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American Apparel files for bankruptcy


Staff member
American Apparel files for bankruptcy

The clothing retailer, which fired controversial founder Dov Charney last year, has posted losses every year since 2010.

By: Steven Church Matt Townsend Stephanie Wong Bloomberg, Published on Mon Oct 05 2015

American Apparel Inc. filed for bankruptcy protection after posting years of losses as the clothing retailer, which fired controversial founder Dov Charney last year, seeks to reorganize debts that have ballooned to levels exceeding its assets.

As part of a pre-arranged Chapter 11 restructuring, more than $200 million (U.S.) of bonds will be exchanged for stock in the reorganized company and the clothing retailer will have access to financing after its restructuring, American Apparel said in a statement Monday. Business will continue throughout the reorganization, which was supported by 95 per cent of secured lenders and may last about six months, it said.

Filing for bankruptcy is a “difficult decision that gives American Apparel the opportunity to rebuild the business,” Bryan Roberts, an analyst with Kantar Retail, said by phone. “Quite a few U.S. retailers have gone down this route and come out the other side.”

Though American Apparel has been in disarray since Charney was suspended and then fired as chief executive officer last December for alleged misconduct — claims he says are baseless — American Apparel’s financial woes stretch back longer. The chain has posted losses every year since 2010.

Chronic losses strained the company’s balance sheet to the point that as of end of June, American Apparel had $161 million (U.S.) more liabilities than assets, meaning the company had a negative book value.

The reorganization is designed to provide relief. Under the accord, creditors will provide enough financing and new capital to fund ongoing operations and reduce American Apparel’s debt to no more than $135 million from $300 million, it said. That will help lower annual interest expenses by $20 million, it said.

“By improving our financial footing, we will be able to refocus our business efforts on the execution of our turnaround strategy,” chief executive officer Paula Schneider said in the statement. The company plans to create new products, launch new design initiatives, invest in new stores and grow its e-commerce business, he said.

American Apparel will pay all of its suppliers in full on or after the filing date of Oct. 5 this year and its international operations aren’t affected, it said. The restructuring plan is subject to approvals by the bankruptcy court and other certain conditions, it said.

A Montreal native, Charney started American Apparel in 1998 during his freshman year at Tufts University in Massachusetts. He never graduated, setting off instead for South Carolina, where he employed 20 women to make T-shirts in a barn with no air conditioning. Ten years later, he moved the company to Los Angeles, where there was greater manufacturing capacity.

The company designs and makes “basic fashion” for women, men, children and even pets. At the end of March, it employed about 10,000 people and had 249 stores in 20 countries.

Sales fell in December, a key month for retailers, as Charney said the botched rollout of a new distribution centre slowed shipments. The brand also lost favour with some teens and 20-somethings, who shifted to chains such as H&M, Forever 21 and Uniqlo, said Craig Johnson, president of Customer Growth Partners, a New Canaan, Connecticut-based consulting firm.
In the second quarter, sales sank 17 per cent to $134.4 million (U.S.) and the net loss expanded to $19.4 million from $16.2 million, the company said in August.

Charney, 45, drew attention for his use of young, scantily clad models in ads for his company’s U.S.-made garments. He also attracted litigation and scrutiny from regulators for his employment practices.
A company investigation this year uncovered a history of misconduct that ranged from sexual harassment and retaliation to misallocation of corporate funds, a person familiar with the matter said.
The turbulence at the top means the company has “arguably not hand a firm hand on the tiller,” Roberts said.

The company, which began trading publicly in 2007, peaked at $16.80 (U.S.) in December of that year. The shares last closed at 11 cents on Friday.

American Apparel files for bankruptcy | Toronto Star
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