American Apparel: The Story Behind The Bankruptcy.

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American Apparel started out as an idea Dov Charney, the founder and long-time CEO, had in his Tufts University dorm room in 1989. The company started out as a wholesale retailer of high-quality cotton T-shirts. This proved to be extremely successful and the company quickly expanded to selling its manufactured goods in 260 shops in 19 countries. In 2005 it was listed among the fastest growing US Companies with a 440% three-year growth and revenues of over $ 211 million.

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The clothes manufacturer is known for its “Made in America” policy, which shuns the sweatshops of Asia to support US manufacturing.

It is a vertically integrated company: all storefronts are owned by the company, they avoid outsourcing and have integrated all steps of production. This business model based on domestic manufacturing allows them to be flexible and quick in the process leading from design to the finished product.

They pay double the minimum wage to their mainly immigrant workforce and provide health insurance and free international telephone calls.

They have attracted great publicity but also notoriety for their advertising: the company is widely known for its provocative and controversial advertising campaigns. Multiple campaigns have been banned in several countries because the images were sexually explicit or because the models in the ads were porn actresses.

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As is common for fashion companies with a teenage customer base, their success was somewhat short-lived. In 2008 the company started encountering financial problems and a substantial decrease in revenues led them to yield negative profits from 2009 onwards. In June 2014 the Board of Directors decided to oust its founder, chairman and CEO Dov Charney after allegations of misconduct.

For a long time Charney’s kinetic lifestyle seemed to embody American Apparel’s anti-establishment flair. But soon, the founder’s antics appeared to cross a line.

He was involved in multiple sexual harassment lawsuits by female employees alleging all kinds of misconduct from choking a store manager to forcing an employee into sex slavery. Charney’s lawyers maintained that these accusations were unfounded and that he was merely a deep-pocketed target for lawsuits. However, his misconduct was not limited to these lawsuits. A profile in the magazine “Jane” described Charney repeatedly masturbating in front of the reporter during an interview.

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Former employees have also stated he once hosted a meeting wearing nothing but a sock – not on his foot.  Furthermore, internal investigations have found that he embezzled company money for his personal use.

Despite all of these accusations, Charney and his lawyers still claim that his being fired was illegal (he is claiming he was blackmailed by the Board of Directors) and are suing the company in order to get Charney reinstated as CEO. After multiple lawsuits, Charney failed to gain back control of the company and a new CEO was appointed.

Throughout the litigation with Charney, American Apparel’s financial situation deteriorated and in 2015 it filed for bankruptcy. It’s losses over the last five years have topped $340 million and it has lost $45 million more this year.

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The main reason behind this crisis is the high debt-to-equity ratio. Before filing for bankruptcy, they were scrambling to raise money to pay down debts amounting to $ 15.4 million. “Our debt load simply wasn’t sustainable. You can’t do a turnaround plan without cash,” Ms. Schneider, the new CEO, said. Further reasons behind the bankruptcy were a precipitous fall in sales and the drawn-out legal battles with the former CEO.

Recently a deal was struck with most of American Apparel’s secured lenders to reduce the retailer’s debt through a process known as a debt-for-equity conversion. During this process bondholders swap their debt for shares in the company. They agreed to a plan with their creditors to convert $200 million of debt into equity, $90 million in debtor financing and $70 million in new capital.

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The new CEO, Ms.Schneider, states that the company is still committed to manufacturing in the US. “We will continue to manufacture in America,” she said. “That’s what the brand is. That’s what it’s about.”

Martina Reich 

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