American Apparel’s Bankruptcy Filing Is No Surprise To Financial Experts

Once revered for its trendy, made-in-American clothing, American Apparel has filed for chapter 11 bankruptcy protection. The company has been plagued with huge debts, sinking sales, employee problems, and ongoing legal battles involving former chairman of the board Dov Charney.

As reported by the Guardian, American Apparel made a restructuring deal with most of its creditors to reduce debts. Lenders will forgive about $200 million of bonds in exchange for equity in the company. This practice is commonly known as a debt-for-equity conversion.

The conversion reduces American Apparel’s annual interest payments by $24 million and overall debt to $120 million. Select bondholders will inject $70 million into the company to help prop it up during the reorganization.

The deal also required American Apparel to file for bankruptcy. In a recent press release, the company announced the chapter 11 petition.

“American Apparel has filed with the Bankruptcy Court and expects to obtain approval for various customary motions for immediate relief to allow the Company to make certain necessary payments to employees and suppliers that will permit it to continue operating without interruption during the initial phase of the restructuring.”

The deal with creditors will keep American Apparel’s Los Angeles manufacturing operation and 130 U.S. stores open. And, as of yet, there has been no announcement of company layoffs. The company’s retail stores outside America will not be affected during the six months restructuring process.

Now known for its notorious sexually explicit advertising, American Apparel started in 1989 as a T-shirt label. From this humble beginning, the company grew to become one of the world’s most admired fashion brands with 260 stores in 19 countries.

Dov Charney American Aparel
American Apparel's Dov Charney has been been the subject of numerous sexual allegations and lawsuits.

After which, the scandalous clothing chain has since been inundated with problems, mostly due to an increasing number of allegations against company founder Dov Charney. According to one accusation, he made a young American Apparel sales clerk his sex slave, while another accuses him of masturbating multiple times in the presence of a female journalist.

Additionally, several sexual harassment lawsuits were filed against him, when Charney showed up to a company meeting wearing only one sock, which, by the way, was somewhere other than his foot. Employees have also complained they have received explicit texts from the 46-year-old founder.

Despite Charney’s sexual misgivings, he contributed a large part to the success of American Apparel. He never wavered from the “Made in America” policy while other companies chose to make products overseas where labor was cheaper. He made sure the company’s mostly immigrant workforce had health insurance and free international telephone calls, while at the same time, paid them twice the minimum wage. He also openly supported causes dedicated to immigration reform and marriage equality, something his competitors ignored.

However, in June 2014, tired of his sexual misconducts, American Apparel’s board fired Charney as chairman and later removed him from the chief executive position. The board solidified its position, saying it was getting too costly to defend the company against lawsuits involving Charney. Also, they were having difficulties finding financial backers due to the ceaseless scandals.

According to the New York Times, the American Apparel bankruptcy will cause a substantial loss for Charney. The filing today wipes out all current shareholders, including the founder’s $8.2 million stake in the company as creditors gain full control.

American Apparel store
Clothing sits on display inside an American Apparel store on June 19, 2014 in New York City.

American Apparel’s financial problems and eventual bankruptcy may have been caused by more than just a sexual deviant in the company’s top position. They may have just fallen to the same trends that have beleaguered other retailers.

Stores like Abercrombie & Fitch and Aeropostale, who also target the same teenage consumers as American Apparel, have struggled to remain relevant. Often, this demographic would rather spend money on the latest gadget than a new pair of jeans. Additionally, increased competition from online retailers, as well as a slow economy, has kept consumer spending at bay.

The announcement of American Apparel’s bankruptcy petition came as no surprise to financial experts. As previously reported by the Inquisitr, American Apparel was hinting at a possible shutdown several months ago. Company sales dropped by 17 percent in the second quarter as compared to last year, and losses over the past five years have amounted to $340 million. Even the New York Stock Exchange warned that American Apparel was to be delisted.

Being relieved of its crippling debt, the American Apparel can again move forward, introduce new product lines, keep stores open, and search for ways to become relevant to young consumers again.

[Photo by Scott Olson/Stephen Shugerman/Andrew Burton via Getty Images]