American Apparel Corporation is a clothing designer, manufacturer, marketer and distributor based in Los Angeles California. It manufactures and sells fashion clothes and accessories for women, men-children, and babies. It was founded in 1989 by a Canadian businessman Dov Charney. The company operated in more than twenty countries worldwide using e-commerce platform and retail stores. The company had been doing well and got listed in the New York stock exchange since 2006. The mission statement of the company is “to make great quality clothing without using cheap ‘sweatshop’ labor and exploiting workers. We manufactures in the United States not because we are crazy flag fanatics but because it is the most vibrant T-shirt market in the world and therefore the most efficient place to manufacture our T-shirts” the vision statement of American apparel is “committed to high-quality products- art, design and technology-employee care- limitation in the industry. The goal of the cloth manufacturer is to seek profits through innovation and not exploitation. Using a hyper capitalist-socialist business strategy to achieve its goal. The company relentlessly pursues its goal by efficiencies in management and production with the aim to demonstrate the use of exploitative labor tactics is not only unnecessary by also counterproductive.
American Apparel has been making losses since 2009. In 2013 the company recorded a net loss of $106 million which was an increase in loss from the previous year which was $ 37 million. By the year 2014, the company was deep in financial crisis with $13.4 million interest and other debt repayments that needed to be paid. The shares of the company also dropped from $15 per share to $0.56 per share. That was a 95 percent loss of its share value. The financial challenges of American apparel can be traced back to continuous borrowing of money at an exorbitant rate that made it difficult to repay. The financial statements show that the company was not gaining profits as its initial goal. It was in a huge debt crisis that was threatening its existence in the fashion market.
American Apparel had been performing well up until 2008 where it becomes a debt-ridden company. From here the fashion powerhouse started its difficult fight for survival. Performing a Swot analysis of the company will help in identifying the best strategy to revive the company.
• American apparel has low inventory stock making it easy to fill orders
• The company has a strong political backing due to its contribution to programs that support immigration and gay rights
• The clothing company is environmentally conscious by using environmentally friendly chemicals in its production
• The strategic location of its stores with trendy layouts that are simple and clean
• Vertically integrated clothing manufacturer that uses in-house design, advertising, and marketing strategies
• The company boasts of a strong customer and brand loyalty due to high ideals and brand quality.
• High wages and benefits to its workers with “sweatshop free” slogan
• The CEO Dov Charney has been facing several sexual harassment lawsuits which make him a liability to the company. His makes questionable business decisions
• The company has been faced with controversies over its use of sexual ads and campaigns
• An investigation by the united states I.C.E found out that some of its employees were illegal immigrants contrary to the law.
• Huge debts for expansion with high-interest rates crippled the operation of the company
• Most of the customer do their shopping online, expansion of its online platform will be a greater opportunity for the company
• American Apparel has to shun away from its sexual ads to reform its brand morals.
• The focus on positive political activism and homegrown products to reform its advertising campaigns
• To do away non-profitable and unsuccessful products and focus on performing products
• The public image of the company has to be made positive by restructuring corporate.
• Financial instability due to lack of investors and failure to repay loans leading to bankruptcy
• Larger retailers such as (Gap) and A&F offer competition to American Apparel
• Increase in the raw material used in production, price of cotton and chemicals
• The economic conditions of operation of the company could change for the worse
• The company strong political views may turn away customers with the contrary views
• Anti-America campaign in other countries may hurt the sales of the company
American Apparel has to undergo several changes to revive itself from its financial crisis. One of the immediate changes is the restructuring of its corporate. A new CEO who is experienced in fashion trend, economics and business should be hired to replace the current CEO. The company has also to cut down on the production of non-profitable products and focus on those products that are performing well in the market. The entire adverting and marketing strategy has to be reviewed and consumer-friendly ads taken on air. The changes will enable to company to cut on costs and maximize profits to regain its market share.
The income statements extracted from the company has been operating on a loss from 2010 to 2013. The company made the highest loss in 2013 of $106298 while the lowest being $37272 in 2012. The balance sheet shows why the company has was debt-ridden. The company kept borrowing loans at an increasing rate from 2010. The highest debt was browed in 2013 which stood at $213468.
Financial ratios of the company can help to show the financial health of American Apparel
Solvency ratios show whether the company has enough cash, assets and low debt to continue operation without getting into financial crisis. The approaches used include quick ratio and a current ratio
Quick ratio: 2013
= (current assets-inventories)/ current liabilities
American apparel quick ratio is low meaning that the company is not in a good position to meet its short term obligation with its liquid assets
Current ratio: 2013
=current Assets/current liabilities
The current ratio is below 1 raising a warning to the American apparel that it may not be able to pay its short term obligation when due. The current ratio has been lower that one in the past 3 years meaning that the company has been operating on high debt levels.
Debt/equity ratio of 2013
Total debt/equity ratio
=total liabilities/shareholder equity
Long term debt/equity ratio = long term debt/shareholder equity
The debt/equity ratios show the financial growth of a company. The ratios are high meaning that the company has been growing due to debt. Both total debt ratio and long term debt ratios are exceedingly high meaning that American apparel is not growing financial and the high debt will lead it to bankruptcy
If American Apparel wants to continue with operation on the fashion industry it has to deal with its debt crisis. The debt to equity ratio shows that that the company overreliance on huge to run its operations. The company has to reduce its debt ratios to attract investors. American apparel has to use the management of inventory and restructuring debt. Management of inventory strategy reduced the debt to equity ratio by increasing the sales revenue in a quest to increase profits. The company will have to reduce or stop the production of non-profitable products. It has to focus on the products that are on-demand in the market. The strategy ensures that the only products on the shelves are the performing stocks. The main goal for concentrating on the fast-moving stock is to create profits faster to repay the huge loans the company owes lenders.
Management of inventory also means that the company to increase the price of the fast-selling products. However, the company should ensure that its price increase is not so high that it chases its customers away. The extra cash generated will be used to repay the loans. The company will also have to reduce its cost of operation. The company has to look for a supplier who will supply raw material at a cheaper price while maintaining the quality Costs can be minimized by reducing the number of employees in the stores and taking pay cuts to help the company repay its debts. The company should consider reducing the number of stores by closing non-performing stores to reduce running costs. The people who will be affected the most are the administration and corporate employees. The production, sales, and advertisement department have to remain with a substantial workforce to help the company to sell its products.
To measure the success of the management of inventory strategy, it is better to use profit as a financial metrics of the key performance indicator. The main reason of the strategy was to help the company to gain profits to repay its debts and run the company. The mission of the company is to ensure it makes profits through innovative ways in the fashion industry. Profit as an indicator will show whether the company is moving in the right direction. Minimization of cost also means that the profit margin will increase. Successful minimization of profits will be compared with the previous year to see how much was saved from the reduction of operation cost.
Management of inventory is the most appropriate strategy to help the company to meets is the organizational goal. The company is making losses due to increases in operation cost and reduced profits margin. Concentration on inventory management to create profit means that the company will ensure that the products in the store are sold to increase profits in the company. The strategy, however, may fail to work if the customers boycott the product due to high prices. Competition from other fashion companies also puts the strategy at risk of non-performance. It needs a proper plan and execution to ensure its success.
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