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Lion Capital Warrants Expand Losses at American Apparel

The Los Angeles-based vertical retailer posted a net loss of $46.5 million.

A noncash item drove losses deeper at American Apparel Inc. in the first quarter ended March 31, historically the company’s weakest earnings period. The Los Angeles-based vertical retailer posted a net loss of $46.5 million, or 42 cents a diluted share, compared with a net loss of $7.9 million, or 7 cents, in the year-ago quarter.

This story first appeared in the May 9, 2013 issue of WWD.  Subscribe Today.

Net sales in the quarter increased 4.1 percent to $138.1 million, up from $132.7 million a year ago. Comparable-store sales improved 8 percent, including e-commerce, and wholesale sales inched up 1 percent.

American Apparel booked a noncash charge of $23.6 million in the quarter in connection with an increase in the fair value of the 21.6 million outstanding warrants that former lender Lion Capital retains at 75 cents a share. As the company’s share price increases, as it did during the period, the value of the warrants rises and American Apparel books an expense to recognize the increase.

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The company emphasized the charges do not impact the company’s operating performance and do not represent a cash obligation, as the warrants will reclassify to equity once exercised. American Apparel shares closed up 2 cents at $2.02 on Wednesday.

“We have significantly improved our store presentation, responsibly added stores when it was appropriate to do so, improved technology in all three channels, increased inventory productivity and substantially improved the effectiveness of our supply chain operation,” said Dov Charney, chairman and chief executive officer of American Apparel.

Adjusted earnings before interest, taxes, depreciation and amortization amounted to a loss of $700,000 compared with a loss of $2.1 million a year ago. Chief financial officer John Luttrell said the losses were in line with plan, and the company reiterated its full-year EBITDA guidance of $47 million to $54 million for the full year, which assumes net sales between $652 million and $660 million.

“We expect key initiatives in the areas of merchandise planning, supply chain and inventory control to drive further sales and expense improvements for the balance of the year,” said Luttrell.

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Gross margin in the first quarter remained unchanged at 52.8 percent from a year ago. Operating expenses increased 4 percent to $83.3 million, related to higher share-based compensation, higher rent expenses and higher radio frequency identification supplies. These were offset by lower store payroll expenses and lower advertising expenditures.

As of May 1, the company operated 248 stores in 20 countries.

In April, American Apparel closed a private bond offering of $206 million and entered into a new $35 million, five-year revolving credit facility with Capital One Bank. The new financing allowed American Apparel to repay and terminate its prior high-interest credit facilities with Lion Capital LLC and Crystal Financial LLC.

“Despite some liquidity challenges over the past two years, we have made the necessary investments that should allow us to exceed our prior EBITDA levels,” said Charney.