(Bloomberg)—American Apparel Inc., the made-in-the-U.S.A. clothing chain known for provocative marketing and boardroom drama, filed for bankruptcy protection after years of losses and a feud with controversial founder Dov Charney.
As part of a prearranged Chapter 11 restructuring, the Los Angeles-based company will reorganize its debts, which have ballooned to levels exceeding its assets. More than $200 million of bonds will be exchanged for stock in the reorganized company, according to a statement on Monday. American Apparel, No. 330 in the Internet Retailer 2015 Top 500 Guide, will remain in business during the process.
“It is business as usual at American Apparel and we are as excited as ever to bring you great fashion basics. Our stores are open, e-Commerce orders will continue to be fulfilled, your gift cards will still be honored, and all of our standard policies regarding returns, exchanges, etc., will remain in effect,” American Apparel’s digital and retail teams said Monday in an email to customers.
Filing for bankruptcy is a “difficult decision that gives American Apparel the opportunity to rebuild the business,” said Bryan Roberts, an analyst with Kantar Retail. “Quite a few U.S. retailers have gone down this route and come out the other side.”
The move follows a clash between Charney and the board that led to his ouster last year for alleged misconduct—claims he says are baseless—but American Apparel’s financial woes stretch back longer. The chain has posted deficits every year since 2010. Chronic losses strained its balance sheet to the point that, as of end of June, American Apparel had $161 million more liabilities than assets, meaning the company had a negative book value. Its web sales drop to an Internet Retailer-estimated $62.1 million in 2014, down 1.5% from $63.0 million the year before.
Sufficient financing
As part of the bankruptcy agreement, American Apparel will have access to financing after the restructuring, according to the statement. The debt reorganization, which may last about six months, is designed to provide relief.
Under the accord, creditors will supply enough financing and new capital to fund continuing operations and reduce American Apparel’s debt to no more than $135 million from $300 million. That will help lower annual interest expenses by $20 million, the company said. The plan was supported by 95% of secured lenders.
“By improving our financial footing, we will be able to refocus our business efforts on the execution of our turnaround strategy,” CEO Paula Schneider said in the statement. The company plans to create new products, introduce new design initiatives, invest in new stores and expand its e-commerce business, she said.
American Apparel expects to pay all its suppliers in full, and its international operations aren’t affected by the bankruptcy. The restructuring plan is subject to approval by the bankruptcy court and must meet other certain conditions, it said.
The company, which began trading publicly in 2007, peaked at $16.80 in December of that year. The shares closed at 11 cents on Friday.
In court papers, the company listed $199.3 million in assets and $397.5 million in debt. Among its largest unsecured creditors listed in court papers were lender Standard General LP of New York, owed $15 million, and the law firm Skadden, Arps, Slate, Meagher & Flom LLP, owed $3.83 million.
Sales decline
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 center slowed shipments. The brand also lost favor 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% to $134.4 million and the net loss expanded to $19.4 million from $16.2 million, the company said in August.
Young models
Charney, 46, 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 uncovered a history of misconduct that ranged from mistreatment of employees to misuse of corporate funds, a person familiar with the matter said.
The turbulence at the top means the company has “arguably not had a firm hand on the tiller,” Roberts said.
American Apparel “is the largest apparel manufacturer in North America,” with 8,500 employees worldwide, said Mark Weinsten, chief restructuring officer, in a declaration. Its T- shirts bear messages on immigrants’ rights, sweatshop conditions and sexual orientation, among other topics. The company lost more than $30 million between 2009 and 2014, struggling with the need for liquidity, he said.