Los Angeles—It appeared inevitable: after failing to make a profit or turnaround sales and operations since 2009, American Apparel Inc. filed today for Chapter 11 bankruptcy protection and revealed a reorganization plan that would keep its retail and made-in-USA manufacturing facilities open.
Under the agreement reached with its most secured lenders, American Apparel said it expects to cut its debt to $135 million from $300 million through the elimination of more than $200 million of bonds in exchange for equity. The company expects to complete the restructuring within approximately six months.
Restructure to Take 6 Months
CEO Paula Schneider said, “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 as we look to create new and relevant products, launch new design and merchandising initiatives, invest in new stores, grow our e-commerce business, and create captivating new marketing campaigns that will help drive our business forward.”
American Apparel’s secured lenders will provide about $90 million in debtor-in-possession financing, and have committed $70 million of new capital, the company said. The restructuring is expected to be completed in about six months.
In the meantime, American Apparel plans to continue implementing its strategic plan, “which is focused on improving product selection, cost management, improving supply chain efficiencies, SKU rationalization, maximizing retail, e-commerce and wholesale opportunities, while continuing to create award-winning marketing campaigns that are positive, inclusive and socially conscious.”
Unfortunately for its founder and ousted CEO Dov Charney who was fired last December for alleged misconduct, he along with other shareholders will likely see their stake wiped out, said Neil Saunders, chief executive of research firm Conlumino.
With all a turnaround means, American Apparel has a tough road ahead, noted Brian Sozzi, analyst and special features correspondent for The Street. “For a provocative fashion retailer that shot to fame in the early 2000s by constantly being ahead of the curve on style trends, the inability to get new products to market to entice free-spending hipsters this year is a huge problem that will linger into 2016, and ultimately lead to its demise,” he said.
“Unfortunately, the temporary access to financing a mere weeks before the holiday rush is unlikely to send the still financially weak American Apparel off on a stretch of new product innovation in 2016. As a result, American Apparel is poised to continue to starve its business of the product differentiation it once pioneered, and which is required to sell merchandise at the premium prices needed to offset expensive costs to manufacture in the U.S.,” Sozzi added.
American Apparel said it August it have not have the capital to survive another 12 months. Its shares closed Friday at 11.2 cents, giving the company a market value of $20.5 million.