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American Apparel's New Sales Metric Could Disguise How Badly It's Doing

By Jim Edwards

Updated on: July 15, 2011 / 9:39 AM EDT / MoneyWatch

Investors are unlikely to touch fashion advertiser American Apparel (APP) with a bargepole as long as the company continues its lax corporate governance practices. The stock has stalled around the $1 level since May last year despite all-new management, new board members, new financing and new lines of clothing including, for the first time, jeans.

The only thing that hasn't changed is CEO Dov Charney, who continues to dilute existing investors' holdings by printing tens of thousands of new stock certificates which he sells to avoid bankruptcy. He also announced a new way of reporting sales at his company which could disguise how badly his stores are doing.

Look how weak and confusing management's financial controls currently are, despite the arrival of a new CFO in February:

The SEC warned Charney July 13 that his board's audit committee only has two people on it when the rules require three, and the rest of his board is full of vacancies:
... the Company's Audit Committee currently consists of two members instead of three members as required by the rules of the Exchange, and the Company's Board of Directors currently consists of three Class A directors, one Class B director (with two Class B vacancies reserved for the designees of Lion/Hollywood L.L.C), and two Class C directors (with one Class C vacancy).
Those vacancies were caused by the July 5 resignations of two directors to make room for appointees from new investors whose money is currently propping up the company.
On July 7, American Apparel sold $6.7 million in new stock at less than $1 a share in private placements to the investors as part of a previously agreed rescue package. About $700,000 of that stock was bought by Charney.
The company also authorized a doubling of the amount of stock it will issue this year, thus ensuring that existing investors will not see the price of APP rise anytime soon.
The disclosures came after the SEC reviewed American Apparel's books in May and, no surprise, found them wanting (nothing substantive, however). The review focused on the dilution of stock. The SEC couldn't even figure out whether Charney still owns a majority of his own stock.

Sales at AA may have bottomed out, prepping the company to get back on the upswing in the fall. Charney reported Q2 2011 sales were $132 million, essentially flat. The good news is that online sales were up 19 percent. However, Charney said he was going to make his sales reports more confusing going forward by changing the way he reports "same-store sales," a crucial measure of "heat" in fashion retailing, which asks whether more of fewer customers are buying in individual stores. From now on, he said in the Q2 note:

... the Company will report comparable store sales as the combination of sales for its comparable stores and online channel.

As the online channel is clearly healthy, that could have the effect of disguising ill-health at the struggling store chain, which was cut from 280 to 256 sites this quarter.

Just to give stockholders added confidence, Charney posted a video of himself sitting on a toilet while defending his leadership of the company:

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