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American Apparel's Bankruptcy Protection Buys It Time, but Not Much Else

American Apparel bought itself time and relief when it filed for bankruptcy protection on Monday, but there's still a long way to go if the struggling retailer is to pull itself out of a sales rut and win back shoppers.
American Apparel | Source: Reuters
By
  • Bloomberg

LOS ANGELES, United States — American Apparel bought itself time and relief when it filed for bankruptcy protection on Monday, but there's still a long way to go if the struggling retailer is to pull itself out of a sales rut and win back shoppers.

In July, Chief Executive Paula Schneider unveiled her plan to resuscitate American Apparel's ailing business, which has lost more than $300 million in the past five years. She's brought in new forecasting and budgeting processes while rebuilding the company's entire corporate management structure. Retail stores are also getting a makeover as the clothing assortment is overhauled.

But Schneider's most visible move was to ditch the brand's overtly sexual advertising, replacing it with more "positive," "inclusive," and "socially conscious" imagery. "There’s a way to tell our story where it’s not offensive," Schneider said in an interview with Bloomberg earlier this year. "It is an edgy brand. And it will continue to be an edgy brand."

It's still not clear what the new American Apparel will look like, or what it stands for. Though oft-maligned, American Apparel's attention-grabbing, hypersexualized aura drew in shoppers seeking something on the fringes, pushing the boundaries more than mainstream teen shops such as American Eagle, Aeropostale, or even Abercrombie & Fitch.

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Now American Apparel lacks a real identity, Neil Saunders, CEO of retail consultancy Conlumino, wrote in a note to clients. Despite the many changes outlined in the turnaround plan, the identity crisis presents a fundamental problem that American Apparel must remedy "as quickly as possible," he wrote. "Without a distinct identity, we fear American Apparel will simply remain lost in the murkiness of the teen apparel market."

Teen retailers have been clobbered lately, with stores like Wet Seal, Delia's, and Deb Shops fighting for survival. The new guard of fast-fashion retailers such as H&M, Zara, and Forever 21 attracted teens by taking styles from the runway and getting them to store racks within weeks. The competition's only gotten more intense with the entry of Primark, an Irish fashion powerhouse that made its U.S. debut in September.

While the bankruptcy filing won't fix all that's wrong with American Apparel, it buys the company some much-needed time to turn things around as it languishes under a mountain of debt. Should the deal be approved by the bankruptcy court, bondholders would convert about $200 million in bonds to equity, putting the creditors in control of the 26-year-old company. American Apparel's debt would fall to $120 million, from $311 million.

American Apparel would have some cash to work with, as the deal includes extra financing to keep operations ticking along. The U.S.-based retailer manufactures its clothes in Los Angeles and runs a fleet of around 250 stores globally.

The filing also guarantees the delay of a multitude of lawsuits as the retailer continues its ugly legal war with spurned founder Dov Charney, who was dumped as CEO in 2014 following an internal investigation into alleged sexual harassment and misuse of company funds. Schneider has described those lawsuits as a "nuisance."

"Chapter 11 buys only time," wrote Saunders. "Whether the company and its management use that time to solve the deep seated issues remain[s] to be seen."

By: Kim Bhasin; editor: Katie Drummond.

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