American Apparel Case Study

Question 1
Reviewing the available financial statements from 2007-present, as well as past articles, when did the company start declining? And where?

After reviewing American Apparel’s financial statement from 2007 to present, it’s clear to us that the company started to decline in 2008. The downfall of the company begin when several sexual harassment lawsuits is filed against their CEO, Doy Charney in 2008 and 2009. These lawsuits could be one of the reasons why customers lost faith in American Apparel’s image. However, the main reason behind the company’s downfall is that the company is involved in illegal immigration issues. American Apparel has been hiring around 1500 illegal immigrants, about one third of its employee; this is discovered in July 2010. Two months later, the company announced they have terminated these employees. Because of this, there is a clear decline in productivity and sales afterward. The company’s net income is $14.11 million in 2008, and in 2010, they experience a net loss of $86.32 million due to rising expenses, possibly from lawsuits.

Question 2
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?

In my opinion, the company should put most of its money in investing activities such as advertising. The company needs to build a new positive image to the public. Hopefully by doing so, people will forget about the lawsuits and immigration issues of the company; thus costumers can regain their trust in the company and buy its product. Some of the $14 million dollar can be spend on R&D to attract new customers. With a new image and new designs, the company will gain back its previous customers, who have left the company due to its reputation, and thus increase sales.

INCLASS DEBATE

I agree with the group that suggests Lululemon should not stock up their inventory. Like the group said, stocking up the inventory will limit the amount of cash flow, which will eventually affect their expansion into other markets besides North America. I believe that markets outside of North America have lots of potential; if we delay the expansion, as suggested by the other group, we will miss a good chance of making money since there will be more competitor in markets like Asia in the future. The other group also suggested that we should stock up inventory first then expand. I don’t agree with what they said because it will be a disadvantage for the company since we don’t know whether our product is popular in new markets. Even if they are, we will be putting a lot of money into inventory, rather than spending on advertising our company in new markets. In addition to that, the group that supports Lululemon not stocking up their inventory actually did research, unlike the other group who just make up random figures.

Uni-Select doesn't foresee problems accessing autoparts from Japan

http://www.canadianbusiness.com/markets/headline_news/article.jsp?content=b6254507

Summary:

Uni-Select claim that the deadly Japanese earthquake won’t limit its access to automotive parts, since less than 10% of the auto parts distributors originate from the part of Japan that is hit by an earthquake and tsunami. Most of its parts come from south of Tokyo, which wasn’t dramatically impacted. The company’s profit surged to $10.8 million in the 4^th quarter though sales slipped by 2%. Its dividend increased to 12 cents per share, up from 11.65 cents in the 3^rd quarter. Earnings from continued operations more than doubled during the quarter; but it didn’t meet the expectation of analysts due to pressures of the loonies being near parity with the U.S. dollar. To reduce currency fluctuation, Uni-Select is switching its reporting currency to U.S. dollar following the acquisition of FinishMaster.

Connection:

Though sales slipped during the fourth quarter, Uni-Select’s profit surged to $10.8 million. This increase in net income will have a positive effect on its operating activity, which will increase the amount of cash in the cash flow statement. Uni-Select also increases its dividend by 3%; this will affect its financing activities. The increase in dividend will decrease the amount of cash available to the company. The article also mentions that Uni-Select acquired FinishMaster, a painting company, for $217 million. This will have a negative affect on investing activities; thus less cash will be available.

Reflection:

I believe that the Japanese earthquake will curtail Uni-Select’s access to automotive parts in Japan. After the earthquake, access to electricity in Japan has become a huge issue to the whole country. Areas that were not hit by the earthquake were limited to the access of electricity, as the Japanese ran into an electricity shortage. With the shortage of electricity, automaker will have a difficult time producing automotive parts for companies such as Uni-Select. In addition to that, as the Canadian dollar reached a 3-year high on April, Uni-Select is likely to experience another slip in sales due to currency fluctuations.

Apple sets new record with sales of $27 billion

Apple sets new record with sales of $27 billion

Summary

Apple reported results of its 4^th quarter today. This quarter is the best-ever quarter for Apple, with revenue of $26.7 billion driven by holiday iPad and iPhone sales. Apple’s net profit for this quarter is $6 billion, which also set a new record. In this last quarter, Apple sold 7.3 million iPads and sold a record of 16.2 million iPhones, surpassing the expectation of most analysts. In addition to this, the success of iPads and iPhones has also encouraged the sales of other Apple products, such as Mac and iPods. It is believed by the Apple Chief Operating Officer Tim Cook that iPad was cannibalizing other Apple products’ sales, especially Mac sales. In addition to that, the CEO of Apple, Steve Jobs has once again stepped down from his job and Cook will again handle all day-to-day operations.

