Los Angeles Based American Apparel Files for Bankruptcy: October
On October 5, 2015, American Apparel filed for Chapter 11 bankruptcy in Delaware, capping a 25 year run from wholesaler to controversial retailer of young American fashion. Whether American Apparel emerges from bankruptcy with some semblance of its former self, merges with some other company, is acquired or simply dissolves is not certain by any means.
American Apparel was once an American success story. Founded in 1989 by Canadian Dov Charney with a loan of $10,000 from his father, the company moved its main offices to Los Angeles in 1997 as a wholesaler and became very successful. It opened its first retail store in 2003 and by 2005 reached Inc.’s list of the 500 fastest growing companies with an astounding growth rate of 440% in 3 years, with gross sales of $211 million. After it became a publicly traded company in 2007 and its merger with Endeavor Acquisition Corp., Charney became the CEO and majority stockholder.
Controversy Breeds Success-At Least Initially
The company’s controversial advertising attracted extensive attention, especially its use of porn actresses to adorn its T-shirts and colorful ads with models in suggestive positions and minimal clothing, prompting a number of European countries to ban them. One 2007 ad featured Woody Allen as a rabbi from the film “Annie Hall.” Allen sued the company for unauthorized use of his image and settled for $5 million in 2009. That year the company became one of the most successful American factories and by 2008, reported overall sales of $545 million.
By 2010, however, the company was being investigated by the Security and Exchange Commission (SEC) and the U.S. Attorney’s Office for the Southern District of New York for failing to file a quarterly report. Soon, cracks in the company’s sales, strategy and operations began to plague the company, though pundits opined that it fell victim to lack of fashion interest among teens and to cheap, overseas “fast fashion” companies. Others cited a glut of brands in the US, increased competition and sluggish consumer spending in the past few years. Filings indicated the company had lost $340 million in the past 5 years and over $45 million this year. Questions over use of illegal immigrant labor also plagued the company.
Its founder and CEO, Dov Charney, did not help matters with his erratic behavior. A female reporter stated that he masturbated during her interview with him. Other reports had him using offensive terms to describe women and he has been sued for sexual harassment a number of times.
American Apparel and the Chapter 11 Process
Chapter 11 bankruptcy is a debt reorganization plan, of which American Apparel has taken advantage. Besides experiencing relief by the automatic stay that goes into effect with any bankruptcy, which halted proceedings in various lawsuits that had bogged the company down, it has taken to using a debt-for-equity conversion plan to generate new financing. This is a process whereby bondholders agreed to trade their debt for shares in the company. Bondholders would also contribute $90 million in debtor-in-possession financing and $70 in liquidity.
The company also has a new CEO, Paula Schneider, after the board of directors decided Mr. Charney was a liability if not an unwanted distraction. His $8 million share in the company is at risk in the bankruptcy as well.
American Apparel has kept its 130 retail stores and has not laid off factory workers. Unfortunately, after its share price fell to $.11, the NYSE delisted the company.
CEO Schneider recently announced that its fall fashion line, designed to highlight the company’s new direction, would fall short of its production goals. Observers have noted that the company should consider streamlining by closing stores and laying off some of its 4,600 manufacturing and sewing employees.
For the time being, American Apparel continues to operate under Chapter 11 protection but apparently needs help in fashioning creative ways to attract buyers of its products or risk become a fading footnote in American retail and advertising history.