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.
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.
