American Apparel Looking Like a Bankruptcy Candidate (Again)

Jacob Harper |

The vertically-integrated clothing retailer American Apparel (APP) extols business integrity, paying their employees above-market wages while basing the entirety of their manufacturing operations on US soil. However, that integrity is not translating into profits anymore. The hip retailer has operated at substantial loss for four years straight now, and unless they can patch up their problems immediately, the clothier’s entire operations could end up right in the scrap heap.  

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American Apparel is simultaneously facing delistment from the New York Stock Exchange, a major cash shortfall, and $206 million in debt to various creditors, with due payments due the coming spring. This isn't the first time they've faced major financial trouble. In 2011 the company announced they were facing impending bankruptcy, and might not have the cash to continue operations. Despite that scare, they were able to stave off their cash shortfall, and significantly reduce losses while increasing sales.

2012 indeed looked to be the start of a turnaround, with losses narrowing to just $37 million on the year. Following that brief victory however, 2013 ended up being their worst on record, with losses ballooning to $107 million.

In response, American Apparel has been forced to dilute stock to raise capital, and on March 27 revealed plans to unload $30.5 million worth of shares. This dilution prompted a sell-off, dropping shares of the company precipitously. American Apparel has languished below a dollar a share since February, in violation of the NYSE’s rules, and unless they can come up with a satisfactory restructuring plan, delistment proceedings will begin on April 15 and could forced American Apparel to trade on the pink sheets.

From Chic to Shambles

Five years ago, American Apparel looked to be a real case study in how to succeed in retail by breaking the rules. In defiance of globalization, the company based the entirety of their operations in the Los Angeles area, and was lauded by industry watchdogs for their fair treatment of employees and commitment to ecologically sound manufacturing. All this was spearheaded by founder and CEO Dov Charney, a brash, uncompromising figure who spent a great deal of time in the spotlight for both his spare, iconoclastic design ethos and his proclivity for attracting sexual harassment allegations.

But the profits and explosive growth of 2009 have given way to mounting debt and shuttering of expensive storefronts. While American Apparel was a former favorite of young, hip coastal consumers, the popularity of the company’s clothing brand has waned considerably in recent years. Same-store sales dropped five percent in 2013, hardly a good sign for an already-struggling company.

Last Shot

A turnaround plan in 2012 failed to do much besides briefly mitigate the cash bleed. American Apparel is scrambling to save themselves, and in February hired restructuring experts Skadden, Arps, Slate, Meagher & Flom LLP to mull their restructuring options.

A turnaround couldn’t come soon enough for investors. Stockholders in American Apparel have been hammered. Shares for the company are down 75 percent from their price a year prior, and more than 33 percent this week alone.

If they are not able to attract enough investment capital by April 15 and are subsequently delisted from the NYSE, it is not inconceivable for American Apparel to be forced to declare bankruptcy before the end of 2014.

American Apparel is currently trading at 49 cents a share.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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