american apparel are bankrupt: what now?
Is there time for a turnaround? We survey American Apparel's chances of survival.
American Apparel have officially filed for bankruptcy, but it's not like we didn't see this coming. Back in July, the clothing company sent out a message to investors detailing their plan to turn their massive losses into profit, in a last ditch effort to prevent exactly what's happening now. They weren't sure if the measures would be enough; "even if American Apparel increases revenue and cuts costs, there can be no guarantee that the company will have sufficient financing commitments to meet funding requirements for the next twelve months without raising additional capital, and there can be no guarantee that it will be able to raise such additional capital." Basically, they thought they were doomed, and they were. From here on out, the future is pretty uncertain. Their bankruptcy claim hasn't been approved yet, so there's a lot that's up in the air. Let's take a closer look at what's gotten them here.
Why doesn't American Apparel have any money?
There's two main reasons. Lots of the company's money is going towards fighting lawsuits filed against them by their own founder: Dov Charney. He was kicked off the ship after evidence that he'd racially vilified, sexually harassed, sexually abused employees reached critical mass. These claims include (but certainly aren't limited to) an interview back in 2004 described Dov masturbating in front of a female reporter, and five separate employees filing sexual harassment lawsuits against Dov in 2011. Now he's gone, it seems like he's determined to hurt the company he founded: American Apparel's money is still tied up fighting "approximately 20 lawsuits and administrative actions" filed by Dov himself. Ah, the circle of life.
Another reason the company is haemorrhaging money is their rapid expansion. They've grown too much, too quickly, and failed to recoup those growing costs. It's similar to what happened to Starbucks in Australia, or Abercrombie and Fitch: a tonne of new stores don't end up making back the cost of their set-up.
Yep. They've racked up a lot of debt, which means they don't actually have the money to make clothes, which is what they're meant to be doing. Current CEO Paula Schneider explained that they manufactured less than a quarter of their planned autumn line, because they just didn't have the cash to make the whole range. So they're pretty stuck: they don't have enough money to make the clothes that should be making them money. Filing for bankruptcy is a pretty fair move at this point.
What's the next move?
To be fair, the company's already tried pretty damn hard to save itself. They put a new captain at the helm last year, retail veteran Paula Schneider. She seems like a cool lady: she's saved other businesses from the brink before. However, those business weren't stuck in court with their founders.
If American Apparel's claim is approved, control of the company is handed over entirely to creditors. As their statement detailed, "American Apparel's debt will be reduced from $300 million to no more than $135 million" and they'll grab "$70 million of new capital." In other words, they might have enough money to start making new clothes and kicking off fresh projects again.
So, how many stores will be closing?
Right now, none. Their current plan allows for all American stores to stay open, and Paula insists that they "will continue to manufacture in America." It'll also cut off all shareholders, which means Dov's last ties to the brand will be severed.
Can they do it?
Maybe. Paula basically nails the company's outlook here: "Not having the nuisance lawsuits, not having this massive debt, these are all extremely important things for the company to thrive." So if Dov chills out and they can somehow work their way out of debt, American Apparel could rise again.
Photography via American Apparel's Press Archive