American Apparel

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W16207
Teaching Note
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AMERICAN APPAREL: DROWNING IN DEBT?
Anupam Mehta wrote this teaching note as an aid to instructors in the classroom use of the case American Apparel: Drowning in
Debt?, No. 9B16B008. This teaching note should not be used in any way that would prejudice the future use of the case.
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This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the
permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights
organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western
University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) [email protected]; www.iveycases.com.
Copyright © 2016, Richard Ivey School of Business Foundation Version: 2016-04-14
SYNOPSIS
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American Apparel, a $600 million1 company, has been experiencing year-on-year losses. The company
grappled with a loss of $106 million in 2013 and huge debt repayments in 2014. Introductory finance
students are introduced to the issues and challenges that will enable them to determine an appropriate
approach for analyzing the company’s financial standing. Also discussed are the effects on the financial
performance of the company as a result of the termination of chief executive officer (CEO) and founder
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Dov Charney. Students will conduct a comprehensive analysis of the company’s 2009–2013 financial
statements using various tools, such as trend analysis, common size statements, and financial ratios. The
results of their analysis are to be used as the basis for recommending a future course of action for the debt-
ridden company.
POSITION IN THE COURSE

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This case is intended for use in introductory classes on financial statement analysis. It is suitable for both
postgraduate introductory lectures and undergraduate accounting courses. The case requires students to
have a basic knowledge and understanding of accounting concepts.
TEACHING OBJECTIVES
The case is aimed at achieving the following objectives:
 To analyze and evaluate the financial performance of the company, and to recommend a future course
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of action.
 To enable learners to understand and apply various financial assessment tools and techniques, in
general, and financial ratio analysis, in particular.
 To train students in preparing and conducting trend analysis and common size statements, specifically
common size income statements and common size balance sheets.
1
All currencies are in U.S. dollars unless otherwise stated.
This Teaching Note is authorized for use only by Shanul Gawshinde, Other (University not listed) until Mar 2024. Copying or posting is an infringement of copyright.
[email protected] or 617.783.7860.
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SUGGESTED READINGS
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1. P. Atrill and E. McLaney, Financial Accounting for Decision Makers, 6th edition, (Don Mills, ON:
Pearson Education Canada, 2010).
2. C. Horngren and W. Harrison, Financial and Managerial Accounting, 1st edition, (Upper Saddle River,
NJ: Pearson/Prentice Hall, 2008).
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3. Investopedia, “Common Size Income Statement Definition,” 2009, accessed June 30, 2014,
www.investopedia.com/terms/c/commonsizeincomestatement.asp.
4. L. Revsine, D. Collins, and W. Johnson, Financial Reporting and Analysis, 1st edition, (Upper Saddle
River, NJ: Pearson/Prentice Hall, 2005).
5. T. Robinson, International Financial Statement Analysis, 1st edition, (Hoboken, NJ: John Wiley &
Sons, 2009).
6. “Beginners’ Guide to Financial Statements,” U.S. Securities and Exchange Commission, modified
February 5, 2007, accessed June 20, 2014, www.sec.gov/investor/pubs/begfinstmtguide.htm.
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ASSIGNMENT QUESTIONS
1. Using a financial ratio analysis, evaluate American Apparel’s financial performance for the past five
years.
2. Analyze the company’s financial statements on the basis of its common size statements. What
additional insights do these statements provide?
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3. Which financial performance factors caused this growing company to become a debt-ridden enterprise?
On the basis of the financial performance analysis, what actions do you recommend to prevent the
company from falling further into debt?
4. Optional question: Does Dov Charney’s termination affect the company’s ability to repay its debts? Do
you agree with the statements that American Apparel has lost its appeal and that Charney has lost his
charm?
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TEACHING PLAN
The analysis and discussion of the case study take 90 minutes to complete. The first 15 minutes can be used
to explain the basic issues confronting the company. Given that the case focuses on financial analysis, the
next hour can be devoted to discussing the company’s financial performance, the various evaluation
techniques that can be applied and the strategies for improving the company’s financial standing. The last
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10 to 15 minutes can be reserved for summarizing the important learning points and attempting to achieve
a consensus regarding the company’s future course of action. The assignment questions/activities should
be given in advance to prepare students for the discussion. Faculty can distribute the case-study Excel
Spreadsheet to students (Ivey product 7B16B008), while the teaching notes Excel Spreadsheet (Ivey
product 5B16B008) is available for instructors.
In analyzing the financial statements of American Apparel, students are required to apply the following
tools:
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1. Ratio analysis, which is designed to obtain information on company performance and delineate the
trends in a company’s financial operations.
2. Horizontal analysis, which involves a year-to-year comparison of company performance.
3. Common size statement analysis, also known as vertical analysis, which entails comparing different
companies or focusing on a single company over a given period.
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ANALYSIS
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1. Using a financial ratio analysis, evaluate American Apparel’s financial performance for the past
five years.
Here, the instructor can raise important issues regarding the company’s financial performance. The financial
ratio analysis is one of the most common financial tools used to evaluate a company’s performance in the
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following areas:
a. Leverage or long-term solvency

