American Apparel Is Weighing Its Options

American Apparel, which warned on Aug. 16 that there was “substantial doubt that the company will be able to continue as a going concern,” is working to increase factory efficiency, cut costs, improve training for its retail personnel, beef up Internet sales and pump up its profitable wholesale-sales division.

Much speculation has been floating around the industry regarding the Los Angeles company’s financial future and whether it will be able to meet terms of a Lion Capital Inc. loan by Sept. 30.

But American Apparel founder Dov Charney said he is not worried about the future of the company. And company executives flatly denied that American Apparel currently intends to file for Chapter 11 bankruptcy.

Spokesperson Peter Schey talked in positive tones, saying the company was not planning to fire any of its workers or outsource production to overseas factories. “The company is not fighting for its life and does not plan to file bankruptcy,” said Schey, an attorney who in the past has worked with American Apparel on its workers’ immigration status. Last year, the apparel company laid off 1,500 workers because their work papers were not in order. Schey said it has been challenging to find skilled workers to fill those positions, but in the second quarter, American Apparel hired 1,600 employees, who are now being trained to work at the same speed as the dismissed workers.

Despite the upbeat tone, American Apparel is expected to be late in filing its second-quarter earning results. In an Aug. 17 statement, American Apparel said it anticipated seeing a second-quarter loss of $5 million to $7 million, compared with a $7.3 million profit during the same period last year. That has many analysts and financial experts concerned that the company won’t be able to meet the covenants required by Lion Capital Inc.

Financial experts, however, note there are a number of ways the Los Angeles apparel maker can keep going.

“When you are in that position, you need to look for ways to cut back, either with store labor, investment in stores or pulling back on inventory,” said Sharif Mityas, a partner with A.T. Kearney’s retail-consulting practice in Chicago. “You can have discussions with the lending community to give you a certain amount of extra time to build back your account.”

American Apparel could find a white knight to make a large investment in exchange for a percentage of the company, whose second-quarter revenues are expected to be $132 million to $134 million. “I have seen companies on the brink of bankruptcy and a white-knight investor comes in and they end up owning a good chunk of the company. They then become a force for change,” said Jeffrey Van Sinderen, a Los Angeles retail analyst with B. Riley & Co.

Charney, according to proxy documents filed on Sept. 11 with the Securities and Exchange Commission, owned 53.7 percent of the company’s common stock.

According to Van Sinderen, one issue that must be addressed is the nearly 280 American Apparel stores around the world. Many of those leases were negotiated when rents were high. Renegotiating leases takes time, and breaking leases is even harder. That is when it makes more sense to file for Chapter 11 bankruptcy, which nullifies most retail leases.—Deborah Belgum