Photographer: Keith Bedford/Bloomberg

American Apparel Seeks Bankruptcy Protection a Second Time

  • They ‘crashed it into the wall,’ ousted founder Charney says
  • Canadian T-shirt maker Gildan agrees to buy brand, not stores

American Apparel Inc., the clothing brand built on racy advertising and made-in-the-U.S.A. marketing, is back in bankruptcy after nine months and may emerge as a Canadian concern.

The Los-Angeles based company filed for Chapter 11 protection Monday, with plans to sell itself at auction with a lead bid of $66 million from Canadian T-shirt and underwear maker Gildan Activewear Inc. Montreal-based Gildan said in a statement that it wants to buy the brand and inventory supply, but not any stores.

American Apparel ran into trouble almost immediately after shedding $200 million in debt and emerging from bankruptcy in February. The company initially failed to raise enough money to implement its turnaround plan, forcing it to borrow from the former bondholders who took ownership during the first reorganization. Chief Executive Officer Paula Schneider, who took charge after controversial founder Dov Charney was forced out, resigned in September.

“American Apparel has struggled in recent years with chronic performance problems,” Chief Restructuring Officer Mark Weinsten said in a filing in Delaware bankruptcy court, citing a decline in sales since February.

Gildan has plans to integrate the American Apparel brand with its own business and evaluate wholesale opportunities. Under the proposed auction rules, the Canadian company has the option of bidding on manufacturing operations in Los Angeles. American Apparel will try to sell all its assets, including its 110 U.S. stores, warehouses and factories.

‘Best’ Move

“We are confident that this decision is the best strategic move forward, in order to preserve the legacy of the American Apparel brand,” American Apparel Chairman Bradley Scher said in a letter to employees, a copy of which was obtained by Bloomberg News.

Charney had repeatedly said the company would collapse without him and fought to reclaim the business he started as a college student. His efforts included borrowing about $20 million from hedge fund Standard General LP to buy more stock and finding financial backers. His stake in the company was wiped out with the first bankruptcy and Standard General is suing him to recoup what it lent him.

“I’ve been saying that this company can’t survive without my leadership,” Charney said on Monday. “They took a company that could have lasted a century and crashed it into the wall.”

An American Apparel spokeswoman declined to comment on his remarks.

More Charney: "At what point do they say we made a colossal mistake?"

Sales Drop

After emerging from bankruptcy in February, sales fell 33 percent compared with the same period a year ago, American Apparel said in court filings. Revenue dropped 18 percent to $497 million in 2015. At its height under Charney, sales reached $633.9 million in 2013.

American Apparel is seeking a $10 million operating loan to help it survive until the sale, according to court papers. Without the money, it would probably run out of cash in two weeks and be forced to liquidate in a Chapter 7 bankruptcy, American Apparel said.

Once one of the largest U.S. clothing makers, the company faced a more difficult retail environment than expected after exiting its prior bankruptcy, Weinsten said.

As malls lose foot traffic and more Americans shop online, many U.S. retailers have struggled, with clothing companies hit particularly hard. Aeropostale Inc., Quiksilver Inc. and Pacific Sunwear of California Inc. have all filed for bankruptcy in recent years.

In its heyday, American Apparel ran 280 stores and five factories. It financed growth on borrowings and bank debt, leaving it vulnerable to a downturn in business.

No Improvement

After filing for bankruptcy in October 2015, it shed $200 million in debt and emerged early last year with former bondholders, led by Monarch Alternative Capital, taking over. A plan to return to its roots and focus on basic items like T-shirts and skirts wasn’t enough to improve results. 

Weinsten said in court papers that a $40 million infusion called for under the previous bankruptcy plan was never completed and the company was forced to turn to its prior lenders and shareholders to cover the shortfall. They have funded the company with $122 million in secured debt, much of which they are unlikely to recover, Weinsten said.

Gildan has asked to maintain some of the company’s manufacturing, distribution and warehouse operations in and around Los Angeles, according to the employee letter. Gildan recently bought Alstyle Apparel, also based in Southern California, where it continues to employ people in administrative offices and distribution centers, Scher said in the letter.

No Stores

Gildan is still evaluating what it would do with American Apparel’s assets if its bid prevails, according to spokesman Garry Bell. It will continue selling basics such as plain T-shirts to screen printers and promotion companies. If American Apparel does live on at Gildan as a consumer-facing brand, it would be sold through several retailers -- potentially globally -- and not at its own stores. That’s why Gildan’s offer doesn’t include any American Apparel locations. 

Bell declined to confirm that American Apparel’s products would continue to be made in the U.S. or at its current facilities in Los Angeles. He did say, however, that a crucial aspect of the brand’s value is its made-in-America heritage.

“It’s our intent to maintain that focus,” Bell said. “Until we’ve evaluated the facilities and the organization, it’s tough for us to commit to a supply chain.”

The case is In re American Apparel LLC, 16-12551, U.S. Bankruptcy Court District of Delaware (Delaware).

— With assistance by Lauren Coleman-Lochner, and Matthew Townsend

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