American Apparel Files for Chapter 11 Bankruptcy

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Summary: American Apparel hopes to restructure its debts within a six month period so it may continue operations.

The New York Times reports that American Apparel, a once-hip outfitter, has filed for bankruptcy protection. American Apparel’s tremendous debts, coupled with declining sales numbers, employee feuds, and a never-ending legal fight with Dov Charney, the exiled founder of the company, have significantly weakened its financial state.

  

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The petition was filed in Delaware, and followed a deal reached with a majority of the company’s lenders to reduce debt through a debt-for-equity conversion, during which bondholders exchange debts for shares in the company.

The deal would allow American Apparel the ability to keep its manufacturing centers in Los Angeles and keep its 130 stores across the states open for business.

The filing must still be approved by the bankruptcy court. Thus far, no mention of layoffs have been made, and the overseas operations will not be touched by the process, which may be completed within six months.

However, the process would eliminate current shareholders, including Charney. Charney’s stake in the company, which he founded in 1989, was worth $8.2 million as of Friday. Instead, the creditors would be in complete control of the company.

American Apparel, RadioShack, and several other companies have recently filed for bankruptcy due to increased competition. Many theorize that the United States has too many stores in a market where consumer spending remains sluggish.

Quiksilver has also filed for bankruptcy.

Stores that target teenagers, such as Abercrombie & Fitch, Aeropostale, and American Apparel, have struggled to keep up with “fast-fashion” labels and a group of consumers who are more interested in technology than shopping for clothes. In just the past year, Deb Shops, Delia’s, Body Central, and Wet Seal have all closed their doors.

American Apparel had demonstrated significant losses for the past few quarters. Sales dropped 17 percent in the second quarter compared with last year. The store blamed the decline on new styles. Over the past five years, its losses have exceeded $340 million, and it lost an additional $45 million this year.

Last week, the New York Stock Exchange said the store was at risk of being delisted because of its losses and its financial condition. Shares were worth just 11 cents on Friday.

A $13.9 million interest payment due on October 15 was creeping up on the company, which had just over $11 million in cash by mid-August. American Apparel revealed that it may not have enough capital to cover next year’s costs.

Rapper 50 Cent filed for bankruptcy.

Under the financing agreement, five bondholders will convert $200 million in bonds into equity in the reorganized company. These bondholders would also provide $90 million in debtor-in-possession financing, in addition to $70 million in new liquidity.

The financing would drop American Apparel’s debt down to $120 million from $311 million. Its annual interest expenses would decline by $24 million as well. The bondholders participating in the deal are Monarch Alternative Capital, Coliseum Capital, Goldman Sachs Asset Management, Standard General, and Pentwater Capital Management. All are hedge funds or investment firms that specialize in distressed debt. They represent roughly 95 percent of American Apparel’s secured lenders.

A pending bankruptcy case would also delay several lawsuits against the company, providing management with leeway to get the company’s finances in order. American Apparel was in the middle of a turnaround plan that included revamping its product lineup, overtaking its supply chain and reining in its scandalous advertising.

Paula Schneider, a retail executive who was brought in in January to try to save the company, is expected to stay on as chief executive through the proceedings.

Schneider said that once the company is free of its debt and interest payments, it could put the turnaround plan into action. American Apparel was only able to bring 15 to 20 percent of the planned fall lineup to stores, because it could not afford to bring any more, she said.

Schneider said, “Our debt load simply wasn’t sustainable. You can’t do a turnaround plan without cash. Every day, we would make choices on what we were going to buy, even though we needed more for everyone. Every day, I have to pick between what I’m buying for retail or wholesale, or giving e-commerce enough money to develop a mobile app. And it was all to get to the point where we could make these massive interest payments, and nothing that was really moving the company forward. Not having the nuisance lawsuits, not having this massive debt, these are all extremely important things for the company to thrive.”

American Apparel started as a T-shirt label in 1989 and was committed to keeping local garment jobs in Los Angeles. Its progressive attitude set it apart from other retailers.

Charney was the brains behind the operation, but his behavior soon attracted negative press. In a 2004 profile in Jane magazine, Charney allegedly masturbated multiple times in front of the reporter. In other stories, Charney apparently called women “sluts” and suggested that “ugly” store managers should be terminated. A number of suits against Charney were filed that included allegations of sexual harassment. Charney’s attorneys argued that the women were simply after money, and that Charney was innocent.

Last year, national law firm Binder & Binder filed for bankruptcy.

Last June, the board of directors ousted Charney as chairman and CEO, stating that an investigation found he misused company funds and that he allowed an employee to post naked pictures of a woman, a former employee, who had sued him. Charney still owns 5% in the company, USA Today adds.

The board also noted the rising expense of defending Charney in the suits against him, and added that Charney’s reputation was hurting the company. Charney has argued that the investigations’ conclusions were unfounded.

Charney then paired up with Standard General to increase its stock holdings to 43 percent, and to begin the process for Charney to return to the company. However, that relationship soon fizzled out. Standard General blocked Charney’s return, and both Charney and Standard General have sued each other for breaching mutual agreements. According to CNN Money, Charney and his associates retaliated with about 20 lawsuits and “administrative actions.”

Additionally, some American Apparel employees have been protesting weekly, complaining about reduced hours and layoffs. In one such protest, a group of employees destroyed a piñata that looked like Schneider, the new chief executive.

Employees have also filed several complaints with the National Labor Relations Board, including one claim by a group that alleges it was wrongfully terminated after it tried to unionize. Many of these complaints have been dismissed, however.

Schneider said that the company is committed to keeping manufacturing jobs in the United States, and that rumors that factory jobs would be moved to El Salvador or Mexico were not true. She said, “We will continue to manufacture in America. That’s what the brand is. That’s what it’s about.”

Laura Davis Jones represents American Apparel in the suit.

Source: New York Times

Photo credit: Yahoo!