American Apparel has admitted it might go out of business within a year.

American Apparel has admitted it might go out of business within a year.

Once the epitome of health with its young, slick, urban fashion sense, American Apparel is now on the critical list thanks to a succession of disastrous setbacks.

Preliminary figures for the company’s delayed second quarter results suggest a haemorrhaging of retail sales, leading to a loss of several million dollars and increased debt levels.

That’s the reason for doubts over the company’s future viability, but a series of problems have also served to distract management and sap morale at the California company.

An immigration crackdown at its Los Angeles factory led to more than 1,600 new workers having to be taken on, with a knock-on impact on labour and production efficiency.

American Apparel parted company with former auditors Deloitte Touche earlier this year after Deloitte identified “material weaknesses” in the company’s controls over financial reporting.

The move has also resulted in a threat of legal action from law firm Levi & Korsinsky, while American Apparel said it had received a subpoena from the US Attorney’s Office in New York, as well as an enquiry from the Securities and Exchange Commission.

And the company was also threatened with being delisted by the New York Stock Exchange after it failed to file its first quarter results on time.

All are worrying setbacks which have undoubtedly had a negative impact on the business, but it is American Apparel’s current trading performance which provides the gravest grounds for concern.

Comparable store sales were down a likely 16% in the second quarter to 30 June, while gross margins slumped to 50-52% from 59% in the same period last year – impacted by a shift from retail sales to lower-margin wholesale revenues.

The result, American Apparel admits, will be a “substantial” loss in the first half of 2010, with little sign of improving trends in the third quarter.

As debts hit $120.3m at the end of June and rising, the company is in crucial talks to renegotiate its credit terms with lenders in advance of a likely default at the end of September.

And it will need to convince those lenders of the merits of its new plan to improve operating performance – or American Apparel could soon be the subject of yet more negative headlines in the near future.

Click here for American Apparel's preliminary second quarter results.