American Apparel Case Study

After examining American Apparel’s financial statements it was painfully obvious that they had began declining since 2007, however it wasn’t until 2009 where they showed their first major decline. One of the main reasons for their declines is having a higher amount of expenses in their financial statements every year. Although their gross profits also increased over the year of 2009, their expenses increased much more. This is mainly due to them expanding and opening more new shops that do poorly and as a result earns more revenue but have much more expenses. With expenses overweighting the revenue, they started a declining flow. American Apparel also had a CEO who had several lawsuits of sexual assault. Furthermore, there have been many semi pornographic advertisements causing American Apparel to develop a shameful reputation. Just when things couldn’t have gotten any worse, there turned out to be another incident where they discovered that American Apparel hired 1600 illegal workers out of the 4500 workers in Los Angeles. All this resulted in a major crisis of American Apparel’s reputation and creditability.

As explained above, American Apparel is in a major reputation crisis and the only way for them to keep moving on and surviving is to clean up their image. Personally I believe that they should spend half of the $14million on paying off their debts because they had to borrow a huge loan in order to avoid bankruptcy this year. By doing this, they can reduce loan payable or interest expense and also develop a better credit rating. Next they would have to find some way to increase cash flow and I believe that the best way would be not to expand but the opposite. By closing off a few stores, they can decrease expenses greatly and also raise more money. With this additional money I believe that American Apparel should focus on marketing their way to a more ethical image. As for R&D, I believe that this is only an area they should invest in after they restore their reputation.