b. Interest coverage
c. Liquidity or short-term solvency
d. Efficiency or activity
e. Overall profitability
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f. Cash performance
Leverage or Long-term Solvency Ratio Analysis
Leverage or long-term solvency ratios are used to evaluate the ability of a company to satisfy its long-term
obligations. For example, measuring an enterprise’s long-term solvency position requires the following
ratios: total debt-to-total assets, long-term debt-to-equity, and total debt-to-total equity. High debt ratios
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indicate considerable financial risk.
Exhibit TN-1 shows an increasing ratio of total debt to total assets. This increase is attributed to
continuously increasing liabilities, which drive a company to acquire huge loans, thereby placing the
company at great financial risk. American Apparel’s 2013 total debt-to-total asset ratio of American
Apparel in 2013 is extremely high at 1.23 times, which amounts to $1.23 of debt for every dollar of asset.
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The company’s 2013 long-term debt-to-equity ratio was negative, that is –3.22 times. A negative net worth
signifies an extremely risky situation for a company. The total debt-to-equity ratio shows the proportion of
total liabilities relative to total equity, which is another measure of leverage. If the ratio is greater than 1,
then a company is financing its assets primarily with debt rather than equity. American Apparel’s total debt-
to-equity ratio has increased every year, and, in only five years, its debt-to-equity ratio increased from one-
fold to more than 13-fold. In 2013, the company’s entire equity was negative, thus leading to a non-
meaningful figure. The comparison of the long-term debt-to-equity ratios in 2013 and 2008 (0.67 times)
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attests to the capital erosion of American Apparel.
The company has incurred enormous debt at a tremendous rate, thereby preventing it from generating
sufficient profitability. All these ratios signify substantial debts in proportion to the total equity of the
company. Along with the leverage ratio, coverage ratios are also used in credit analysis.
Coverage Ratio Analysis

