Coverage: American Apparel files for Chapter 11

In a not too surprising turn of events, American Apparel filed for Chapter 11 bankruptcy protection early Monday morning. The past few years have been difficult for the “Made in the USA” company, with debts piling up, sales dropping and a never-ending lawsuit with its founder Dov Charney all bringing the retailer down.

Hiroko Tabuchi of The New York Times had the early-morning Monday news:

American Apparel, the one-time arbiter of edgy made-in-America cool, filed for bankruptcy protection early Monday, its business crippled by huge debts, a precipitous fall in sales, employee strife and a drawn-out legal battle with the retailer’s ousted founder, Dov Charney.

The Chapter 11 petition, approved by the board, was filed in federal bankruptcy court in Delaware. The filing followed a deal struck with most of American Apparel’s secured lenders to reduce the retailer’s debt through a process known as a debt-for-equity conversion, where bondholders swap their debt for shares in the company.

The deal, which also includes extra financing from the participating bondholders, would enable American Apparel to keep its manufacturing operations in Los Angeles and its 130 stores in the United States open, the company said.

No layoffs were announced in the filing, which still requires approval by the bankruptcy court. The retailer’s overseas operations are unaffected by the restructuring, which American Apparel expects to complete within six months.

Supriya Kurane of Reuters broke down the retailer’s filing to the numbers:

The retailer expects to cut its debt to $135 million from $300 million, as the deal will eliminate more than $200 million of bonds in exchange for equity in the reorganized company.

Under the agreement, American Apparel’s secured lenders will provide about $90 million in debtor-in-possession financing, and have committed $70 million of new capital, it said.

The company expects to complete the restructuring within six months.

“By improving our financial footing, we will be able to refocus our business efforts on the execution of our turnaround strategy,” Chief Executive Paula Schneider said in a statement.

Teen apparel retailers are struggling as customers switch to fast-fashion brands such as H&M, Forever 21 and Inditex’s Zara and online retailers such as Amazon.com Inc that offer deep discounts.

Companies such as Wet Seal, Cache Inc, Deb Shops, Delia*s and Body Central Corp have filed for bankruptcy in the last year.

Wall Street Journal reporters Suzanne Kapner and Matt Jarzemsky explained how the Los Angeles-based company got to where it is:

Paula Schneider, the new chief executive officer, has been trying to overhaul the company by streamlining product offerings and cutting costs. But those efforts have so far failed to stem a string of losses. In the quarter that ended June 30, American Apparel lost $19.4 million as sales fell 17% to $134.4 million.

Problems at the company started well before Mr. Charney’s ouster. American Apparel hit a setback in 2009, when it was forced to lay off more than half its Los Angeles factory staff after a probe by immigration authorities found those workers weren’t authorized to be in the U.S. The company had to replace them and train the new workers, which caused costs to soar and delayed shipments to stores. A year later cotton prices spiked, causing expenses to jump further.

American Apparel wound up borrowing money at high interest rates. Mr. Charney’s exhibitionism—he spoke openly about sex, staged racy photo shoots in the basement of his mansion and sometimes walked his factory floor in his underpants—scared off some lenders altogether, other people familiar with the matter said.

Sapna Maheshwari of BuzzFeed provided background on the company’s rocky relationship with its founder Dov Charney:

American Apparel’s brand recognition has far exceeded its sales numbers over the past decade with its “Made in the USA” ethos, provocative advertising, and colorful, scandal-ridden founder Dov Charney.

The brand faced serious difficulties under Charney, who was its CEO until last year. When BuzzFeed News profiled him in February 2014, American Apparel’s stock was trading below $1 and the company hadn’t posted a profit since 2009. (Charney’s response: “You really couldn’t judge Steve Jobs the day he was thrown out of the office, you know?”)

Beyond that, Charney’s behavior made headlines, including accusations of lewd conduct from former employees and antics like calling his CFO a “loser” to the Wall Street Journal. The CFO resigned after that.

Still, his leadership went unquestioned by the company’s board and investors until last year.

In June 2014, Charney was served with a surprise termination letter alleging he misused corporate assets, violated sexual harassment policies and more.

Shortly thereafter, Charney formed a risky partnership with Standard General, a hedge fund, that increased his stake in the business but ceded his ownership control to the firm. He believed the hedge fund, best known for its investment in RadioShack, would reinstall him, working as a consultant of sorts for American Apparel during a third-party investigation. Instead, he was fired entirely in December.

This year, all hell broke loose.