American Apparel reported total retail sales across all segments increased 65% to $63.1 million for the first quarter of 2008 as compared to $38.3 million for the same period in 2007, with same-store sales for stores open at least 12 months rising 36%. Total wholesale sales across all segments $48.5 million for the first quarter of 2008, as compared to $35.2 million for the first quarter of 2007, an increase of 38%. American Apparel ended the quarter with 186 stores, having added 4 net new stores in the period.
Gross margin in the quarter declined 280 basis points to 55.3%. The main driver in this decrease was a decline in the U.S. Wholesale gross margin to 20.6% from 38.4% in the first quarter of 2007. Gross margin for the U.S. Wholesale segment for the full year of 2007 was 27.8%, and the company expects its gross margin for this segment to be more in line with that level for the remainder of 2008.
Gross profit in the first quarter of 2008 was impacted by approximately $0.9 million in startup costs at the companys garment dyeing and finishing facility purchased in December 2007, and $0.5 million in extra costs related to a three day production shutdown to accommodate the cutover to a new ERP system. The company also incurred additional training and startup costs relating to increased hiring to support an expansion in production capacity starting in the first quarter.
Operating expenses increased 170 basis points to 51.4% of sales, partly as a result of a shift in mix due to the growth of the companys retail operations. Operating expenses in the first quarter of 2008 were impacted by $0.4 million related to stock-based compensation payable to directors recognized in the period, $0.7 million in legal expenses incurred to defend against a wrongful termination suit, and $0.4 million in additional costs related to the relocation of the companys Canadian headquarters and warehouse. Retail store pre-opening expenses were $1.7 million in the first quarter of 2008 versus $1.1 million in the first quarter of 2007.
Net income for the first quarter was $1.1 million versus $1.7 million in the same period a year ago, or $0.02 per diluted share versus $0.03 per diluted share a year ago.
The company reaffirmed its financial guidance for the year. The company continues to expect diluted earnings per share in the range of $0.32 to $0.36, before giving effect to a one-time non-cash stock compensation expense resulting from the companys previously announced employee stock grant. The company currently has over 35 signed leases for retail stores in its pipeline and believes it is still in a position to open 40-45 stores in calendar 2008 as originally planned.
Dov Charney, Chairman and Chief Executive Officer, stated: “The first quarter of 2008 was a period of significant investment at American Apparel. During a quarter which is traditionally the slowest one for our business, we began a new phase of retail expansion. While significant capital outlays were made in the first quarter, we will begin to see this investment pay off in future quarters.
During this period, we moved our Canadian operations to a new facility. We ramped up the new garment dye facility purchased last December. Earlier we announced another significant acquisition of production capacity from U.S. Dyeing & Finishing. In the first quarter, we successfully went live on the first phase of our new ERP system, which should provide for production efficiencies and a more streamlined supply chain.
We have also hired a number of experienced accounting professionals to bolster our internal staff, and have begun working with Moss Adams LLP to bring our internal controls in compliance with Sarbanes-Oxley. With the groundwork having been laid in the first quarter, we look forward to making 2008 another record year for American Apparel.”