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
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
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 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
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.
