American Apparel Returns to Bankruptcy Yet Again

Fate of its 110 stores and factories to be decided by the end of 2016

a1Beleaguered clothing retailer American Apparel Inc. has filed for Chapter 11 bankruptcy yet again on November 14th, 2016, less than a year after ending its first stint under court protection. The retailer has also struck a deal with Gildan Activewear Inc., a Canadian maker of T-shirts and underwear, to sell the brand for about $66 million, as reported by Bloomberg on November 14th, 2016. Under the deal, Gildan has agreed to acquire American Apparel’s intellectual property assets and inventory by Q1 FY17, including the chance to maintain some or all of the company’s Los Angeles production and distribution operations, according to a court filing. However, Gildan is not buying any of American Apparel’s retail stores, although the court may require American Apparel to hold an auction for these. In that case, the purchase is conditional on Gildan winning the auction, and if it does not, it will receive a break-up fee.

American Apparel’s stores will remain open while the company scouts for a suitable buyer for those operations. While the clothing retailer has secured a $30-million bankruptcy lifeline to keep operations going until a sale can be closed, the cash would run out by the end of the year, putting the retailer at a serious risk of liquidation if sales do not pick up during the peak holiday season. In the meantime, American Apparel has already initiated liquidation proceedings for all of its foreign operations that comprise 83 stores, and has begun winding up operations in the U.K., Ireland, Germany, Spain, Canada, Japan, and Australia.

Adding to its woes, if the bankruptcy court refuses to sign off on the retailer’s financial lifeline, American Apparel will run out of cash by next week, paving the way for a full-blown liquidation. Encina Business Credit LLC, an asset-based retail lending firm, is lending a six-month loan that could likely run operations until May 2017.

a2Failed turnaround strategy

Founded in 1989, American Apparel still remains the only American clothing manufacturer, distributor, and retailer with tag of “Made in USA”, compared to its peers who outsource it from Third World nations. The company has only its seven-storied 800,000-sqft factory in downtown Los Angeles, California, which makes its products dearer and uncompetitive.

American Apparel’s founder and CEO, Dov Charney, was fired in June 2014 over allegations of misconduct. He fought unsuccessfully to regain control of the business he started as a college student. Standard General LP (SG), a New York-based private investment firm, acquired a controlling 43% stake in the company in July 2014. SG worked to revive the struggling retailer to battle against bankruptcy and even nominated a new set of independent directors to the American Apparel board after Dov Charney and six other board members were charged with breach of fiduciary trust towards the company and shareholders. However, American Apparel’s results only got worse, and it filed for bankruptcy in October 2015.

The retailer gained a fresh lease of life and shed $200 million in debt and emerged from that bankruptcy when former bondholders, led by Monarch Alternative Capital, took over. Chief Executive Officer Paula Schneider, who took charge after Charney was forced out, charted a new strategic direction for the company, including a plan to overhaul its controversial advertising and improve its products. However, the turnaround strategy flopped as the company reported a 33% Y-o-Y decline in sales as of September 30th, 2016, following which Paula Schneider resigned in September 2016. After many speculations of a possible sale, American Apparel’s return to bankruptcy surfaced in October 2016.

It appears that American Apparel has not been able to hold its own in the fiercely competitive teen fashion space dominated by fast-fashion brands like H&M and Forever 21. a3These retailers have gained major market share in recent years, leaving American Apparel floundering over its staid clothing line of basic items like T-shirts and skirts.

Since its first bankruptcy, the company failed to optimize merchandising, bolster online sales, improve quality expeditiously and form a cohesive marketing plan. American Apparel has dwindled to just 110 stores in 28 states and the District of Columbia, from the time of its first bankruptcy filing when it had about 8,500 employees at six factories and 230 stores worldwide. The company had about $215 million in debts. It had $497 million in net sales in 2015.

American Apparel fails to make online shift

American Apparel is the latest among clothing retailers failing to make the transition from bricks-and-mortar to online sales to cater to changing customer preferences. In recent years, other retailers that have succumbed to the same industry pressures include Golfsmith International Holdings, Inc., Sports Authority Holdings Inc., Aéropostale Inc., Pacific Sunwear of California Inc. and Nasty Gal Inc. At a time when an increasing number of shoppers are going online, American Apparel watched its online sales plunge. However, some retailers have been able to successfully make the shift to online sales; these include women’s clothing retailer Coldwater Creek, gadget seller Sharper Image, and lingerie retailer Frederick’s of Hollywood.

Physical stores lose relevance among shoppers

As malls lose foot traffic and more Americans shop online, many U.S. retailers have struggled, with clothing companies hit particularly hard. This in turn is a reflection of the broader industry scenario in which departmental stores in general have been struggling with stiff competition from online and off-price retailers. They are also grappling with pressure as shoppers are spending more on big-ticket items such as electronics and cars than on apparel. In the first few months of 2016, apparel retailers also had to bear the brunt of unfavorable weather and a strengthening dollar, which in turn reduced tourist spending.

The change in shopping habits of consumers from physical stores to online stores has contributed to the fall in traffic. Macy’s and other major apparel retailers such as Kohl’s Corp. (NYSE: KSS) and Nordstrom Inc. (NYSE: JWN) are under intense pressure because of falling foot traffic at shopping malls and heightened competition from internet players such as Amazon.com Inc. (NASDAQ: AMZN). Another trend is that shoppers who prefer physical stores are gravitating toward more specialty retailers or malls that offer experiences such as outdoor entertainment and dining. It hence comes as no surprise that as department stores and shopping centers have cut back on customer service, consumers are now opting for the convenience of e-commerce. Many apparel retailers have recognized the need to change their department store model, and resort to digital and omni-channel retailing to beat dismal sales. Standardized inventory has also reduced the appeal of departmental stores.

With American Apparel having secured a bankruptcy loan, it remains to be seen if the retailer can use the lifeline to turn around its operations or lose the battle to liquidation.

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