American Apparel Case Study

TASK
Question 1 (15 points)
Reviewing the available financial statements from 2007-present, as well as past articles, when did the company start declining? And where?
~150 words

1.      http://moneycentral.msn.com/investor/invsub/results/statemnt.aspx?lstStatement=CashFlow&symbol=US%3aAPP&stmtView=Ann

2.      http://articles.latimes.com/2011/apr/01/business/la-fi-american-apparel-20110401

3.      http://jezebel.com/#!5717112/a-financial-scandal-at-american-apparel

According to the financial statements that I analyzed, the company started declining in 2008.  According to the cash flow statement, the company suffered a net loss of $7,920.  From that year till 2010, according to the income statement, American Apparel has had terrible financial results as the company has resulted in net losses.  As you can see, that supply of cash in this company is the major issue right now.  Cash is an important asset to have in a business because it is used to pay off company debts and expenses.  The major source of incoming cash into business is revenue.  Between the years 2009 and 2010, according to the income statement, the company has suffered loss in sales.  In 2010, there were sales of $533 million and in 2009 there were sales of $559 million.  There was an overall decrease of $26 million in sales between 2009/2010.  With all that cash lost, the company has lacked liquidity assets and this will soon cause the company some difficulties of paying its debts.  Also prices of cotton prices (raw material expenses) are increasing as well which makes it more difficult for the company to pay for its expenses.  One factor that contributed to the decline in sales was the massive layoffs of employees.  An immigration inspection occurred in the manufacturing industry of American Apparel and many were not authorized to work in the United States.  This created massive layoffs of employees and as a result, production was cut back.  Another reason why the company is lacking cash right now is because in the past few years, Dov Charney, the CEO of American Apparel who is currently holding 53% of the shares of the company, has been charged with sexual harassment on 3 female employees.  It not only affected Charney personally but it also affected the financial statements and the reputation of the business.  The female employees sued Charney and the business in order to regain a huge sum of money from the company.  The company suffered massive losses in cash from these sexual assault cases and also Charney had ruined the reputation of its company.  The image of the brand has been damaged and as a result, consumers started turning away from American Apparels.  As a result, demand for American Apparel goods declined and its share prices decreased by 7%.  Also American Apparel is much known for displaying sex ads on the Internet in order to make its product stand out.  Unfortunately Doy Charney has taken a wrong step in publishing these kinds of ads.  Many people feel very disturbed by these ads.  Ads are suppose to attract more customers into your store but however these ads are presented in a negative manner and many people are starting to turn away from American Apparel products instead of being attracted by them.  Dov Charney is more interested in his sense of fashion than the financial results of the business.  As a result, in 2009, American Apparel was accused of having a financial scandal.  The company did not have effective control over their financial statements.  Deloitte & Touche’s, was the auditor of American Apparel.  Poor management of financial reports had led to the downfall of American Apparel.  Right now retail stores are suffering losses everyday.  Sales are down 16% in all retail shops of American Apparel right now.  This incident is occurring at every American Apparel store worldwide and the answer to the future of American Apparel is questionable right now.

Question 2 (15 points)
Take a look at the recent financial statements (cash flow statement in particular) – with 14 million injected into the company right away, how should the company allocate this money? Into which activities? And why?
~100 words

1.      http://online.wsj.com/article/SB10001424052748703778104576286983268919662.html?mod=googlenews_wsj

Recently, after American Apparel almost went bankrupt, a group of Canadian investors led by Michael Serruya and private-equity firm Delavaco Capital Corporation injected $14.9 million into American Apparel to save it from going into bankruptcy.  However this money is only a temporary bailout for American Apparel as this money can help save the company for a very long period of time.  With this money, the company should first pay off its major debts.  This is a significant step to make because it makes the company’s balance sheet look better with a lower amount of liabilities.  They should recreate their store image by taking down all those sex ads because those ads are part of the reason why many customers are turning away from American Apparel products.  New ads that are less sexual and more appealing to customers are definitely a factor that can help the company capture the market.  Also the company must cut its wasteful spending.  For example, American Apparel expanded too much (more than 260 stores) since 2007.  A company can only expand only if they have a large sum of money in their company.  Also Don Charney must change his attitude towards the financial reports.  He lacks the interest of the financial reports of the business and he cares more about fashion.  This attitude towards finance of the business is causing American Apparel to suffer into major losses.  There is lack management of financial reports which was a major factor to American Apparel’s downfall.  The company should adapt to a slow growth in sales because its image has already been damaged.  It is very difficult to cause a consumer to change his/her mind about the reputation of company, especially if it has a long history of sexual actions that were intolerable.  The only way for the company to stay alive in business is to build up sales and gain the trust of consumers.

