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 prearranged Chapter 11 restructuring, more than US$200 million of bonds will be exchanged for equity interests in the reorganized company and the clothing retailer will have access to financing after its restructuring, American Apparel yesterday said in a statement via PR Newswire.
Business is going to continue throughout the reorganization, which was supported by 95 percent of secured lenders and might last about six months, it said.
Though the clothing maker has been in disarray since Charney was suspended and then fired as chief executive officer in December last year 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 US$161 million 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 US$135 million from US$300 million, it said.
That will help lower annual interest expenses by US$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, she said.
American Apparel will pay all of its suppliers in full on or after the filing date of yesterday and its international operations are not 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.
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 last year, 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 consulting firm based in Connecticut.
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