American Apparel Glamour Fades as Cash Crunch May Spur Bankruptcy

A worker organizes clothing at an American Apparel retail store in New York. Photographer: Keith Bedford/Bloomberg

American Apparel Inc. (APP), the Los Angeles clothier once heralded as a U.S. manufacturing success story, said it may seek bankruptcy protection after slumping sales and productivity ate into its cash.

“We are currently experiencing significant liquidity constraints,” the company said yesterday. Chairman and Chief Executive Officer Dov Charney had almost doubled sales in the three years through 2009 before immigration-related staff firings, coupled with store overexpansion, sapped revenue.

Charney, 42, founded the retailer in college, building a U.S. empire known for colorful t-shirts and ads featuring scantily clad women. The chain, which has lost money for four straight quarters, has amended its loan agreements at least five times to avoid breaching debt covenants.

“There was a lot of glimmer and glamour associated with them,” said Craig Johnson, president of Customer Growth Partners in New Canaan, Connecticut. “It was a story built on image and now the more sunlight that gets shed on it, the sorrier the image has become.”

American Apparel declined 6 cents, or 6.6 percent, to 90 cents at 4:01 p.m. New York time in NYSE Amex trading. The shares have dropped 46 percent this year. The stock traded at an all-time high of $15.80 in December 2007.

Return to Profitability

The company doesn’t need more capital and doesn’t expect a bankruptcy, Charney said in a telephone interview. The chain is primed to become profitable again now that it’s hired and trained workers to replace those fired, and to return within two years to its 2007-2009 levels of earnings before interest, taxes, depreciation and amortization of about $50 million, he said.

The new staff, coupled with selling brand clothes at other retailers and opening as many as 70 stores, may help the company reach his goal of $1 billion in annual sales, Charney said. Revenue fell 4.6 percent to $533 million last year, according to a regulatory filing yesterday.

American Apparel was legally required to refer to possible bankruptcy in its disclosures, Charney said. “They disclose risk, but at the same time I believe in this opportunity, and I’m getting ready to have a great season,” he said.

The company also said yesterday that two of its board members, Lyndon Lea and Neil Richardson, both from lender Lion Capital LLP, resigned to evaluate the private-equity firm’s investment. Lion, based in London, lent the chain $80 million in March 2009 to pay off a credit facility. Lion also has 16.8 million warrants of American Apparel stock.

American Apparel said last year that it may not have enough money to keep operations going, creating “substantial doubt” about its future.

U.S. Manufacturing

American Apparel gained attention for manufacturing its clothes in Los Angeles, instead of cheaper labor markets, and for offering workers pay above the minimum wage. That prompted headlines such as “American Apparel: A Made-In-U.S.A. Success” from CBS News in 2006.

The chain almost doubled in size to more than 280 stores from 2007 through 2009. That growth may have been part of its decline as Charney, the retailer’s majority shareholder, said last year that expansion led to sales cannibalization in some markets. Productivity also slumped in 2009 after the chain fired 1,500 workers for immigration violations.

The company has closed 13 underperforming stores this year, according to a statement today.

Sales at stores open more than a year, a key metric of a retailer’s health, may decline in the high-single-digit percentages in the first quarter, a ninth-straight drop. For this year, American Apparel expects so-called same-store sales to increase.

2011 Goals

“Our principal goal in 2011 is to stabilize the business and create a platform for renewed growth and increasing sales,” Thomas Casey, American Apparel’s acting president, said in the statement. “2010 was an extremely challenging but productive year.”

The company has identified “material weaknesses” in control of its financial reporting as of Dec. 31, 2010, according to yesterday’s filing. Former auditor Deloitte & Touche LLP resigned last year, after telling the company it couldn’t determine whether its financial statements were reliable.

Charney has used his own money to boost the balance sheet. He purchased 1.8 million shares for $2 million in a private sale, according to a public filing March 24. The company needed money help pay for the cost of rising yarn prices, Charney said today. American Apparel had $138.4 million in outstanding debt and cash of $7.7 million as of Dec. 31.

Sexual Lawsuits

American Apparel and Charney are also facing two sexual harassment lawsuits filed by former female employees in March. Charney declined to comment on the litigation. Peter Schey, a lawyer for American Apparel, said the claims aren’t true, in a telephone interview on March 29.

“With all these ethical and legal issues, it’s too much of a distraction,” Johnson said. “Even if he had zero problems, there’s a huge problem to fix in the business. When you have that and all these other problems, it makes it more difficult.”

American Apparel has shaken up management to improve results. Casey, former chief financial officer at Blockbuster Inc. (BLOAQ), joined in October, tasked with devising a turnaround plan. John Luttrell, former CFO at Gap Inc. (GPS)’s Old Navy, came on as CFO in February. Martin Staff became chief of business development in March after stints at Hugo Boss and Calvin Klein.

To contact the reporter on this story: Matthew Townsend in New York at mtownsend9@bloomberg.net.

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net