How fashion retail giant American Apparel went bankrupt

Even as e-commerce behemoth Amazon.com and teen apparel store chain Forever 21 vye to acquire bankrupt and ailing fashion retailer, American Apparel LLC, Indiaretailing Bureau brings you the rise and fall of the fashion retailer.
1989 born American Apparel is a 21st century manufacturing miracle. Dov Charney founded American Apparel as a vertically integrated company and one of the largest apparel manufacturer in the North America when most garment-making was moving offshore.
A Brief History
American Apparel primarily started as a wholesale business, selling blank T-shirts to screen printers and fashion brands. Expeditiously, it entered the retail grounds with its stores in 2003 in Los Angeles, Montreal, and New York to nearly $80 million in sales. The company’s expansion into retail was the fastest retail rollout in American history.
At the time of shuttering stores, the retailer operated in 1.5 million sq.ft. of manufacturing space – the equivalent of 26 American football fields. All of its manufacturing units – which employed almost 4,700 people – were based in Los Angeles. While the factory headquarters in downtown LA had 2,600 employees manufacturing 90,000 t-shirts per day, the knitting factory located on 59th and Central, LA housed roughly 50 employees. The retailer’s denim factory – which produced 1,000 jeans per day – had provided employment to 750 people.
American Apparel’s distribution center had 500 employees and the Dyeing and Finishing factory employed 800 people who managed approximately 3,00,000 pounds of fabric per week.
Once ranked 308th in Inc.’s 2005 list of the 500 fastest growing companies in the United States, with a 440 per cent three-year growth and revenues in 2005 of over US$211 million, and 249 stores in 20 countries, American Apparel sank as fast and deep as it had risen.
So what happened? In a nutshell, the ailing fashion retailer failed to keep up with in a highly competitive apparel industry, characterized by rapid shifts in trends, and evolving consumer demand, resulting in both price and demand volatility.
There are five more reasons that contributed to the retailer’s rapid downfall:
A Controversial CEO: Founder and former CEO, Dov Charney, faced allegations of sexual harassment and other outrageous behavior before he was finally ousted in December 2014.
He was replaced by Paula Schneider, formerly the president of ESP Group Ltd. Paula, who was brought to the helm in early 2015 to help turnaround the fortunes of the headline-hitting retailer. She failed to live up to the task and eventually, stepped down from her role as the company moved closer to a sale.
Huge Amounts in Legal Fees: For the second quarter of 2015, American Apparel reported $3.6 million in legal fees, an increase from $1.4 million for the same period the previous year. The company said as of summer 2016 was engaged in battling 20 lawsuits from Charney and his associates.
Redundant Debts: In March 2009, the company narrowly avoided a Chapter 11 bankruptcy when it sold 18 per cent stake to private-equity firm Lion Capital – this even as the retailer faced pressure, including loan obligations, after it took on $111.6 million in debt to expand over five years.
American Apparel was quoted in its second-quarter earnings announcement as saying: “Based upon the trends occurring in our operations since June 30, 2015, and through the date of this release, together with our current expectations and projections for the next four fiscal quarters, we believe that we may not have sufficient liquidity necessary to sustain operations for the next twelve months.”The company had a long-term debt of $234.9 million as of June 30, 2015.
Soon after, Moody’s Investors Service downgraded it, citing its ‘fragile liquidity’.
Dubious Branding: American Apparel was known just as much for its racy advertising as its US-manufactured clothing for many years. Featuring scantily clad models in provocative poses, the ads generated a lot of negative publicity for the company, much of it negative.
The company ditched the suggestive branding and, in a June 2015 presentation, outlined a new branding strategy in line with a ‘positive, inclusive, socially-conscious’ mindset. However, it was too little too late.
Prolonged Losses: In November 2016, American Apparel went bankrupt for the second time, knee deep in about $177 million debt. Over the years, sales margins shrunk, net losses rose. For the six months ending June 30, 2015, net losses totaled $45.8 million.
According to the New York Times, American Apparel’s cumulative losses in the last five years are more than $340 million. In the last week of December 2016, American Apparel shut all its 13 UK stores, laying off over 150 employees.
Why It Makes Sense For Amazon To Buy American Apparel
The US-based online giant has already put the $3 trillion global fashion market in its sights and analysts have predicted that the high-margin fashion business could give a much-needed boost to Amazon’s profitability.
READ MORE: Amazon Unveils Private Label Dress Shirts For Men
Also, 110 established American Apparel stores would boost Amazon’s brick-and-mortar presence in the US considerably more than the current handful of bookstores and grocery stores.
A third reason could be softening President Trump’s stand on Amazon top boss Jeff Bezos. According to The New York Times, by acquiring American Apparel – best known for its Made in USA slogans – Amazon would get to save thousands of US manufacturing jobs, while helping Trump continue to play up the “keep jobs in the US” rhetoric – and also win Trump’s support in one master stroke.
Other Contenders
Apart from Amazon and Forever21, California-based apparel maker Next Level Apparel and brand licensor Authentic Brands Group LLC, are in talks with American Apparel and its financial advisers about submitting offers.
Any successful offer would have to top a $66 million stalking horse bid by Canadian apparel maker Gildan Activewear Inc, which American Apparel agreed to when it filed for bankruptcy in November.