American Apparel files for Chapter 11 bankruptcy – again

January 2017 | DEALFRONT | BANKRUPTCY & CORPORATE RESTRUCTURING

Financier Worldwide Magazine

Clothing manufacturer American Apparel has filed for Chapter 11 bankruptcy protection in the US for the second time in just over a year, a move which will likely be the end of the company in its current incarnation.

The Los Angeles-based company, which was not only known for making its clothes in the US, rather than outsourcing operations overseas, but also for the controversial and provocative nature of its advertising campaigns, has struggled to survive in an increasingly challenging market. Indeed, the company’s second Chapter 11 filing has come in the wake of escalating losses and an increasingly crowded marketplace. Over the last year, the company’s sales declined by around 33 percent and revenue fell by 18 percent to $497m in 2015. In 2013 the company recorded sales of $633.9m.

Arguably, much of the damage done to American Apparel’s sales was caused by the company’s inability to react to the rapidly evolving retail market. With more shoppers making their purchases online, the lack of a successful internet strategy cost the company dearly. As a result of its latest difficulties, the company listed assets and liabilities in the range of $100m to $500m, according to a filing in a US Bankruptcy Court in Delaware.

The company initially filed for Chapter 11 bankruptcy protection in October 2015 with $300m worth of debt. While the company was able to renegotiate its outstanding debt with its noteholders and emerge from bankruptcy, it remained greatly troubled. The contentious relationship between the company and its controversial founder Dov Charney meant that American Apparel was ultimately unable to raise the $40m in new capital that was needed as part of its restructuring deal.

At the time it raised $57m from existing shareholders and lenders, taking the total value of secured debt to $122m. In light of the company’s latest bankruptcy filing, it seems unlikely that those shareholders will see much, if any, of that funding returned. Given that the company was borrowing more than $2m a week to simply keep the lights on, the writing appears to have been on the wall. The company’s chief executive Paula Schneider, who replaced Mr Charney after he was ousted for allegedly misusing funds, resigned in September.

Though it appears likely that American Apparel stores will disappear following the company’s latest bankruptcy, at its peak the firm had around 200 globally. Yet the brand name will, it seems, live on. In a statement released in mid-November, Canadian clothes manufacturer Gildan Activewear announced that it had agreed a deal to acquire the American Apparel brand and certain assets for around $66m in cash. According to a statement released by Gildan, the deal for American Apparel intellectual property, as well as a significant amount of its inventory, is expected to occur during the first quarter of 2017, though the transactions is subject to approval by the bankruptcy process as well as the usual closing conditions.

Gildan has also agreed to take over some of American Apparel’s wholesale assets and the opportunity to maintain all or a portion of the company’s Los Angeles manufacturing facilities. However, the fate of the company’s remaining 110 stores seems less certain. Gildan will not be acquiring the locations, so they are likely to be liquidated.

The bankruptcy filing will allow American Apparel to hold an auction for the rest of the assets which Gildan has not acquired. While this sale process continues, American Apparel says its day to day operations in the US will continue as normal. In a letter sent to the company’s employees, chairman Bradley Scher wrote: “Everyone will continue to come to work, do their jobs and get paid on each payday. Wages, hours, and benefits will remain the same”.

The company’s UK and European businesses were wound up in early November.

Richard Summerfield