By and  on March 14, 2012

With another credit lifeline secured this week, Dov Charney has lived another day. However, industry observers are questioning how much longer the money losing American Apparel Inc. chairman and chief executive officer can keep running the clock on the retailer’s massive debt load before the company runs out of options — even while they admire Charney’s pluck.

“Dov keeps pulling another rabbit out of his hat, which I would say is pretty impressive for a small company,” said retail consultant Antony Karabus. “Many others would not have been able to continue to fight another day.”

American Apparel won $80 million in financing from Boston-based Crystal Financial LLC and Salus Capital Partners LLC, comprised of a $30 million term loan and a $50 million revolving credit facility. George Soros’ Quantum Strategic Partners Ltd. is the lead investor in Crystal Financial.

RELATED STORY: American Apparel Taps Pricy New Financing >>

The deal retires about $50 million in debt with Bank of America that was set to come due in July. However, the new financing almost doubles the interest rate American Apparel will pay, from about 5 percent previously to about 9.5 percent under the Crystal Financial terms.

“The goal posts keep moving,” said a veteran industry executive who has closely followed developments at American Apparel. “Dov doesn’t care about debt. He just wants to buy more time to keep the company afloat.”

Most onerous to American Apparel is the $116 million it now owes to London-based Lion Capital, at a whopping 18 percent interest rate. That loan has ballooned from the $80 million the private equity player loaned to American Apparel in March 2009 to rescue it from its previous creditor, SOF Investments.

“I think at some point, this all comes to a breaking point. The company’s debt load is too high and the interest rates are too high to be manageable,” said a source.

A specialty retail analyst at a major Wall Street bank noted of the new loans: “It’s a very high interest rate given that it’s a revolving credit facility, which is paid off in a relatively short amount of time. These guys are lenders of last resort and American Apparel is in dire straits, which gives them few choices.”

The analyst noted that it will become increasingly difficult for American Apparel to find new lenders once the Crystal Financial financing expires in March 2015 and the Lion Capital loan comes due in December 2015.

“Charney is digging himself into a hole he won’t be able to get out of. Given the history of the company, it’s apparent there are fewer and fewer people who want to lend to these guys. People have been willing to give them a pass in the past, but at some point, nobody is going to want to play with these guys,” said the analyst.

American Apparel is aiming to improve its financial metrics, particularly earnings before interest, taxes, depreciation and amortization, which will allow it to secure lower-cost loans in the coming years and retire the crushing, high-interest Lion Capital debt.

“Our new capital structure removes a significant overhang from the business and allows our management to fully concentrate on making further operating improvements,” said the company’s chief financial officer, John Luttrell, while reporting fourth-quarter and year-end 2011 earnings on Wednesday.

The company was successful in narrowing losses, but the balance sheet remains mired in debt and excessive inventories, the latter topping $185 million.

For the three months ended Dec. 31, net losses were $11.2 million, or 11 cents a share, compared to a loss of $19.3 million, or 27 cents a year ago. Adjusted EBITDA was $9.1 million, up from a loss of $500,000 a year earlier. Sales for the three months ended Dec. 31 rose 9.5 percent to $157.6 million from $144 million. Same-store sales increased seven percent — against an easy comparison a year ago when comps slumped 11.5 percent — and online sales increased 19 percent.

For the full year, American Apparel’s losses totaled $39.3 million, or 42 cents, compared with red ink of $86.3 million, or $1.21, in 2010. Total sales increased 2.7 percent to $547.3 million.

Adjusted EBITDA tallied $14.5 million and compared with losses of $9.6 million a year earlier. Gross margin improved to 53.9 percent from 52.5 percent in 2010, driven by improved manufacturing efficiency at its Los Angeles headquarters.

The $14.5 million in EBITDA was 2.6 percent of sales. Retail consultant Karabus said he would expect a specialty retailer to have EBITDA in the high-single digits to low teens, as a percent of sales. This year, American Apparel is aiming for the lower end of that target, projecting adjusted EBITDA of $32 million to $40 million on sales of $552 million to $559 million. The upper end of both ranges would place EBITDA at 7.2 percent of sales.

“There’s obviously a level of sexiness and excitement that [Charney] portrays, and passion for the brand,” Karabus said. “If the numbers aren’t that positive, as they’re not, investors are probably buying a vision and a promise that things will get better.”

American Apparel posted EBITDA of $56 million in 2009, $70 million in 2008 and $55 million in 2007. “With more EBITDA we can borrow at a lower average cost,” said Charney recently.

However, one source with knowledge of American Apparel’s operations called the strategy a “pipe dream,” calling the balance sheet a “catastrophe.” He pointed to the absence of experienced, senior management at American Apparel as a key weakness for the company, hampering operational and merchandising efficiency.

“The company has no infrastructure. There are bodies in middle management but everything goes through Dov,” he noted.

American Apparel has continually breached covenants on its lending terms over the past two years, but each time its lenders have agreed to amend the terms to prevent the retailer from falling into default.

Charney has pumped his own money into American Apparel to provide necessary cash resources. Last April, American Apparel finalized a private placement of shares to a Canadian investment group led by Michael Serruya that staved off another potential bankruptcy.

“I’ve never seen a company get so many lifelines. Dov must be very charming,” said the retail analyst.

Stephen Krawchuk, managing director of Crystal Financial, said, “American Apparel has made great strides over the past year in improving its overall financial performance and we are pleased to be in a position to provide them with the financial flexibility needed to continue to build upon that momentum.”

Shares of American Apparel were down 10 percent to 92 cents on Wednesday.

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