in net sales in the wholesale business.
Gross profit was $72.0 million for the first quarter 2014 versus $72.9 million for the first quarter 2013. Gross margin decreased to 52.5% for the first quarter 2014 versus 52.8% for the first quarter 2013. The decrease in the gross margin was primarily due to a relative increase in the mix of lower-margin wholesale net sales.
Operating expense was $79.5 million for the first quarter 2014 versus $83.3 million for the first quarter 2013. As a percent of sales, operating expenses decreased to 58.0% for the first quarter 2014 versus 60.4% for the first quarter 2013. The decrease includes approximately $3 million in lower payroll and associated costs, advertising and marketing, and professional fees. The reductions are largely as a result of cost reduction efforts. In addition stock compensation expense was lower by $2.3 million and equipment lease expense increased $1.0 million. In the first quarter 2014 the Company incurred $0.5 million in retail store impairment charges versus $0.1 million in the first quarter 2013.
Other income for the first quarter 2014 was $2.5 million as compared with other expense of $35.6 million in the first quarter 2013. The $38.1 million change was primarily the result of an unrealized gain for the change in fair value of warrants of $12.7 million incurred in the first quarter 2014 as compared to an unrealized loss of $23.6 million in the first quarter 2013.
Adjusted EBITDA increased to $1.4 million for the first quarter 2014 versus a loss of $0.7 million for the first quarter 2013. Please refer to Table A for a reconciliation of consolidated Adjusted EBITDA, a non-GAAP financial measure, to consolidated net loss.
Income tax provision in the first quarter 2014 was $0.5 million versus $0.5 million for the first quarter 2013. In accordance with U.S. GAAP, the Company has discontinued recognizing potential tax benefits associated with net operating loss carryovers.
Net loss for the first quarter 2014 was $5.5 million or $0.05 per common share, versus a net loss of $46.5 million, or $0.42 per common share for the first quarter 2013.
Fully-diluted weighted average shares outstanding were 111.6 million in the first quarter 2014 versus 109.9 million for the first quarter 2013. As of May 1, 2014 there were approximately 173.5 million shares outstanding. As of April 30, 2014 the Company had $18.3 million available for borrowing under its revolving credit agreement.
Explanation of Unrealized Gain (loss) of Change in Fair Value of Warrants
Lion Capital currently holds 24.5 million warrants to purchase American Apparel common stock at a price of $0.66 per share and as the share price of American Apparel's stock increases the fair value of the warrant liability recorded on the balance sheet increases and the Company records an expense to recognize the increase in the fair value of the warrant liability.
Conversely, when the share price of American Apparel's stock decreases, the Company records a gain to recognize the related reduction in the fair value of the warrant liability on the balance sheet. Although the income statement impacts associated with the warrants are appropriate and required under GAAP, they do not impact the operating performance of the Company nor do the credits and charges have an impact on 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.
Company Outlook
The Company reaffirms its prior estimate of Adjusted EBITDA for 2014 of $40 million to $50 million.