Chapter 5 Blog- “Capstone Reports Record Revenue and Strong Earnings for 2010”

Link: http://www.prnewswire.com/news-releases/capstone-reports-record-revenue-and-strong-earnings-for-2010-117974954.html

Summary:

The Capstone Mining Corporation announced its final results for the year 2010.  In 2010 the Capstone Mining Corporation earned a total of $301.3 million in gross sales revenue.  The company sold 72.8 million pounds of copper, 15.0 million pounds of zinc, 9.4 pounds of lead, 25,460 ounces of gold and 1,582,033 pounds of silver.  Overall the company earned a net income of $72.6 million and it was recorded in the operating activities section of the cash flow statement.  The total amount of cash flow in the operating activities section is $86.3 million including net income.  So as you can see the net income is responsible for most of the cash flow coming into the mining company.  Capstone Mining Corporation produced a total of 73 million pounds of copper at a cost of $1.40 / pound in 2010 where in 2009 the company produced a total of 86.6 million pounds of copper at $1.03 / pound.  In January 2011, the Capstone Mining Corporation fully repaid its debt of $17.4 million owing to Yukon Energy Corporation and to the main power lines serving the Minto mine, 7 years ahead of time.  In the report, Capstone predicts that in 2011, production will range between 80 - 85 million pounds of copper at a total cost per pound of $1.30 - $1.35 per pound.  This coming year is sure going to be a successful one for the Capstone Mining Corporation. 

Connection:

The company that I analyzed was the Capstone Mining Corporation, comparing the operating activities in 2009 and 2010.  Between 2009 and 2010 there was a decrease in cash from the operating activities of the cash flow statement.  In 2009 there was a total of $112.1 million cash flowing in the operating activities section and in 2010, the amount from the operating activities decreased to $86.3 million.  In the operating activities section, the net income in $72.6 million from selling copper while in 2009 there was a net loss of $18.3 million.  Also there was a decrease in amount of inventory.  In 2010 there was 73.0 million pounds of inventory and in 2009 there was 86.6 million pounds.  When there is a decrease in inventory, the company spends less money on it, which indicates there is a positive cash flow.  Also in January 2011, the Capstone Mining Corporation paid a major debt of $17.4 million owing to Yukon Energy and main powering lines serving the Minto mine.  Since the debt (liability) is being paid off, the debt is decreasing which means that the cash flow also decreases.  If you click on this link http://capstonemining.com/i/pdf/2011-03-CS-YearEnd-Financials.pdf, you will find its financial statements including the balance sheet and its balance sheet which is required to produce the cash flow statement.  In the balance sheet you will see there is an increase in accounts payable.  In 2010 the accounts receivable was $16,392 and in 2009 the accounts receivable was $6,946.  Between those two years, the accounts receivable increased by $9,446.  Since it is an increase in an asset, there is a decrease in cash flow in the operating activities section.  Also in the liabilities section, you will see that there was an increase in accounts payable.  In 2010 the accounts payable was $22,277 and in 2009 the accounts payable was $19,782.  The overall increase is $2,495 in accounts payable.  Since accounts payable is a current liability, there was an increase in cash flow because when current liabilities increase, cash flow also increases as well.  As a result, the company did incredibly better in 2010 than 2009.  The results are indicated in the cash amount of the balance sheet.  Overall there was an increase in cash flow in the year 2010.  The Cash amount in 2010 was $165,945 and the cash amount in 2009 was $115,931.  The overall increase in cash during the 2009/2010 year is $50,014.

Reflection:

Overall in my opinion I think the Capstone Mining Corporation will see prosperity and success in the future.  The results of the cash flow statement indicated that the company was more successful in 2010 than 2009.  First of all in the cash flow statement, the net income in 2010 was relatively higher than 2009.  In 2010 there was a total net income of $72.6 million.  This indicates that revenue exceeded expenses.  Much of the contribution came from the high gross revenues this year earned which reached $301.3 million.  In 2009 there was a net loss of $18.3 million.  The difference in the net income with the net loss is $54.3 million.  This indicates that expenses exceeded revenue.  The gross sales revenue in 2009 was $250.4 million.  The difference in gross sales revenues between 2010 and 2009 are by $50.9 million.  That is a really big increase in one year and you can see the different effects by the difference in revenue.  Right now when there is a high sales volume, we can assume that there is a really high demand for copper and these other valuable minerals which are used to create raw materials to produce products.  Prices of minerals are increasing from year to year due to the high demand for this mineral.  As a result, the company is now earning money with a net income instead of losing money with a net loss.  As a result, the boost in net income has made a significant increase in operating activities.  These financial results will likely attract investors due to its recent success and I believe that after Capstone Mining Corporation’s recent downfall in 2009, the business has made a strong push to make its business more profitable and more attractive to investors.  I personally believe that this business has made a lot of progress to become a successful mining and manufacturing company.

