Problems are mounting for American Apparel Inc., the popular Los Angeles apparel maker and retailer that has been plagued by debt constraints and weak sales since last year.

On Wednesday, the company reported disappointing first-quarter preliminary results and said it expected problems with its debt, sending its shares plummeting 41% to its lowest price in more than a year. It also declined to provide a financial outlook for the year because of continued uncertainty about its business.

Even as its fortunes have reversed, founder and Chief Executive Dov Charney has remained upbeat.

Recently, he scoffed at reports that the company was in trouble, telling The Times, “It’s so silly — we’re a flourishing, growing company.” On Wednesday, he was equally optimistic.


“Our company in the past has been through these types of issues before, and it’s never presented us with any particular difficulties in running our business,” he said in a call with analysts.

But retail experts are becoming increasingly worried about the company, which is known for its racy advertising and colorful clothing.

In a note to investors, Todd Slater, an analyst at Lazard Capital Markets, said the first-quarter results were “not the turn we were looking for.” He also lowered his estimates for the year and said he believed the company would remain under pressure.

For the quarter, American Apparel reported that sales at stores open at least a year — an important indicator of a retailer’s performance because it excludes the effect of store openings and closings — had tumbled 10%.


The results are especially troubling because competitors have posted healthy sales and stock growth in recent months as economic conditions have improved and because of easy year-over-year comparisons.

American Apparel also warned that it anticipated being unable to comply with the terms of its credit agreement by June 30, which could have an effect on the company’s ability to carry out its operating plan for the year. It said it planned to continue to work with its second-lien lender to amend the agreement before the projected default.

The company’s growing problems are leading some to speculate that the company could be a target for a takeover or bankruptcy filing, which the company had flirted with in late 2008.

“They might get somebody to come in and do a bottom-fishing bid,” said Tom Burnett, a mergers and acquisitions expert and director of research at Wall Street Access. “There’s always somebody willing to take a chance.”


Shares of American Apparel plummeted $1.11 to $1.63.

American Apparel also posted an operating loss of $17.6 million. That compared with an operating loss of $3.9 million in the first quarter of last year.

The company has struggled with reduced manufacturing efficiency at its production facilities after laying off 1,500 workers in September.

Those job cuts stemmed from a government inspection last year that found that hundreds of American Apparel workers didn’t appear to be authorized to work in the U.S. At the time, company executives said they didn’t anticipate any significant loss in productivity.


Final first-quarter results, including net income and earnings per share, are expected to be filed no later than the end of June, the company said.

Still, American Apparel continues to be considered a promising firm by some standards.

The company, which has been outspoken about immigrant rights, was praised in a report released Wednesday by the Harvard Business Review for treating its lower-wage workers well. The report said the company’s implementation of a team structure and worker-friendly perks boosted productivity.

In a call with analysts Wednesday, Chief Financial Officer Adrian Kowalewski said American Apparel would “work to regain our footing coming out of the global recession.”


“As we deal with the specific shocks our business has weathered in the last nine months,” he said, “we are confident we have the talent, or are hiring the talent, to overcome any drags on our business and plan to reemerge a stronger company.”

andrea.chang@latimes.com