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Coverage ratios are used to determine the extent to which a company’s profits before interest and taxes can
cover its interest payments. The coverage ratio is a measure of a company’s ability to satisfy its financial
obligations, with higher ratios indicating a better cushion for interest payments. In broad terms, the higher
the coverage ratio, the better the ability of an enterprise to fulfil its duties to its lenders. Analysts and
investors study the trend of coverage ratios over time to ascertain changes in a company’s financial position.
Common coverage ratios include the interest coverage ratio and cash coverage ratio.
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As depicted in Exhibit TN-2, American Apparel’s coverage ratios point to its inability to cover its interest
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payments. Both its cash coverage ratio and interest coverage ratio were negative in 2013. The company’s
interest coverage ratio has been consistently negative beginning in 2010. This decline is attributed to
American Apparel having been incurring losses instead of income. The negative interest coverage ratio
indicates that the company will need to depend on existing cash reserves or additional borrowing to cover
its interest payments instead of increasing earnings before interest and taxes.
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The cash coverage ratio is a more severe test of an enterprise’s ability to make interest payments. American
Apparel’s cash coverage ratio also indicates that it cannot issue interest payments out of the cash flow that
it generates from operating activities.
Liquidity Ratio Analysis
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Another important aspect of a company’s financial position is liquidity for the current and previous years.
Liquidity ratios are used to interpret the ability of a company to meet its short-term obligations. A high
current ratio indicates sufficient current assets to cover current liabilities.
American Apparel exhibited a favourable current ratio of 2.87 times in 2009 (see Exhibit TN-3). As the
company’s position diminished in succeeding years, however, its liabilities dramatically increased, thereby
reducing the current ratio. American Apparel’s current ratio in 2010 was 1.0 times, a value that only just
covered its current liabilities. Since 2011, this ratio has consistently exhibited a downward trend, reaching
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1.33 times in 2013. At this stage, the company’s current assets were sufficient to satisfy its current
obligations.
The quick ratio, a more stringent test of liquidity, compares a company’s quick assets with its current
liabilities. An acceptable rate is 0.90 to 1.00. The considerably low quick ratio of American Apparel
signifies a lack of liquidity. Cash flow diminished over the years, and current liabilities increased; thus, the
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cash ratio of the company has been minimal. This position strongly indicates to investors and creditors that
the company will fail to fulfil its short-term obligations.
As previously stated, the current ratio of the company in 2013 was 1.33 times, whereas its quick ratio was
0.18 times. At this point, the instructor must show that although both ratios are continuously decreasing,
the wide gap between these ratios is due to the company’s huge inventory of current assets. Once the
inventory is removed from the list of current assets, the quick assets decrease to a very low amount. The
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company’s cash ratio has been running extremely low at 0.05 times in 2013. A noticeable issue is that the
cash position of American Apparel has stalled at a very low point since 2009. The company’s liquidity
dropped considerably from 2009 to 2013.
Efficiency or Activity Ratio Analysis
Efficiency or activity ratios are employed to evaluate an enterprise’s ability to sell merchandise inventory
and collect receivables. Activity ratios, also called performance ratios or turnover ratios, reveal how
efficiently an enterprise uses the facilities at its disposal. In other words, these ratios measure the
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effectiveness with which resources are used. Efficiency ratios comprise a debtor’s turnover ratio, asset
turnover ratio, inventory turnover ratio, and working capital turnover ratio.
Inventory turnover ratios indicate how quickly a company converts its inventory into sales. In the case of
American Apparel, its inventory turnover ratio slightly improved in 2013 over the level generated in 2012
(3.43 times).
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The receivables turnover ratio of the company has stayed almost the same in the past three years, with the
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ratio slightly improving in 2013 (see Exhibit TN-4). A similar enhancement in working capital turnover
also occurred, with the ratio increasing from 8.22 times in 2012 to 10.92 times in 2013. Its asset turnover
ratio in 2013 was very low at 1.92 times, but has improved over time. The efficiency ratios are listed in
Exhibit TN-4.
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Profitability Ratio Analysis
The major challenge for the company is to achieve profitability. Its gross profit ratio is almost 51 per cent,
indicating that out of every dollar of sale, American Apparel earns a gross margin of $0.51. Although the
gross margin is above 50 per cent, it has been decreasing over time. The high gross margins reflect the
ability of the company to cover its operating and non-operating expenses for 2010.
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American Apparel has been generating a negative net profit ratio since 2010. Although it slightly improved
its net margins in 2011 and 2012, it generated a net profit ratio of –17 per cent in 2013 because of excessive
expenses.
The beginning of 2008 was auspicious for American Apparel in terms of sales and overall growth. The
major setbacks experienced by the company surfaced, beginning in 2009. The company’s return on assets
(ROA) drastically reduced from 7 per cent in 2009 to –15 per cent in 2010. The strategic changes that the
company made in terms of disinvesting the unprofitable stores improved ROA from –15 per cent in the
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year 2010 to –7 per cent in 2011. In 2012, the ROA further improved from negative in the previous year to
zero in 2012, but this improvement could not be sustained; the company slipped back into negative ROA
in 2013.
The company’s negative return on equity (ROE) indicates that it is unable to generate returns on its equity
capital. It is, in fact, losing money on the capital invested by its equity shareholders. The ROA and ROE
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have both decreased to levels lower than those generated in previous years. Decreasing overall profitability,
as reflected by the negative ROE and ROA, points to the poor financial health of the company.
The substantial debts of American Apparel and its negative margins are a very dangerous combination. The
profitability ratios of the company are presented in Exhibit TN-5.
Cash Performance Ratio Analysis