Chapter 3 Blog- “Illinois Tax Hikes will Hurt Companies"

Link: http://money.cnn.com/2011/01/13/news/economy/illinois_corporate_tax_hike/

Summary:

This article is about how Illinois’s budget crisis is reaching high levels of deficit and how Illinois has raised its corporate income taxes in businesses and raised income taxes from the citizens in order to pay off this deficit..  Corporate income taxes were previously 4.8% and have now increased to 7%.  Corporate taxes are taxes calculated on the company’s final net income.  The original income tax rate of Illinois was 3% and it has now risen to 5.25%.  Right now, Illinois is facing a deficit of approximately $13 million and $6 million of that are unpaid bills to social service agency, schools, and funeral homes.  Companies have angry responded to this crisis because many companies in Illinois are still recovering from the effects of the recent depression.  Now with these high corporate taxes this will cause a lot of negative effects to the companies.  Now companies will have a lower net income after the calculation of corporate taxes which mean they will have a lower margin than it used to be.  As a result less people will be hired in the future creating a higher unemployment rate.  Before the increase in income tax, Illinois was ranked 21^st for highest tax rates and now Illinois is one of the top states with one of the highest tax rates in the United States being ranked 3^rd right now.  There are many reasons why Illinois is in this deficit which forced them to increase corporate taxes.  The government isn’t paying its vendors and it isn’t corporate tax refund checks back to the government.  As a result, the Illinois government owes companies around $1 million in refunds.  Therefore this increase in income tax and corporate tax rates is not getting a good response from the citizens and companies and it seems like these increases in taxes are doing more harm than good to the economy.

Connection:

This article is related to chapter 3 because it mostly talks about how corporate income taxes can affect the net income of a company.   With increasing corporate income taxes, companies will have to pay more taxes off their sales and revenue, depending on the amount they earn in one accounting period.  Since companies lose money from corporate taxes, companies will treat it as an expense.  So, this article is also related to corporate income tax expense of chapter 3.  Corporate income tax expense is calculated on the net of all the sources of income including income from operations, non-operating sources and income from unusual or infrequent events.  If you take the company, JK Creative Printers & Mailing for example, they earned close to around $4 million in revenue and let’s say for example they had around $2 million worth of expenses.  Their net income is $2 million.  If we were to calculate the corporate income tax in Illinois, we would take the net income and multiply it by the corporate income tax rate.  The corporate tax rate in Illinois is 7%.  The tax that the company would have to pay is $140,000.  If you take a look at the previous tax rate, it was 4.8%.  If there was no increase in corporate taxes, the income would only have to pay $96,000.  It may seem that an increase of 2.2% of corporate tax rates may not be that high, but when dealing with really high numbers, it can make a big difference.  You can see why companies are really upset about this increase in corporate tax rate.  When the government increases corporate tax rates, the businesses will have to increase their sales tax rates as well.  With higher sales taxes less people would want to buy the goods and therefore result in a loss of sales.  This article also relates to deficit in chapter 3.  A deficit is when a corporation has more expenses than revenue.  In other words, in this case, the government is spending more money than money being earned and right now the government has a net loss.  Therefore by increasing the corporate tax rate, the government is earning more revenue but companies are receiving more expenses as a result from this cause.    

Reflection:

If I was put into this situation I would disagree with the idea of raising corporate tax rates because although the government is earning more revenue, it is harming the businesses too.  So, the increase in corporate tax rates has positive and negative effects.  The positive effect is that the government can collect enough revenue and pay off its bills and to its accounts payables to get out of the deficit.  However, on the negative side, businesses will lose more income, resulting in a lower margin.  Businesses will have to charge higher sales taxes which will cause a lower demand in their good with an increase in price.  More workers will get laid off since some businesses cannot afford to pay their salary with this increase in corporate taxes.  Therefore this will cause a higher unemployment rate which will worsen the economy.  Long-term effects may include lower sales because since more and more people become jobless, they will be less likely to buy goods which will lower business sales causing negative effects to the economy.  As you can see that the increase in corporate tax rates is doing more harm than good.  There are other solutions that the government can use instead of raising tax rates.  I thin the best solution is for the government to lower its spending.  Since United States is a capitalist country, there is little government involvement and really low tax rates.  Therefore the government isn’t receiving a lot of income from the citizens.  In other words, the government has a very low budget and it must be very careful of trying not to overspend its budget or it may result in a deficit like this one.  With lowering the spending, the government can avoid having more expenses than revenue and businesses won’t be hurt from the increase in corporate tax rates.