Why American Apparel Has to Keep Hurting Its Shareholders

The shares were down or 11.5% to $0.52 on Wednesday, after already being hit hard on Tuesday. The reason: The business is in such trouble that the company had to sell 61 million shares at $0.50 each on Wednesday so it can make an April debt payment.

The struggles are nothing new for the company that makes a big deal out of not buying product from, say, apparel makers in Bangladesh. American Apparel is run by Dov Charney, a charismatic entrepreneur who loves fashion but insists on being involved in every decision.

But sales have been falling. Same-store sales in February, a key performance metric, were off 7% from a year ago. It expanded in 2013 because sales improved, but it set up a new distribution center that cost more than expected. Sales were hurt because deliveries were disrupted.

American Apparel lost $107 million, or $0.97 a share, in 2013. It has lost $270 million since 2010. It has debt of some $206 million, the Los Angeles Business Journal says.

To make the April debt payment of $13.5 million, American Apparel needs cash. At the end of February, according to Bloomberg News, the company had $4.9 million in cash and $3.3 million it could access from existing credit lines.

So, to make the interest payment and obtain a new credit line from Capital One Financial, the company sold the 61 million shares.

It is not clear how much the stock sale will help in the long run. Its stock listing is being threatened by NYSE Amex, which isn’t sure the company can continue. The shares have traded as high as $2.38, but that was a year ago. The low on Wednesday was $0.46, a 52-week low.

So, pity the shareholders. They don’t have a lot of choice if they want to get anything out of this company