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The cash flow statement is one of the most useful tools for determining the financial status of a company.
As stated in the case, American Apparel’s cash flow from operations is negative, reflecting the inability of
the firm to generate earnings from its operating activities. All the cash performance ratios of the company
are decreasing. The company acquired negative cash returns (cash from operations) on revenues and assets
in 2013. Its cash return on equity reached 0.05 times, or 5 per cent, in 2011, whereas non-meaningful figures
were earned in 2012 and 2013 because the cash flow from operating activities and net equity were negative
during these periods. The cash performance ratios are provided in Exhibit TN-6.
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2. Analyze the company’s financial statements on the basis of its common size statements. What
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additional insights do these statements provide?
Common size statements facilitate the analysis of income statements at different periods of company
operations. These statements are very useful for comparisons across time or comparisons of different
company sizes.
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From the common size income statement of American Apparel (see Exhibit TN-7), the following
interpretations can be formulated:
 In 2013, the cost of sales was 49 per cent, whereas the operating expenses (i.e., selling expenses) were
38 per cent.
 The administrative expenses were 17 per cent of total sales, showing that 55 per cent of such sales is
spent on operating expenses (including administrative and selling expenses).
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The income statement indicates that American Apparel’s expenses on interest have increased by 74 per cent
over the years (see case Exhibit 2), whereas the common size statement shows that such expenses amount
to only 6 and 4 per cent of net sales in 2013 and 2009, respectively. These results show that the interest
expenses are substantially lower than the operating expenses. The majority of company sales are therefore
used up by operating expenses (administrative and selling expenses), not by interest expenses. A negligible
proportion of total sales is spent on other expenses.
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With respect to the bottom line, the company’s soaring gross margin of 51 per cent resulted in a total net
loss of 17 per cent in 2013. The instructor should highlight the fact that the company has a good markup,
with the cost of goods sold at 38 to 50 per cent of merchandise sales. Despite a high gross markup of around
50 per cent, however, the company has been incurring losses every year. A high gross margin corresponds
to a minimal cost of goods sold. The instructor can ask students what components swallow the company’s
sales revenue. The selling and distribution expenses have been excessive since 2009, indicating that the
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company spends about 38 per cent of net sales on the sale and distribution of merchandise. General and
administrative expenses were 17 per cent of net sales in 2013.
Another key revelation of the analysis of American Apparel’s common size income statement is that the
interest component was only 6 per cent of total sales in 2013. What follows is a discussion of the trends
that underlie American Apparel’s operating efficiency and financial position.
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The 17 per cent net loss amid the 51 per cent gross margin points to severe operating inefficiencies in the
management of the company’s selling costs and administrative expenses. These expenses amount to 55 per
cent of net sales. Despite the high gross margin, therefore, the company has incurred net losses, indicating
its inability to manage its operating expenses, and in turn, its inefficiency in operations.
The common size balance sheet (see Exhibit TN-8) provides further insights into the company’s statements
for 2013. An important issue for consideration is that the assets of American Apparel primarily consist of
current assets, which are 64 per cent of the total assets for 2013. The instructor should emphasize that out
of the 2013 total assets, more than 50 per cent are in the form of inventory. This composition is due to the
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company’s high inventory stock and slow-moving inventory, which account for more than 50 per cent of
total current assets. The problem is exacerbated because the inventory level continued to increase over a
given period. The cash balance declined from 3.41 per cent in 2009 to 2.60 per cent in 2013. The fixed
assets of the company also decreased over a given period.
The total liabilities and equity highlighted in the common size balance sheet statement illustrates that
American Apparel’s long-term debt as a percentage of total liabilities and equity capital is excessively high.
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One of the most important factors in this regard is the presence of accumulated losses, which account for
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77 per cent of total liabilities and equity. The equity paid in capital in 2013 was more than 50 per cent, but
the overall shareholder net worth was negative because of the tremendous accumulated losses. These losses
have increased multifold and reached a level where the entire paid-up capital has been consumed. This
situation drove the company’s net worth down to –23 per cent of total liabilities and equity capital.
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The analysis of common size liabilities indicates that current liabilities account for 49 per cent of total
liabilities compared with only 31 per cent in 2008. The company’s current liabilities have grown
significantly over the years.
3. Which financial performance factors caused this growing company to become a debt-ridden
enterprise? On the basis of financial performance analysis, what actions do you recommend to
prevent the company from falling further into debt?
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This question can sum up all the issues and red flags identified in the case. The challenges that confront
American Apparel are as follows:
Problems with Earnings
American Apparel’s income has significantly declined, with the company earning a net profit of $14 million
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in 2008 but incurring a substantial $106 million in losses in 2013. Although the company attempted to
regain its financial strength, none of the measures implemented has produced the favourable outcomes
necessary to guarantee the longevity of the company.
Low Liquidity
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American Apparel has exhibited a low cash ratio since 2009. The company is in a liquidity crunch, as
identified from its extremely low quick and cash ratios across the years. With stagnating sales and huge
expenses (including interest expenses) to be paid, the company is experiencing considerable difficulty in
generating cash.
Changes in Top Management

