American Apparel Case Study

Question 1
Reviewing the available financial statements from 2007-present, as well as past articles, when did the company start declining? And where?

After looking at American Apparel’s past articles and financial statements from 2007 up until now, we can see that the company started declining in 2008. One of the reasons why this company started a downfall was because of the multiple sexual harassment lawsuits against the company, and their CEO, Dov Charney, in 2008, and 2009. Then, to make situation even worse, American Apparel had some issues with illegal or unauthorized workers in their factories in 2009, and was forced to fire around 2000 employees resulting a decline in their productivity, and sales. Then, the company continues to decline and produced a net loss in 2010 due to more challenges that came up. For example, the rising costs of productivity and on-going debt issues. Charney was confident on recovery but it did not happen and it was not convincing since all these issues, and unusual expenses created a liquidity problem for the company, and when a company has problems with the cash flow, they are on their way to bankruptcy if they do not improve. 

Question 2
Take a look at the recent financial statements (cash flow statement in particular) – with 14 million injected into the company right away, how should the company allocate this money? Into which activities? And why?

American Apparel has been temporary saved by the $14 million injection into the company. In my opinion, I think they should use some of this money on operating activities, like marketing, to increase sales, sell their excess inventories, and perhaps “clean up” the company’s image with advertisements that are not sexual, which may prevent future lawsuits. Then, hopefully, there would be an increase in sales, and improve their liquidity problem by paying off some debt and having some cash on hand. Also, a part of the $14 million could be spent on creating new products that would attract past and new customers since this would help sales increase as well.  

http://www.nytimes.com/2009/09/30/us/30factory.html

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

http://www.marketwatch.com/story/american-apparel-reports-fourth-quarter-and-full-year-2010-financial-results-and-provides-business-update-2011-04-01

http://www.bankruptcyattorneylexington.com/news/new-bankruptcy-warning-for-american-apparel

http://www.bloomberg.com/news/2011-04-26/american-apparel-gets-14-9-million-investment-that-may-grow-1-.html

http://moneycentral.msn.com/investor/invsub/results/statemnt.aspx?Symbol=app

Chapter 5 Blog

GM Declines to Lowest Since Initial Public Offering on Rising Oil Prices

http://www.bloomberg.com/news/2011-02-24/gm-posts-smallest-profit-in-year-on-new-vehicle-costs-sales-beat-estimate.html

Summary

Since GM’s infamous bankruptcy in 2008, their sales are finally improving. They announced their annual profit of $6.17 billion for 2010 and it was the most outstanding amount since 1997. However their shares on the stock market decreased. The drop of their stock price was probably due to the overreaction of the rising oil prices and the events in Libya, because there was no change in GM’s performance that would worry investors at that time.In the fourth quarter, the North America truck production increased by 22% from last year. This became a concern for GM because the rising oil prices will affect the sales of trucks. Akerson, the CEO of GM also explained that the fourth quarter results was lower than earlier quarters because they have been spending money on marketing and engineering, and the results for first quarter will be higher. Akerson also said that GM is prepared for the expensive energy with their energy efficient vehicles.

Connections

GM reported their net income for the fourth quarter of $1.41 billion, which would be the first item of their cash flow statement. Also, the net income of this quarter is 31 cents per share, but it would have been 52 cents per share if they excluded a charge from the purchase of preferred shares from the U.S. Treaty. This transaction would be listed under the investing section of the cash flow statement, and would decrease the amount of cash since they are purchasing shares. Also, the increase of trucks for their inventory will obviously lower their cash flow. They may run into troubles with their cash if their inventory does not get sold, causing the company to lack cash.

Reflection

Since General Motors' bankruptcy in 2008, I would say that GM has been recovering slowly. They announced that their annual profit for 2010 has been the highest since 1997, but this amount excludes a purchase of shares ($127.1 billion). GM has explained that the first quarter coming up will be better than the fourth quarter of 2010, but I would not put much hope on that. They said that they are prepared for the rising energy prices, but they do not explain in this article how they are prepared except for their energy-efficient vehicles. However, even though energy prices are increasing, this does not mean that people will go out and buy more energy-efficient vehicles. Most of the people that already has a car would not go out and buy another vehicle if energy are so expensive. People that do not have a car yet may reconsider the plan of actually buying one. Also, the inventory of trucks they have may actually cause troubles in their cash flow in the near future.

Canadian Airfares Expected to Rise

http://www.cbc.ca/money/story/2011/01/11/consumer-air-fares-rise-canada.html#socialcomments

Summary:  

In the first 2-3 weeks of 2011, some U.S airlines have already increased their prices three times. An analyst, Chris Murray, says Canadian airlines are expected to increase prices soon as well, but will not predict an amount of the increase. These price hikes are possibly going to stay since some major U.S airlines all increased and matched prices on the market. This was predicted by Rick Seaney, the CEO of FareCompare.com. In 2008 and 2009, U.S airlines had lost billions but turned around in 2010, and are expected to earn more this year. They increased prices for peak travel days, and collected more fees. These increases can be caused by the rising fuel costs, and the limited supply of airline seats. The world’s airlines are expected by the International Air Transportation Association to make $9 billion Cdn this year.

Connection:

The connection to chapter three would be the gross margin and the income from operations. In this article, many airlines are increasing prices because of the rising expenses they must cover. On a multi-step income statement that is thoroughly discussed in chapter 3, covering expenses with sale or service revenues will provide a gross profit or gross margin amount, which appears at the start of the statement. A gross margin percentage can then be calculated (gross margin divided by sales). This is an important percentage because can reflect the performance of your company over time by seeing if it is increase, decreasing, or remains the same. Also, in a multi-step income statement, income and expenses are divided into specific sections. In this case, the revenue gained from increased prices of fares, it will be recorded under income from operations instead of others like income from non-operating sources. This is because the revenue will be obtained by their normal operating services, and are expected to continue in the future.

Reflection:
Even though airlines are increasing their prices, I agree that the airlines will still be earning this year. During the year, people need this extremely important transportation for many reasons. For example, business trips, vacations, world events like the 2011 FIFA Womens World Cup, family issues, and many more. People will need the airlines no matter what, and when all the airlines increase their prices, people will not have many choices. Also, the economy is slightly better and people will be more willing to go on vacations. I think that the airlines will earn even more during high seasons with their increased prices like the usual, because as a student, or families with students will only have a certain period of time to travel, so therefore they cannot escape the expensive fares.