American Apparel to finish 2008 with 80 new store openings

American Apparel Inc announced its financial results for the third quarter of 2008 and for the nine month period ended September 30, 2008.
American Apparel reported net sales for the quarter ended September 30, 2008 of $154.8 million, a 45.2% increase over net sales of $106.6 million for the quarter ended September 30, 2007. Total retail sales increased 65.3% to $97.4 million from $58.9 million for the prior year third quarter, with comparable store sales for stores open at least 12 months rising 24%.
American Apparel ended the third quarter of 2008 with 228 stores, having opened 33 stores in the period. The Company operated 163 stores at the end of the third quarter of 2007. Total wholesale sales increased to $46.4 million for the third quarter of 2008, as compared to $41.3 million for the third quarter of 2007, an increase of 12.3%. Online consumer sales increased to $11.0 million from $6.4 million for the prior year third quarter, an increase of 72.0%.
In the third quarter of 2008, American Apparel awarded approximately 1.9 million shares of common stock to eligible manufacturing employees, which shares were granted pursuant to the merger agreement between American Apparel Inc. (formerly Endeavor Acquisition Corp.) and American Apparel Inc., a California corporation.
To provide greater clarity about the Company's operating performance for the third quarter of 2008, the impact of the related $13.2 million stock based compensation expense on the results is discussed in the paragraphs below and in Table A. This stock award resulted in the recording of $12.1 million of stock based compensation expense and $1.1 million of employer related payroll taxes in the Company's financial statements for the third quarter of 2008.
Gross margin for the third quarter of 2008 was 50.1% versus 55.2% for the prior year third quarter, including the impact of the merger related stock based compensation expense. The stock based compensation expense of $13.2 million negatively impacted gross margin by 850 basis points. The gross margin was favorably impacted by a reduction in inventory obsolescence reserves of $1.1 million, for an improvement of 70 basis points. Gross margin was also favorably impacted by the growth in retail sales from the expansion of the U.S. Retail, Canada and International business segments, which generate a higher gross margin than the company's U.S. Wholesale business segment.
Operating expenses for the third quarter of 2008 increased to 45.7% of net sales, versus 44.2% for the third quarter of 2007. Operating expenses increased due to higher payroll, rent and occupancy expense related to the growth in the number of retail stores from 163 as of September 30, 2007 to 228 as of September 30, 2008. Pre-opening expenses for retail stores were $4.4 million in the third quarter of 2008, versus $0.9 million in the prior year third quarter. Operating expenses were also higher due to an increasein corporate expense of approximately $2.9 million versus the year ago period, related primarily to an increase in accounting and professional fees as a result of American Apparel operating as a public company in 2008.

Operating income for the third quarter of 2008 was $6.8 million, after the impact of the $13.2 million stock based compensation expense, versus $11.7 million in the prior year third quarter Operating margin for the third quarter of 2008 was 4.4%, versus 11.0% in the quarter a year ago. The impact of the share based compensation expense reduced the third quarter 2008 operating margin by 850 basis points.
Interest expense for the third quarter of 2008 decreased to $3.2 million from $4.4 million in the third quarter of 2007. The decrease in interest expense was due to a decrease in the LIBOR rate on which the company's floating rate debt is based.
The company's effective tax rate in the third quarter declined to 26.9%, reflecting the benefit of federal and state enterprise zone tax credits related to the company's expanded hiring and manufacturing activity in the downtown Los Angeles area. The effective tax rate for the nine months ended September 30, 2008 was 33.5%.
Net income for the third quarter of 2008 was $2.3 million, or $0.03 per diluted share. Excluding the impact of the merger related stock compensation expense, net income would have been $11.1 million, or $0.16 per share. This compares to $6.0 million in net income, or $0.10 per share, for the third quarter of 2007.
The company continues to expect diluted earnings per share in the range of $0.32 to $0.36 for 2008, before giving effect to the stock based compensation expense resulting from the 2.71 million share employee stock grant pursuant to the merger agreement between Endeavor Acquisition Corp. and American Apparel, Inc. The company has approximately 800,000 shares remaining pursuant to the merger which it expects to grant in the fourth quarter of 2008 to eligible retail and administrative employees.
As of October 31, 2008, American Apparel had opened 55 new store locations since the beginning of the year and closed 3 locations. The company had 40 signed leases for retail stores in its pipeline, including stores in new markets such as Yokohama, Japan; Toulouse, France; and Adelaide, Australia. The company plans to have opened approximately 80 stores by the end of 2008, up from its previously stated guidance of 50 to 55 stores.
Dov Charney, Chairman and Chief Executive Officer, stated: "We are very pleased with our financial performance in the third quarter, and the momentum our business has had while we have expanded in so many new markets this year. While we are cognizant of the economic difficulties worldwide, particularly in retail, we remain cautiously optimistic that our products represent a unique value to consumers even in a weak economy."
"As we look at 2009, having already experienced so much growth in 2008, we plan to tailor our expansion plans accordingly with an eye on the overall economic environment and our goal to generate significant free cash next year."