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The termination of Dov Charney at such a crucial time can be a lethal blow to the company. It can trigger
an issuance of penalty from lenders that provided loans on the condition that no changes in top management
will be implemented.
Huge Debt
The company is burdened with soaring total liabilities. The presence of huge debts in the company’s
financial structure and its inability to elevate sales and revenues are the most demanding challenges that
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American Apparel faces today. American Apparel, Inc. needs to pay a substantial $13.4 million in interest
and settle other debt repayments. The long-term debts are increasing on a yearly basis. The high rate of
interest on borrowing also diminished the company’s ability to cover interest.
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Decreasing Sales
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Another troublesome concern is the continuously decreasing or stagnating sales of the company.
Year-on-Year Operating Losses
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The company has been incurring losses since 2009. The sluggish growth in sales and huge cost of goods
sold are the principal problems that have driven such losses.
Low Financial Strength
The company’s ROA has shown a diminishing trend since 2009 and has become a negative value. This
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inefficiency in productivity considerably affected the profitability of the company. The net profit margin
has also been negative for the previous four fiscal years, indicating that the sales generated during this
period did not translate into profits. This failure is attributed to American Apparel’s high selling expenses.
Mismanagement of Expenses
The analysis points to a mismanagement of expenses; even as the company increased its gross profits, it
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also incurred net losses because of its high expenditures. The examination of the common size income
statement indicates that even when the company was falling deep into debt and paying high interest rates,
the interest expense was, on average, only 5 per cent. However, the selling and general administrative
expenses reached 35 and 15 per cent, respectively. Although sales have been increasing annually, the cost
of sales and selling and administrative expenses ate into the gross profits of the company.
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Huge Reduction in Share Price
The share price of American Apparel has decreased by 80 per cent, and current investors have been
incurring losses on the shares that they own.
Key Qualitative Factors that Favour the Company

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 Has a vertically integrated business model, acting as clothing manufacturer, wholesaler, and retailer;
performs design advertising and marketing in-house
 Produces high-quality and trend-setting clothes
 Refrains from labour exploitation
 Quickly adjusts designs on the basis of market preference
 Seeks profits through innovation, not exploitation
 Has built a good online sales platform
 Launches new merchandise for users

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Has created a strong information system to support company operations

 Boasts of broad appeal to consumers of various demographic classifications
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Future Course of Action
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The performance of the company is gradually declining, given its almost-stagnant sales and growing costs,
which are exacerbated by the high presence of leverage. Moving forward, the company’s strategic
initiatives can increase profitability but may be insufficient to pay off its debts. Another critical
consideration in ensuring the survival of American Apparel is its ability to reduce its operating costs.
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The key points for improvements are as follows:
Appropriate Inventory Management
The inventory turnover of the company is the most critical component of its strategies for improving
performance. Effective inventory management not only increases sales but also frees the working capital
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blocked by slow-moving inventory. More than half of the company’s total assets lie dormant in inventory.
American Apparel has implemented many initiatives and strategic decisions, some of which are listed
below:
 Application of the radio-frequency identification system (RFID) system, which is anticipated to resolve
inefficiencies
 Revamping of brand image

