American Apparel Reports First Quarter 2009 Financial Results

Business Wire, May 18, 2009

• Net sales of $114.3 million, an increase of 2.4% over the first quarter of 2008
• Loss per share of $0.13 compared to diluted earnings per share of $0.02 in the first quarter of 2008
• 2009 Guidance on income from operations reduced to a range of $40 to $50 million

LOS ANGELES -- American Apparel, Inc. (NYSE Amex:APP), a vertically integrated manufacturer, distributor, and retailer of branded fashion basic apparel, today announced its financial results for the first quarter of 2009.

American Apparel reported net sales for the quarter ended March 31, 2009 of $114.3 million, a 2.4% increase over net sales of $111.6 million for the quarter ended March 31, 2008. Total retail sales increased 16.5% to $78.0 million for the first quarter of 2009 as compared to $67.0 million for the same period in 2008, with comparable store sales for stores open at least 12 months declining 7%. American Apparel ended the quarter with 264 stores, having added 4 net new stores in the period. The Company operated 186 stores at the end of the first quarter of 2008. Total wholesale sales, excluding online consumer sales, were $28.1 million for the first quarter of 2009 as compared to $36.0 million for the first quarter of 2008, a decrease of 21.9%. Sales to third party wholesale customers in the Company’s U.S. Wholesale segment declined 27.4%, as a result of decreased end-user demand given the unfavorable economic environment. Slightly more than a third of the reduction in third party wholesale sales was a result of significantly reduced sales to the Company’s largest distributor, as the Company decided to limit its credit exposure to this customer which was in the process of an exchange offer with bondholders to restructure its debt to avoid a bankruptcy filing. Total online consumer sales decreased 5.5% to $8.2 million in the first quarter 2009 versus $8.6 million for the first quarter of 2008. The decrease was primarily to customers in the U.S., the result of the combined impact of a reduction in online advertising spend and the cannibalization of online sales by the Company’s significantly expanded brick-and-mortar retail footprint in the U.S.

Gross margin for the first quarter of 2009 increased to 57.2% from 55.3% for the first quarter of 2008. Gross margin in the period benefited from an increase in the proportion of retail sales, which generate a higher gross margin than wholesale sales. Total wholesale sales declined to 24.6% of total sales compared to 32.3% of sales in the first quarter of 2008. The benefit of the mix shift was partially offset by a decline in the gross margin of the U.S. Wholesale business segment to 18.0% from 20.6% in the first quarter of 2008, as a result of lower capacity utilization of the Company’s manufacturing facilities in light of lower wholesale demand and the Company’s constrained liquidity position in the first quarter of 2009, which necessitated lower-than-planned production volumes. Additionally, gross margins in the U.S. Wholesale business segment were negatively impacted by an increase in production of more complicated product styles. Gross margin was also negatively impacted by declines in gross margin in the Canada and International business segments due to unfavorable currency shifts as a result of the appreciation of the U.S. dollar.

Operating expenses for the first quarter of 2009 increased to 60.6% of net sales, versus 51.4% for the first quarter of 2008. Operating expenses increased significantly in the U.S. Retail and International segments due to higher payroll, rent and occupancy expense, and depreciation related to the greater number of retail stores in operation including the accelerated store rollout in the second half of 2008. Operating expenses as a percentage of net sales also increased due to the decline in comparable store sales in the period versus the previous year. Store pre-opening expenses were $0.7 million in the first quarter of 2009, versus $1.3 million in the prior year first quarter. Unallocated corporate expenses increased 7% to $10.7 million from $10.0 million in the first quarter a year ago.

Operating loss for the first quarter of 2009 was $3.9 million, versus operating income of $4.4 million in the prior year first quarter. Operating margin for the first quarter of 2009 was negative 3.4%, versus 3.9% in the first quarter 2008.

Interest expense for the first quarter 2009 increased to $7.6 million from $3.3 million in the first quarter 2008. The increase in interest expense was largely attributable to the increase in amortization of and early extinguishment of deferred financing costs primarily related to the extension of the Company’s prior second lien credit facility in December 2008, as well as increased collateral monitoring fees on behalf of the Company’s senior lender. The amortization and early extinguishment of deferred financing costs amounted to approximately $4.7 million in the first quarter of 2009, and collateral monitoring fees of approximately $0.4 million.