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American Apparel Announced Financial Results for Third Quarter Ended September 30,2012

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Core Tip: American Apparel Inc.,a vertically integrated manufacturer,distributor,and retailer of branded fashion-basic apparel,announced financial results for its third quarter ended

American Apparel Inc.,a vertically integrated manufacturer,distributor,and retailer of branded fashion-basic apparel,announced financial results for its third quarter ended September 30,2012.

Dov Charney,Chairman and CEO of American Apparel,Inc.,stated,"We are pleased with our third quarter results that again show solid growth and continuing momentum in all business segments and major geographies.Significant sales growth allowed us to more than double our EBITDA performance to$13 million for the third quarter of 2012 from$6 million for the third quarter of 2011.

Year-to-date our EBITDA performance has improved to$19 million from$5 million for the corresponding period last year.EBITDA performance for the twelve months ended September 30,2012 was$28 million or double that reported for the full year in 2011.

As we improve store productivity and aggressively grow our online and wholesale businesses we expect operating expense leverage will allow us to continue to significantly grow EBITDA performance.

"We continue to make meaningful progress in improving inventory efficiency with a 5%reduction in unit inventory in this quarter.This brings our total unit reduction to over 18%since we began this undertaking in 2011.

"Although our aggressive approach to reducing inventories has caused a modest amount of margin erosion,improving inventory turns by driving unit sales will improve inventory efficiency,lower carrying costs and reduce working capital requirements over the long-term.These efforts,together with other operating performance improvements will assist in our near-term refinancing efforts."

So far,through November 12,2012,comparable sales for the Company's retail stores have increased 13%.

Operating Results

Comparing the third quarter 2012 to the corresponding period last year,net sales increased 15%to$162.2 million on a 20%increase in comparable store sales in the retail business,a 6%increase in net sales in the wholesale business and a 1%increase in the average number of stores.

Gross profit of$85.2 million for the third quarter of 2012 increased 14%from$75.0 million reported for the third quarter of 2011.Holding foreign currency rates constant to those last year,gross profit in the 2012 third quarter would have been$87.1 million or 16%higher than reported in the 2011 third quarter.Gross margin rate for the 2012 third quarter decreased to 52.5%from 53.2%for the 2011 third quarter.

The gross margin reduction was due to planned promotional activities,the effect of"warehouse-type"clearance sales as a part of our overall inventory reduction strategy and the negative impact of the strengthening US dollar on margins from our international segment.

Partially offsetting these impacts was a shift in mix to higher margin retail sales in the 2012 third quarter,lower inventory shrink reserves reflecting the benefits of our RFID implementation and lower costs of production in our manufacturing operations.

As a percent of revenue,operating expenses for the quarter decreased 540 basis points to 49.7%from 55.1%for the third quarter 2011.Included in operating expense in the 2012 third quarter was$5.5 million in depreciation expense versus a combined$6.9 million in depreciation expense and store impairment charges in the third quarter of 2011.

After excluding the effects of store impairment and depreciation charges between the quarterly periods,there was a 390 basis point decrease in operating expenses as a percent of net revenues.The decrease was primarily due to a reduction in corporate overhead expenses and the fixed cost leverage as a result of increased sales.

Other expense for the third quarter of 2012 was$23.1 million versus$4.4 million in the comparable quarter last year.The$18.7 million increase was primarily due to the increase in the fair market value of our outstanding warrants at September 30,2012 as compared with September 30,2011,resulting in a net change in unrealized loss of$19.4 million.

As our warrant liability is deemed to be a derivative financial instrument it is marked-to-market based primarily upon the change in our stock price between accounting periods.The warrant liability will not result in a future cash outflow by the Company and classified as equity when the warrants are exercised.Additionally,we incurred higher interest expense due to a higher average balance of debt outstanding and higher interest rates related to the Crystal Credit Agreement.

The third quarter 2012 net loss included an income tax provision of$0.5 million versus$0.2 million in the 2011 third quarter.In accordance with U.S.GAAP,we discontinued recognizing potential tax benefits associated with current operating losses.As of September 30,2012,we had available federal net operating carry forwards of approximately$73.3 million and unused federal and state tax credits of$16.2 million.

Net loss for the third quarter of 2012 was$19.0 million,or$0.18 per common share,compared to net loss for the third quarter of 2011 of$7.2 million or$0.07 per common share.The 2012 third quarter net loss and net loss per common share includes$13.3 million of expense($0.13 per common share)associated with a non-cash charge for an increase in the fair value of outstanding warrants.The 2011 third quarter includes an income statement credit of$6.1 million($0.06 per common share)for a non-cash reduction in the fair value of the same warrant liability.Weighted average shares outstanding were 106.2 million in the third quarter of 2012 versus 102.3 million for the third quarter of 2011.

2012 Outlook Update

For 2012,the Company is updating its adjusted EBITDA outlook to$36 to$40 million from the prior estimate of$36 million to$44 million.The adjustment to our estimate reflects in part a reduction to the business lost as a result of Hurricane Sandy,and additional investments inadvertising and store technologies.This outlook assumes net sales of$604 million to$610 million and a gross profit margin of 53%to 54%.Capital expenditures are estimated at approximately$17 million for 2012.

 
 
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