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Shutting down of stores that incur losses
 Creating a strong information system to support company operations
As illustrated in the case, the company has launched major initiatives to increase its turnover. The company
expects the RFID implementation to produce better results in 2014. American Apparel has also articulated
its focus on achieving operating efficiency. The success of the company depends on its ability to reduce its
operating costs.
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4. Optional question: Does Dov Charney’s termination affect the company’s ability to repay its
debts? Do you agree with the statements that American Apparel has lost its appeal, and that
Charney has lost his charm?
Students may have very different perspectives regarding this question. Most students will disagree that
Charney’s termination affects the company’s ability to repay its debts. They may support this argument by
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pointing out that repayment depends on a strong balance sheet and a positive bottom line and not on
personnel issues.
Others may argue for the necessity of Charney, who has been the face of the company since its inception.
The company’s ability to quickly respond to market changes and consumer needs is attributed to Charney’s
immaculate business development skills. In his absence, a company already on the verge of bankruptcy will
suffer from a lack of innovative business ideas, which are necessary for a sustainable future. Additionally,
investors who infused funds into the company because of Charney’s goodwill are expected to withdraw
their investments.
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In the past, Charney saved American Apparel by bringing in investments at a critical period, thus preventing
the debt-ridden company from defaulting on its interest payments, even when the loans were taken at
interest rates as high as 18 per cent. High operating costs, tremendous losses, lack of investments, and cash
deficits, coupled with Charney’s exit, have placed the company in a position where it is nearing default.
The rigid terms set by lending companies will make it all the more difficult for the company to make timely
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repayments. Lenders impose stringent terms and conditions on their agreements with American Apparel.
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One of the provisions of the loan agreements is that lenders can increase debt payments or cancel a loan in
the event of top management changes. Charney’s removal therefore potentially means more costly loans
for the company, thereby presenting difficulties in achieving recovery.
Other students may put forward an entirely different standpoint, with support from the termination being
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based on an internal inquiry, during which Charney was found guilty. An advantageous strategy in this
regard is for the board of directors to hire a competent turnaround specialist, in which case, the company’s
performance may improve to a point where it can repay its accumulating debts. Although such arguments
are equally valid, students should also consider the fact that the CEO has been able to persuade investors
to infuse money into the company during the liquidity crisis. The termination may exert negative effects,
as indicated in the statement released by CEO Johannes Minho Roth and the debt clause given in the case.
The instructor can invite suggestions from students regarding future courses of action for American
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Apparel. The majority of students are expected to raise negative projections about the future of the
company, invoking support from the leverage and profitability analyses. The financial analyses of American
Apparel reveal that the company increased its sales revenue after a massive downfall in 2010. However, it
has failed to convert revenue into income because of excessive expenses (selling, general and administrative
expenses, and heavy interest expenses).
Although, the situation appears to be bleak, some aspects that favour the company should be examined,
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including its reputation, loyal customers, fully integrated business model, and huge tangible asset base.
The instructor should also point out that the strategic initiatives launched in 2010 are either completed or
on the verge of completion. The new initiatives would be able to generate profitability in the future. The
implementation of the company’s RFID system may also positively influence profitability. If the company
fails to achieve its target sales and fails to effectively implement its new initiatives, it will be forced to
default on its payments and ultimately declare bankruptcy. It may also be acquired through a buyout.
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WHAT HAPPENED
 The board fired CEO Dov Charney and refused to reinstate him.
 The board fulfilled its April 2014 repayment and hired investment banker Peter J. Solomon as an adviser
on the escalating crisis. The company stated that it wants to ensure “adequate access to capital in the
future at a reasonable cost.”
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 Charney filed a lawsuit against the board for his wrongful termination; the legal battle is ongoing.
 Because of Charney’s termination, Lion Capital (a major lender to the company) demanded full
payment.
 Johannes Minho Roth sold his shares of American Apparel upon Charney’s exit, further worsening the
crisis and leading to a further decline in share prices.
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EXHIBIT TN-1: LONG-TERM SOLVENCY RATIOS, 2009–2013
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16.00
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14.00
12.00
10.00
8.00
Ratios
6.00
4.00
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2.00
0.00
‐2.00 2013 2012 2011 2010 2009
‐4.00
‐6.00
Years
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Total Debt to Total Asset Ratio Long‐Term Debt to Equity Ratio Total Debt to Equity Ratio
Ratios 2013 2012 2011 2010 2009

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Total Debt–to–Total Asset Ratio 1.23 0.93 0.85 0.77 0.52

Long-term Debt–to–Equity Ratio –3.22 6.54 2.77 0.52 0.67
Total Debt–to–Equity Ratio NMF 13.86 5.75 3.37 1.08
Note: NMF = non-meaningful figure (i.e., both the numerator and denominator are negative values); the debt-to-asset ratio
contains both long-term and short-term debts.
Source: Compiled by the author from American Apparel’s 8-K reports for the year 2008–2013.
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American Apparel, Inc., Edgar Online, accessed March 27, 2016.

