American Apparel goes bankrupt

American Apparel goes bankrupt

A pedestrian walks past an American Apparel Inc. store in Chicago, Illinois, U.S., on Monday, Oct. 5, 2015. (Bloomberg photo)
A pedestrian walks past an American Apparel Inc. store in Chicago, Illinois, U.S., on Monday, Oct. 5, 2015. (Bloomberg photo)

New York: American Apparel, the one-time arbiter of edgy made-in-America cool, filed for bankruptcy protection early Monday, its business crippled by huge debts, a precipitous fall in sales, employee strife and a drawn-out legal battle with the retailer’s ousted founder, Dov Charney.

The Chapter 11 petition, approved by the board, was filed in federal bankruptcy court in Delaware.

The filing followed a deal struck with most of American Apparel’s secured lenders to reduce the retailer’s debt through a process known as a debt-for-equity conversion, where bondholders swap their debt for shares in the company.

The deal, which also includes extra financing from the participating bondholders, would enable American Apparel to keep its manufacturing operations in Los Angeles and its 130 stores in the United States open, the company said.

No lay-offs were announced in the filing, which still requires approval by the bankruptcy court.

The retailer’s overseas operations are unaffected by the restructuring, which American Apparel expects to complete within six months.

Still, the bankruptcy would wipe out American Apparel’s current shareholders, including Charney, whose stake in the retailer that he founded in 1989 was worth about $8.2 million as of Friday.

It would instead put the company’s creditors in full control, including Standard General LP, the little-known hedge fund that is also leading the turnaround at RadioShack, which went bankrupt in February.

American Apparel and RadioShack join numerous peers that have succumbed to intense retail competition.

Some analysts say the United States simply has too many brands — and too many brick-and-mortar stores — chasing consumer spending that is growing sluggishly at best.

Stores that cater to teenagers, like American Apparel, Abercrombie & Fitch and Aeropostale, have especially struggled in the face of an onslaught of “fast-fashion” labels and an increasingly fickle demographic more interested in the latest app or gadget than a pair of jeans.

In the past year, Wet Seal, Deb Shops, Delia’s and Body Central have all gone under.

American Apparel’s bankruptcy had become a matter of not if, but when, as the retailer posted quarter after quarter of steep losses. Its sales fell 17% in the second quarter compared with last year, a slump the beleaguered retailer blamed on a dearth of new styles.

The company’s losses over the last five years have topped $340 million, and it has lost another $45 million this year.

The New York Stock Exchange warned last week that American Apparel was at risk of being delisted, saying it had suffered losses so substantial, and its financial condition had become so impaired that it was questionable whether the retailer could stay in business.

At the close of markets Friday, its shares were worth just 11 cents.

A $13.9 million interest payment due Oct 15 had loomed large on the horizon; as of mid-August, American Apparel had just over $11 million in cash on hand. The shortfall prompted the company itself to warn it may not have enough capital to cover its costs over the next year.

Under the financing agreement, five American Apparel bondholders would convert some $200 million in bonds into equity in the reorganised company. Participating bondholders would also provide $90 million in debtor-in-possession financing, as well as $70 million in new liquidity.

The fresh financing would reduce American Apparel’s debt to $120 million from $311 million, and its annual interest expenses would fall $24 million, the company said.

The participating bondholders are Standard General, Monarch Alternative Capital, Coliseum Capital, Goldman Sachs Asset Management and Pentwater Capital Management, all hedge funds or investment firms specialising in distressed debt. Together, they represent 95% of the retailer’s secured lenders.

Bankruptcy proceedings would also temporarily delay numerous lawsuits against the company, giving its management some breathing room to get the company’s financial house in order.

The retailer had been in the middle of a turnaround plan that included freshening up its product line-up, overhauling its supply chain and reining in American Apparel’s notoriously risqué advertising.

Paula Schneider, a veteran retail executive brought in last year to salvage American Apparel’s ailing operations, is expected to stay on as chief executive through the bankruptcy proceedings.

In an interview Sunday, Schneider said that free of its crippling debt and interest payments, American Apparel could finally put that turnaround plan into action.

The retailer was only able to bring to the store 15-20% of its planned line-up for the fall season, because it simply couldn’t afford to do more, she said.

“Our debt load simply wasn’t sustainable. You can’t do a turnaround plan without cash,” Schneider said. “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,” she said.

“Not having the nuisance lawsuits, not having this massive debt, these are all extremely important things for the company to thrive.”


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