retail or wholesale?
May 27, 2009 6:36 PM   Subscribe

How does American Apparel make money?

A friend and I have a disagreement over this that basically breaks down to: retail or wholesale? As I understand it, they started out as t-shirt wholesalers and expanded into a retail empire. But where do they make the bulk of their revenue?

They charge much higher prices for their retail clothes than for their wholesale t-shirts, but maintaining storefronts must also be a costly undertaking. The higher overhead might cancel out the higher prices. They clearly have the money for major ad campaigns and numerous store fronts so they must be making money somehow, but I don't know how to find this information.

Of course, it's also possible that they aren't making money, or that one part of their business subsidizes other parts of the business. I know very little about garment manufacturing and retail, so I'm hoping that someone with a knowledge of the biz can clue me in.
posted by abirae to Clothing, Beauty, & Fashion (10 answers total) 4 users marked this as a favorite
Best answer: I think they don't.
posted by jeb at 6:39 PM on May 27, 2009

Here's a breakdown of their most recent financials

Roughly $78M of a total of $114M in sales came from Retail, so they're about 50/50. retail to wholesale. They also took about a $9M loss on the quarter, but that's not strange in the current economy and considering their rate of retail growth. I'd think they're turning into a Gap style clothing manufacturer and likely moving away from wholesale but YMMV.
posted by bitdamaged at 6:49 PM on May 27, 2009

Response by poster: Wow! Thanks jeb. From their first quarter filing:

American Apparel reported net sales for the quarter ended March 31, 2009 of $114.3 million.
Total retail sales... $78.0 million for the first quarter of 2009.
Total wholesale sales... $28.1 million for the first quarter of 2009.
Total online consumer sales ... $8.2 million in the first quarter 2009.

Gross margin for the first quarter of 2009 increased to 57.2% from 55.3% for the first quarter of 2008. Gross margin in the period benefited from an increase in the proportion of retail sales, which generate a higher gross margin than wholesale sales. Total wholesale sales declined to 24.6% of total sales compared to 32.3% of sales in the first quarter of 2008.

Operating expenses for the first quarter of 2009 increased to 60.6% of net sales, versus 51.4% for the first quarter of 2008. Operating expenses increased significantly in the U.S. Retail and International segments due to higher payroll, rent and occupancy expense, and depreciation related to the greater number of retail stores in operation including the accelerated store rollout in the second half of 2008.

Operating loss for the first quarter of 2009 was $3.9 million, versus operating income of $4.4 million in the prior year first quarter. Operating margin for the first quarter of 2009 was negative 3.4%, versus 3.9% in the first quarter 2008.
posted by abirae at 6:52 PM on May 27, 2009

Best answer: First of all, they're not making much money.

But, the key to American Apparel's brilliance is in their marketing and their control of costs. The largest single cost for any apparel manufacturer is going to be labor, ergo the race to the bottom Hanes, et al. has seen lately. If you trace the textile industry it is a timeline of the development of world economies, first the South, then Mexico, China and now Vietnam. The pressure to push cost down to get into Wal-Mart is huge. You're running thin margins, but your volume is huge. Really large apparel manufacturers are more of tails on running good supply chain management and less on how to make good clothes.

On the other side of this, you have retailers like American Eagle and mid-market brands that sell on fashion. This is a double edge sword, you're lead time for overseas manufacturing that your clientele can afford is something like 6-9 mos. from final spec to landing in the retail store. So you have to have good buyers and designers that can anticipate what's coming off fashion shows, what can be reproduced by low skilled workers, and what can still be relevant by the time you get product to market. In my opinion its a chumps game, I'd much rather be a Hanes or VF than a American Eagle.

Now, AA on the other hand, has taken a completely different tactic. They've tackled Hanes/Fruit of the Loom/VF, by using their own designs. There's no slew of buyers and marketing focus groups (or at least I do not believe there is, and all indication is that there isn't). How the hell do you compete with someone who can deliver 10 pairs of t-shirt for several dollars a pack? And who does so on huge volume? Simple. Your clients are your marketing. Instead of making the products XXL, XL, L and making it so they can fit that wide parabola that is the American consumer, target the 10-5% with the disposable income, and self-limiting size. You're not going find many 50 year olds of any level of fitness that can fit into an American Apparel t-shirt, it is self-limiting! You have to be their build or you don't fit. Great, so fat kids from the Midwest aren't going to be tromping down to LA in AA and ruining it for the hipsters. You no longer have to run a cut above, because you're products are self-selecting.