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EXHIBIT TN-2: INTEREST COVERAGE RATIOS, 2009–2013
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2.50
2.00
1.50
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1.00
0.50
Ratios
0.00
(0.50) 2013 2012 2011 2010 2009
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(1.00)
(1.50)
(2.00)
(2.50)
Years
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Cash Coverage Ratio Interest Coverage Ratio
Ratios 2013 2012 2011 2010 2009

Cash Coverage Ratio (0.32) 0.57 0.07 (1.36) 2.00
Interest Coverage Ratio (0.75) 0.02 (0.70) (2.11) 1.08
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No
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EXHIBIT TN-3: LIQUIDITY RATIOS, 2009–2013
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Chart Title
3.50
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3.00
2.50
2.00
Ratios
1.50
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1.00
0.50
0.00
2013 2012 2011 2010 2009
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Years
Current Ratio Quick Ratio Cash Ratio
Ratios 2013 2012 2011 2010 2009

Current Ratio 1.33 1.39 1.61 1.01 2.87
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Quick Ratio 0.18 0.22 0.22 0.11 0.40

Cash Ratio 0.05 0.08 0.07 0.04 0.14
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EXHIBIT TN-4: ACTIVITY RATIOS, 2009–2013
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Chart Title
40.00
35.00
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30.00
Ratios
25.00
20.00
15.00
10.00
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5.00
0.00
2013 2012 2011 2010 2009
Years
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Inventory Turnover Receivables Turnover
Working Capital Turnover Total Asset Turnover
Ratios 2013 2012 2011 2010 2009

Inventory Turnover 3.69 3.43 3.01 3.34 3.86
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Receivables Turnover 29.04 28.12 29.09 31.73 33.51

Working Capital Turnover 10.92 8.22 12.19 8.61 5.47
Total Asset Turnover 1.92 1.89 1.68 1.63 1.69
No
Do
Page 15 8B16B008
t
EXHIBIT TN-5: PROFITABILITY RATIOS (%), 2009–2013
os
100%
rP
50%
0%
2013 2012 2011 2010 2009
yo
Ratios
-50%
-100%
op
-150% Years
tC
-200%
Net Profit Margin Gross Profit Margin Return on Assets Return on Equity
Ratios 2013 2012 2011 2010 2009

Net Profit Margin –17 –6 –7 –16 0
No
Gross Profit Margin 51 53 54 53 57

Return on Assets –9 0 –7 –15 7
Return on Equity NMF –169 –82 –115 1
Note: NMF = non-meaningful figure (i.e., both the numerator and denominator are negative values)
Do
Page 16 8B16B008
t
EXHIBIT TN-6: CASH PERFORMANCE RATIOS (%), 2009–2013
os
CASH PERFORMANCE RATIOS
40%
30%
rP
20%
10%
Ratios
0%
‐10% 2013 2012 2011 2010 2009
‐20%
‐30%
yo
‐40%
‐50%
Years
Cash Return on Equity Cash Return on Assets Cash Return to Revenue

op
Ratios 2013 2012 2011 2010 2009
Cash Return on Equity NMF NMF 5 –43 29
Cash Return on Assets –4 7 1 –10 14
Cash Return to Revenue –2 4 0 –6 8
tC
Note: NMF = non-meaningful figure (i.e., both the numerator and denominator are negative values); Cash from operating
activities and Cash return are the same.
No
Do
Page 17 8B16B008
t
EXHIBIT TN-7: COMMON SIZE INCOME STATEMENTS (%), 2009–2013
os
Common Size Statements of Operations and Comprehensive Loss
Years Ended December 31
2013 2012 2011 2010 2009
Net sales 100 100 100 100 100
rP
Cost of sales 49 46 40 40 38
Gross profit 51 52 47 44 50
Selling expenses 38 36 33 34 31
General and administrative expenses 17 15 16 16 15
Retail store impairment 0.2 0.3 1 1 1
(Loss) income from operations –5 0.2 –4 –8 4
yo
Interest expense 6 7 5 4 4
Foreign currency transaction loss 0.00 0.02 0.26 -0.11 –0.46
Unrealized loss (gain) on change in fair value
of warrants and purchase rights 1 1 –4 0.2 0.2
Loss (gain) on extinguishment of debt 5 –2 0.5 0.5 0.5
Other expense (income) 0.02 0.03 –0.03 0.01 –0.03
op
Loss before income taxes –16 –5 –6 –12 1
Income tax provision 0.3 1 0.3 2 1
Net loss –17 –6 –6 –14 0
tC
No
Do
Page 18 8B16B008
t
EXHIBIT TN-8: AMERICAN APPAREL’S COMMON SIZE BALANCE SHEET (%), 2008–2013
os
Common Size Consolidated Balance Sheets
2013 2012 2011 2010 2009 2008
rP
ASSETS
CURRENT ASSETS
Cash 2.60 3.92 3.17 2.33 2.76 3.41
Trade accounts receivable 6.20 7.00 6.45 5.09 5.16 4.93
Restricted cash 0.00 1.14 0.00 0.00 0.00 0.00
Prepaid expenses and other current assets 4.68 2.92 2.35 2.87 3.05 1.61
Inventories, net 50.75 53.08 57.21 54.29 43.11 44.41
Income taxes receivable and prepaid income taxes 0.09 0.16 1.83 1.25 1.37 0.18
yo
Deferred income taxes, net of valuation allowance 0.18 0.15 0.05 0.19 1.41 1.18
Total current assets 64.51 68.37 71.05 66.03 56.87 55.71
Property and Equipment, net 20.76 20.65 20.77 26.04 31.54 33.69
Defered taxes 0.73 0.38 0.47 0.52 3.67 3.04
Other Assets, net 14.00 10.60 7.71 7.42 7.92 7.55
TOTAL ASSETS 100.00 100.00 100.00 100.00 100.00 100.00
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY

