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American Apparel's Great Sales Numbers, But Big Legal Problems

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I was traveling in LA back on St. Patrick's Day and didn't get a chance to blog about American Apparel's Q4 earnings when they were reported on March 17th. As we mentioned on this blog, same store sales were expected to be up an impressive amount and they certainly were: + 40 percent. Net sales for 2007 came in at $387 million (v. $1.02M in 2006.)

Anyhow, there are some interesting nuggets in the American Apparel 10-K SEC filing. For those who are following the ongoing growth story of the company or simply the legal proceedings against CEO Dov Charney. Here's the SEC file.

What jumped out at me was the section devoted to legal proceedings. Under NOTE, the company lists a number of legal issues in addition to the ongoing suit brought by Mary Nelson (Mary Nelson v. American Apparel, Inc. et al.) Nelson alleges that she was wrongfully terminated and subjected to sexual harassment and discrimination based on her gender. She is seeking 'unspecified monetary damages and costs' but the company denies all of her allegations.

Here's the rub: APP's insurance carrier, Navigators Insurance Company, now says that it is not obligated to provide coverage for this proceeding. While American Apparel is fighting this decision, the filing notes that "no determination can be made at this time to the final outcome, nor can the range of potential loss be estimated."

My questions back in January to CEO Dov Charney about whether the company and its shareholders would be at financial risk due to this case (see related content links), certainly do seem relevant (despite management's protests at the time!) Just yesterday, the appellant's opening brief (the basis for the appeal) was filed...will this case head to trial?

There also is a claim mentioned in the 10-K brought by former employee Sylvia Hsu. It alleges that she was subjected to sexual harassment by a co-worker (the alleged offender isn't stipulated.) As of last month, American Apparel filed an appeal and the Ninth Circuit Court of Appeal has ordered that American Apparel file its opening brief in the appeal on July 21, 2008.

The company doesn't quantify just what this case could cost the company but the filing does say that the company only discloses claims if a loss is 'reasonably possible' and the cost amount 'could be material.'

We'll keep you posted on just where these claims head.

Questions? Comments? retaildetail@cnbc.com