American Apparel Inc. posted a 78 percent pickup in third-quarter profits as a shift toward the higher margin retail component of its business helped offset a decline in wholesale revenues.

This story first appeared in the November 11, 2009 issue of WWD. Subscribe Today.

Year-over-year comparisons benefited from stock-based compensation expense in the 2008 quarter related to an earlier merger.

In the three months ended Sept. 30, the Los Angeles-based marketer of trendy basics reported net income of $4.2 million, or 5 cents a diluted share, up from $2.3 million, or 3 cents, in the year-ago period. Analysts anticipated earnings per share of 3 cents a share. Without the compensation expense, year-ago EPS would have been 16 cents a diluted share.

Net sales shrank 2.9 percent to $150.3 million, from $154.8 million in 2008. Same-store sales declined 16 percent on a constant currency basis.

The company’s wholesale business fell 14.5 percent to $40.2 million and its direct business contracted 12.5 percent to $9.1 million, but its retail sales increased 3.7 percent to $101 million, anchored by gains in the U.S. Wholesale slipped to 26.7 percent of sales from 30.4 percent.

However, Dov Charney, chairman and chief executive officer, said on a conference call that wholesale business has “turned a corner.”

“Wholesale is connected to the economy,” he added. “I think at some point, maybe mid-next year, we will be in a very good position.”

Gross margin as a percentage of sales improved to 58.1 percent versus 49.1 percent, but all but a small portion of the increase was due to year-ago compensation expense, with the rest attributable to a “favorable shift in mix towards greater retail sales,” the company said. Total inventories during the quarter were reduced by $6.6 million to $152.6 million.

Adrian Kowalewski, chief financial officer, said the third-quarter comp decline was evidence that “we are nearing the end of a period of severe cannibalization that was brought about by the opening of nearly 80 new stores in 2008 — a more than 40 percent increase in our store base.”

The October comp drop of 6 percent has given the company “additional optimism” about the “possibility of renewed sales momentum,” Kowalewski said.

For the nine months, the vendor swung to a loss of $1.9 million, or 3 cents a diluted share, versus a profit of $10.2 million, or 15 cents a share, a year earlier. Revenue edged up 0.3 percent to $400.7 million, from $399.4 million.

The company reiterated its full-year guidance in the range of a $1 million net loss to a $4 million profit, on sales of between $540 million and $555 million. Wall Street was looking for earnings of 3 cents, on revenue of $543.8 million.

The company’s shares Tuesday closed at $2.49, down 12 cents, or 4.6 percent. The S&P Retail Index gained 2.09 points, or 0.5 percent, to end the day at 405.17 as the Dow Jones Industrial Average gained 20.03 points, or 0.2 percent, to close at 10,246.97.

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