American Apparel Files 2nd Bankruptcy, Seeking Acquisition

American Apparel LLC has filed for bankruptcy protection for the second time in just over a year. The Los Angeles–based manufacturer is discussing plans to attract buyers.

The long troubled basics and fashion giant filed for Chapter 11 on Nov. 14 in United States Bankruptcy Court in Delaware.

Gildan Activewear Inc. the Canadian manufacturer of fashion basics such as T-shirts, fleece and socks, announced the same day that it had started work on an asset purchase agreement for the intellectual property rights for the American Apparel name, and certain assets of the company for a cash purchase price of $66 million. American Apparel, which still runs a fleet of 110 stores, currently owes $215 million.

In the statement from Gildan, the company said it has no interest in acquiring American Apparel’s fleet of retail stores or its assets. Gildan’s offer for American Apparel must be first approved by the bankruptcy court before going forward. The transaction might be completed in the first quarter of 2017, according to a Gildan statement.

Gildan has expressed an interest in keeping manufacturing operations in Los Angeles, according to an American Apparel representative. The beleaguered retailer also is entertaining bids for its retail business.

Last May, Gildan purchased Anaheim, Calif.—based T-shirt maker Alstyle Apparel LLC in a $110 million all-cash offer subject to a working capital adjustment.

Filing two bankruptcies in a 12-month period is unusual, said Mark Brutzkus, a partner with Woodland Hills, Calif., law firm Brutzkus Gubner Rozansky Seror Weber LLP. However, American Apparel had little room to maneuver.

“American Apparel went into first bankruptcy with hope of restructuring and keeping the business model, i.e. retail, intact. [Former chief executive officer] Paula Schneider and new designers/merchandisers were brought in to revamp/freshen up the brand,” Brutzkus said. “Obviously, they could not right a sinking ship and when the company could not be sold intact, it was obviously decided to sell off certain assets and close down the retail portion through a bankruptcy liquidation.”

American Apparel filed for Chapter 11 bankruptcy protection in late 2015, emerging four months later in February in a deal that took the public company private, while converting approximately $230 million of bonds into equity into American Apparel and provided for the infusion of $40 million of exit capital and a commitment for a $40-million, asset-backed loan.

Mark Weinsten, American Apparel’s chief restructuring officer, said that a second bankruptcy was necessary, because the retail market was much worse than anticipated when the first Chapter 11 bankruptcy was negotiated. The company experienced a 32.73 percent year-over-year decline in sales since emergence from the first bankruptcy, he wrote in a declaration for the filing.

In the declaration, Weinstein described reasons why a once-celebrated company would experience such trouble. In 2015, before American Apparel’s first bankruptcy, the company generated more than $497 million in net sales. But American Apparel financed its growth and much of its general operations from a combination from borrowing, lease financing and proceeds from issuance of common stock. The company was burdened with a high level of indebtedness, and had to devote a substantial portion of its cash flow to pay interest and principal on debt. By the end of 2015, American Apparel was $300 million in debt and the indebtedness came at a cost of nearly $40 million annually, Weinsten said.

The company also suffered from chronic problems. Before the first bankruptcy filing, American Apparel was unable to track and plan what items to produce. Measures designed to resolving product acquisition and merchandising came too late.

American Apparel’s e-commerce did not perform well at a time when foot traffic at physical stores was declining. The company’s e-commerce comprises more than 10 percent of sales, when the industry average is 20 percent, Weinsten said.

The company had not adequately dealt with long-term problems in quality control. Garments were manufactured and often not inspected. It resulted in high customer returns. The problems were fixed after a thorough audit, Weinsten wrote, but it slowed down deliveries and contributed to declining sales.

American Apparel drew attention with a risqué marketing and advertising plan. Once it dropped the spicy ads in 2014, there was no focused campaign to replace it, and the brand fell off of shoppers’ radar screens.

When the company went private, Schneider, the former CEO, called it “the start of a new day at American Apparel.” Schneider, who signed on to the company in early 2015 after the company’s founder Dov Charney was fired as the chairman, chief executive and president, stepped down from American Apparel in early October. She has since taken the top post at DG Premium Brands, whose recently acquired Los Angeles labels include 7 For All Mankind, Ella Moss and Splendid. Since Schneider’s exit from American Apparel, Bradley Scher, a venture capitalist, has served as the chairman of the board for the company.