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Sunday, June 16, 2024 | Back issues
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American Apparel Files for Bankruptcy

(CN) - American Apparel, known as much for its provocative advertising as its made-in-America hipster fashions, filed for Chapter 11 bankruptcy protection Monday, capping one of the most staggering commercial swoons in recent memory.

The filing in federal bankruptcy court in Delaware capped years of legal warfare between former company CEO Dov Charney and employees, who accused him of everything from gross sexual misconduct to general ickiness; Charney and his one-time board of directors, whom he accused of defamation and of ousting him after a bogus investigation into false claims; the board and Charney, which accused him of workplace and financial malfeasance and of generally "going too far"; and finally, between the company and shareholders, who said the whole mess dramatically reduced the value of their shares.

The bankruptcy proceedings will temporarily delay the pending lawsuits, giving its American Apparel's board and management time to get its financial house in order.

It also comes after a dramatic decline in the retailer's favor with consumers. Industry analysts said as of the second quarter of 2015, American Apparel's sales had declined 17 percent compared to the same period last year.

All told, the company's losses over the last five years now stand at over $340 million, including $45 million in losses this year.

If there is a silver lining to all this, it's that American Apparel's secured lenders have agreed to reduce the retailer's debt by swapping nearly $200 million in debt the company owes them into shares in the reorganized business.

Under the restructuring support agreement, American Apparel's secured lenders will provide approximately $90 million in debtor-in-possession financing. These supporting creditors have committed $70 million of new capital to support the reorganization and recapitalization of the business.

As a result of the reorganization, American Apparel's debt will be reduced from $300 million to no more than $135 million, and annual interest expense will decrease by $20 million, the company told its investors Monday morning.

It will also allow American Apparel to keep its 130 stores and manufacturing operations open as it reorganizes, a process the company says will take about six months.

Those who will are expected to take huge hit as a result of Monday's action are the company's existing shareholders, including Charney, whose shares were said to have been worth more than $8 million when the weekend began.

Only last week the New York Stock Exchange warned American Apparel was at risk of being delisted because the company was so fiscally impaired that its continued viability was very much in question. The warning came five years after shareholders' originally sued Charney and company over fears that just such a delisting could occur.

In a written statement, Paula Schneider, the company's chief executive officer, 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 ecommerce business, and create captivating new marketing campaigns that will help drive our business forward."

Schneider went on to say the company plans to continue implementing its strategic plan, which is focused on improving product selection, cost management, improving supply chain efficiencies, SKU rationalization, maximizing retail, ecommerce and wholesale opportunities, while continuing to create award winning marketing campaigns that are positive, inclusive and socially conscious."

American Apparel is represented by Laura Davis Jones of Pachulski, Stang, Ziehl & Jones LLP in Wilmington. Del.

Representatives of Charney could not be reached for comment Monday morning.

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