Then you pick the price. I have no idea what the margins are on individual shirt, I'd be surprised if AA wasn't making 30-40% even after their made in America labor costs factored in. Here, I'll look at my recent order, a pair of boxer-briefs for $14. $14! I could by a dozen at Target for that, and they're probably the same thing. I'm going to say $4 in cost of fabric (stretch there, I think AA uses shit material). They're looking at, what how many do you think someone could do an hour? 40? You're looking at $1.50 in labor costs for a single piece of underwear. Even if you take that down to 20 an hour you're only looking at $3 + $5 in fabric(being generous) and you're still looking at 50% profit margins before it leaves the factory floor. AND you don't have to deal with Wal-Mart et al., telling you there's a German conglomerate that's cutting their price per underwear by 10 cents and if you want to do $100mm a year with us, you'll cut it by 15 cents.

Obviously there's a market cap in AA way below what the big boys will do, but it is a great business. Go through their catalog, do you see any style there that's not classic? No, it is all simple, slim fitting clothes. No spending gobs of money on over-priced "buyers" and consultants, no putting up a bunch of clothes for a middle manager to pick so it can go to another manager, and so on. Yeah your max potential volume is limited, but if you can hit the niche good luck to you. Plus the DIY marketing and photos are great.
posted by geoff. at 7:00 PM on May 27, 2009 [8 favorites]

Response by poster: thanks geof. for that trenchant look at the rag trade. I feel like I finally understand what "vertically integrated" really means, and how it benefits AA. (Not to mention an explanation of why their clothes run so small. But regarding "do you see any style there that's not classic?" perhaps a few things do come to mind. )
posted by abirae at 7:26 PM on May 27, 2009

If you look at the products you mentioned, the patterns there aren't that different. The cut off shirt is simply a normal t-shirt with some slight modifications cut in half. The same with the other designs, they're not that different even if they happen to made from different fabrics. Compare to this from JCrew, where you have another piece of fabric that needs to be sewn on and you have basically two separate processes for a single piece of garment. If you look at labor as the biggest cost factor in the piece and what in a piece is labor intensive it is very apparent that all of AA's pieces are very easy to make.
posted by geoff. at 7:37 PM on May 27, 2009

Bet they have an army of unpaid slave interns from LA's fashion scene.
posted by Ironmouth at 10:11 PM on May 27, 2009

Pretty much everybody is right on the money, especially geoff., except for the numbers. In my experience, as a rule of thumb, if a piece of clothing has an MSRP of $100, it cost no more than $15 to produce - probably $10. $14 boxer briefs? $2 tops. Most of that is labor, fabric is incredibly cheap in bulk. In 3 minutes of searching on the internet, I found 500 Hanes white Ts for $800, that's $1.60/pc, including the manufacture and distributor margins. 20 yard bolts of 100% cotton for $48.
posted by jedrek at 5:08 AM on May 28, 2009

I read geoff's post quickly and I didn't see this explicit point (I may have missed it): their styles barely change from year to year or season to season. I go in their stores a lot to see if there's anything new or interesting and every time I go in I say to myself "ok I already have 5 of these I don't see anything different from what I bought 3 years ago and the shit is still holding up so, why buy anything". That means that they probably spend next to no time or money on 'the next in thing' and they don't have to revamp their labor (train them on how to make new, different things) - meaning they can probably keep their labor costs down because they don't need highly skilled people, just people who can learn to do their basics correctly. When you don't have to pay designers or manufacturers to constantly rethink and revamp your line, you probably save a shit load of money.
posted by spicynuts at 7:50 AM on May 28, 2009

Also Lion Capital (previously Hicks, Muse and Tate), a London based private equity firm now back them. I suppose they are focused on the top line for now.
posted by laukf at 12:32 PM on May 28, 2009

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