op
CURRENT LIABILITIES
Cash overdraft 1.20 0.00 0.59 1.01 1.14 0.72
Revolving credit facilities and current portion of long-term 0.00 0.00 0.00 0.00 0.00 0.00
debt 13.20 18.45 15.51 42.23 1.94 10.29
Accounts payable 11.47 11.63 10.45 9.62 6.02 9.81
Accrued expenses and other current liabilities 14.99 12.65 13.47 11.90 9.33 6.64
Fair value of warrant liability 6.28 5.25 2.97 0.30 0.80 2.57
Income taxes payable 0.52 0.65 0.75 0.07 0.00 0.00
tC
Deferred income tax liability, current 0.37 0.09 0.05 0.00 0.00 0.00
Current portion of capital lease obligations 0.51 0.52 0.36 0.17 0.58 0.78
Total current liabilities 48.54 49.24 44.15 65.30 19.81 30.81
LONG-TERM DEBT, 63.96 33.52 29.92 0.14 0.00 0.00
Subordinated notes payble to related party 1.63 0.87 0.00 1.41 20.15 20.10
Capital Lease Obligations, Net of Current Portion 0.00 0.00 0.53 0.17 1.33 0.99
Deferred Tax Liability 0.16 0.08 0.03 0.08 0.31 0.60
Deferred Rent, Net of Current Portion 5.46 6.31 6.85 7.60 6.73 4.80
No
Other Long-Term Liabilities 3.44 3.26 3.71 2.44 3.64 1.82

Total Long-Term Liabilites 74.66 44.03 41.03 11.82 32.16 28.30
TOTAL LIABILITIES 123.19 93.27 85.18 77.12 51.97 59.11
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' (DEFICIT) EQUITY
Paid-in capital 55.57 53.95 51.27 46.92 45.93 39.34
Accumulated other comprehensive loss -1.29 -0.83 -1.03 -0.97 -0.64 -0.81
Accumulated deficit -76.83 -45.74 -34.75 -22.42 5.80 5.37
Less: Treasury stock -0.65 -0.66 -0.66 -0.66 -3.07 -3.01
TOTAL STOCKHOLDERS' (DEFICIT) EQUITY -23.19 6.73 14.82 22.88 48.03 40.89
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Do
100.00 100.00 100.00 100.00 100.00 100.00

*All figures are in Percentages.

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Copyright © 2016, Richard Ivey School of Business Foundation Version: 2016-04-14

POSITION IN THE COURSE

The case is aimed at achieving the following objectives:

a. Leverage or long-term solvency

Leverage or Long-term Solvency Ratio Analysis

attests to the capital erosion of American Apparel.

Coverage Ratio Analysis

Liquidity Ratio Analysis

Efficiency or Activity Ratio Analysis

Cash Performance Ratio Analysis

Problems with Earnings

Changes in Top Management

Year-on-Year Operating Losses

Low Financial Strength

Huge Reduction in Share Price

Key Qualitative Factors that Favour the Company

Has created a strong information system to support company operations

Appropriate Inventory Management

Ratios 2013 2012 2011 2010 2009

Total Debt–to–Total Asset Ratio 1.23 0.93 0.85 0.77 0.52