RPR&C In The Media

October 5, 2015

American Apparel files for bankruptcy; manufacturing to remain in U.S.

By Shan Li

American Apparel, the trendy but troubled Los Angeles clothier, filed for Chapter 11 bankruptcy protection Monday — yet another blow to a company that has been struggling since ousting its chief executive last year.

The firm said it had reached an agreement with 95% of its secured lenders to implement a financial restructuring that will drastically cut down its debts and interest payments.

Under the agreement, which has been approved by the board, lenders have agreed to eliminate more than $200 million in bonds in exchange for shares in the reorganized company — known in business parlance as a debt-for-equity swap.

American Apparel said the reorganization will allow the company to keep its “production and operations in the U.S.” The company will come out of bankruptcy as a private company, analysts said.

“The debt structure was the biggest impediment that we have. When you have over $300 million in debt and are paying $35 million plus in interest rates, it’s not a sustainable business model,” Chief Executive Paula Schneider said in a Monday interview.

“I had cash flow restrictions every day. We were making choices everyday of funding retail or wholesale or ecommerce,” she added. “Let’s layer on all the nuisance lawsuits that cost millions of dollars. We had no liquidity and that’s what led us to the decision. And it’s the right decision for the company.”

Creditors have agreed to provide American Apparel with $90 million of debtor-in-possession financing, and have committed an additional $70 million in capital to support the restructuring of the company, American Apparel said. The participating lenders are Monarch Alternative Capital, Coliseum Capital, Goldman Sachs Asset Management, Pentwater Capital Management and Standard General. After the bankruptcy, the bondholders will own nearly 100% of the company.

That should reduce the company’s debt from $300 million to no more than $135 million, American Apparel said. Annual interest payments will be reduced by $20 million.

But if the plan meets with the approval of the bankruptcy court in Delaware, existing shareholders will essentially be left with nothing. That includes founder Dov Charney, who was fired as chief executive last year after an investigation alleged evidence of inappropriate behavior with employees and misuse of company funds. Charney has denied these allegations.

Instead, creditors of American Apparel would take over the company, including Standard General, the New York hedge fund that has lent millions to the retailer since last year.

American Apparel’s net losses have totaled nearly $384 million over the last 5 1/2 years.

Since Charney was ousted, sales and revenue have continued to slip. The company has lost customers to fast-fashion rivals such as Zara and H&M, analysts said.

With American Apparel almost out of cash, filing for bankruptcy was more a question of when, not if, analysts said. As of Aug. 11, the company had only $11.2 million in cash, but a $13.9-million interest payment was due on Oct. 15.

“They were running out of time, without an infusion of cash and without a white knight coming.” said Lloyd Greif, chief executive of Los Angeles investment banking firm Greif & Co. “This interest payment was the last straw that broke the camel’s back.”

Schneider said restructuring will help improve efficiencies; with enough cash, the company can buy goods when needed for production, which should push down manufacturing costs.

A lack of liquidity meant American Apparel could only produce about 15% to 20% of its autumn product line, she said. “We designed a really beautiful fall line, and we simply couldn’t afford it all by any stretch,” she said.

By filing for bankruptcy, American Apparel can shed much of the dead weight that had been dragging it down — including underperforming stores, heavy debts and also a flurry of lawsuits filed by Charney, employees and investors.

Although American Apparel said production would continue in the U.S., some analysts predict the company will shift at least part of its manufacturing overseas. The company, which had employed 8,500 employees worldwide, didn’t address how restructuring will affect workers, who have already endured layoffs and reduced hours this year.

Schneider said there layoffs are not part of the restructuring plan. The company is “100%” committed to manufacturing in the U.S., she said, and has no plans to shift production to a lower-cost country.

“American Apparel is a noun and it’s a verb. You can’t have American Apparel without Apparel made in America,” she said. “It’s what sets us apart and what makes us different. That’s what makes us a really important company and a company that needs to thrive and be saved.”

Schneider said the turnaround plan will essentially the same  as was announced earlier this year, including revamping its fashion offerings, streamlining its offerings and reduce supply chain costs. A small number of stores in underperforming areas will close, she said.

Bankruptcy experts said the extra capital infusion will give American Apparel a much-needed boost. However, the company must rejuvenate its product line and entice customers to shop again, analysts said. Otherwise, sales will continue to slip.

“Sales have been declining for the last several years, and it’s all a result of lack of creativity and fashion,” said Jerry Reisman, a bankruptcy expert who has worked in the fashion industry. “They need to drive sales, or they’ll only fall back into having problems again.”

Unhappy workers have staged numerous protests over the last year, as well as filed lawsuits and complaints with the National Labor Relations Board. In one lawsuit, Charney alleged that his ouster was part of a plot to get him out of the way so that the company could be sold.

Sales continue to slip from the 2013 peak of $633.9 million, despite a turnaround plan announced this year that included reaching out to a broader age range and $30 million in cost cutting.

In the three months that ended June 30, American Apparel suffered a 17% decline in revenue to $134 million, the fourth straight quarterly drop. At the same time, the company was shelling out at least $10 million a quarter in interest expenses.

The stock has dropped so low — hovering about 16 cents a share — that the New York Stock Exchange sent notice to American Apparel last month that the company did not meet its continued listing standards, according to a filing with the Securities and Exchange Commission.

But the company should come out of bankruptcy with the best chance of a turnaround it has had in years, analysts said. A bankruptcy will clear up debts to unsecured creditors, such as vendors who supply the yarn and raw materials to the downtown Los Angeles factory.

“What they are trying to produce through this bankruptcy process is a leaner, meaner machine,” Greif said. “By carving away 85% of the debt weighing the company down, you would think American Apparel should be able to survive and prosper.”

“This is a way for all the ills of the company pre-bankruptcy to be cleared in one fell swoop.” Greif added.

But the company is facing a long battle in bankruptcy court from the likes of Charney and other creditors who will be left with nothing, analysts said. American Apparel predicted the restructuring will take about six months.

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