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.