American Apparel Files for Bankruptcy

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This story originally appeared on Fortune Magazine

After months of warning investors that its sales and cash were dwindling, American Apparel has   filed for bankruptcy protection on Monday, the latest drama befalling a retailer trying to rebound since the ousting last year of its founder and former CEO Dov Charney.

American Apparel in August had reported that sales for its second quarter fell 17.2%, continuing a downward spiral in the last several years that has severely drained its coffers.

The clothing manufacturer, famed for its once semi-pornographic ads and emphasis on making its products in its Los Angeles, has also been feuding with the controversial Charney, spending millions on litigation to fight the executive, whom American Apparel ousted in December.
American Apparel, which said business would continue without interruption during its restructuring, filed for Chapter 11 bankruptcy protection in federal court in Wilmington, Delaware. American Apparel’s plan calls for restructuring its debt, and creditors will provide $70 million in new capital, as well as a $90 million bankruptcy loan to keep it going.
“This restructuring will enable American Apparel to become a stronger, more vibrant company. By improving our financial footing, we will be able to refocus our business efforts on the execution of our turnaround strategy,” said Paula Schneider, American Apparel’s Chief Executive Officer in a statement.
The result of the restructuring will be to reduce American Apparel’s debt load by replacing $200 million of its bonds in exchange for equity interests in the reorganized company. The agreement will reduce its $300 million debt to no more than $135 million, and annual interest expense by $20 million.
Since taking the helm earlier this year, Schneider has been trying to fix American Apparel, announcing a plan in June to get the once iconic retailer’s sales up to $1 billion at some point, toning down the company’s notoriously raunchy ad campaigns, and streamline its retail footprint to focus on fewer markets but go deeper, rather than have a few stores in countless markets.
American Apparel ousted Charney last year after a series of allegations of improper behavior, accusations he has in the past denied. He has since filed several lawsuits against American Apparel, alleging defamation in one.

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