Connection

The connection to chapter three is the income from operation, which is revenue and gross profit or gross margin. Gross profit is calculated by using sales revenue minus the cost of goods sold (an expense that records the cost of the units of inventory sold during the period). Because Apple’s major source of revenues is selling goods, it must make enough profit from sales of its goods to cover all the other expenses in order to operate the company. By calculating and examining the gross margin percentage (gross margin divided by sales), we can evaluate the company’s performance over time. To do this, we simply have to look whether the percentage has been increasing or not; plus we can also compare this percentage with other companies in the same industry.

Reflection

With a strong sale in quarter four, I believe that the sale for the current quarter is likely to fall. The success of this quarter is driven by holiday iPad and iPhone sales. Because of this, many people have used up their credits over the holiday; thus it is likely that sales of most Apple products will go down. The company itself has also noted that iPad sale will fall back in the current quarter because the tablet proved to be a hot holiday purchase only. Despite these facts, CEO Steve Jobs still believed that iPhone sales will be strong with exciting new features such as iPhone 4 on Verizon.

GM strengthens ties with Chinese partner

http://money.cnn.com/2010/11/03/news/companies/gm/index.htm

Summary

This article reports that General Motors has made a significant agreement with its Chinese partner SAIC Motor Corporation. These partners are planning to design new vehicles for global markets, such as a new generation of electric vehicles; the cost for research and development will be shared between the two. The SAIC officials have also expressed an interest in acquiring 5% of GM’s shares, but this was not confirmed by the GM officials. In addition to that, GM is expected to give more detail of its plan to sell shares to the public for the first time since it emergences from bankruptcy in 2009. If GM’s IPO (Initial Public Offerings) put its value higher than $66 billion, it’s likely for taxpayers to break even on the 2009 bailout. Thought some analysts forecasted GM shares would end up being worth between $64 billion and $80 billion, recent reports suggest its shares would only worth around $40 billion.

Connection

In chapter 2, we have analyzed different transactions. If the transaction for developing new vehicles is to take place now under the condition that GM’s partner agrees to share the cost for research and development of new vehicles, GM will have less expense and a higher profit (only if everything else stays the same). So we will debit expense and credit accounts payable because there will be less fees to pay; fees that are associated with new developments. If GM is to issue share now, the accounts that will be affected will be cash and common shares. We will debit cash and credit common shares, since there will be more cash for the company and shares are issued to the public.

Reflection

The agreement between GM and its Chinese partner will not only benefit GM, but its partner as well. The Chinese corporation, SAIC Motor Corporation, may have enough money to develop new vehicles, but they don’t necessarily have the technology and experience to do so. On the other hand, GM has the technology and experience, but GM lacks in cash. So when the two sign the agreement, it benefits both of them. When a new vehicle is developed, the Chinese corporation can manufacture it in its own factories and sell it within China or around the globe under the well-known brand name, General Motors. GM will also be able to gain profits from the sales of this new vehicle and they will have a stronger tie with the Chinese corporation, which manufactures many of their cars.

Forestry sector posts loss despite price spikes

http://www.vancouversun.com/business/Forestry+sector+posts+loss+despite+price+spikes/3501728/story.html
Summary

This article reports that the Canadian forestry suffers a loss in the second quarter though prices for lumber and oriented strand board spike. The spike level was not seen since 2006, but only come crashing down by the end of the second quarter. One of the main reasons why the forestry suffers a lost is the fact that demands for building materials remains very low in the second quarter; a lot lower than industrial capacity. Another main factor is the strength of our Canadian dollar, which is 12 per cent higher than it was last year. The strengthened Canadian dollar counteracts revenues earned in U.S. currency.

Connection

The connection in this chapter is the practice of the three fundamental business activities: financing, investing and operating activities. These forestry companies have not successfully invested and operate their companies. When the Canadian dollar is high, instead of exporting lumbers to the U.S; they could have keep it to a minimum and encourage sales within the country. Or, they can keep the revenue in US currency and trade back to Canadian dollar when Canadian dollar weakens. While the lumber tax was eliminated due to the spike in price, these corporations could have finance and invest more in the production of lumber and encourage sales!

Reflection

As stated in the article, there was a brief elimination of lumber tax during the second quarter. The Canadian forestry should have used this chance to their advantage. They could have financed for a maximum production and sales of lumbers within and out of the country. Or they can import as much as lumber as they can to the USA or other places. Remember, with the elimination of tax, the price of lumber is lowered by 15%. Also, since the end of the second quarter is the beginning of school, the producers could have raised the price of line paper for higher revenue since there will be a high demand for paper! Why didn’t the forestry sector report positive earnings like the top four Eastern producers did??