American Apparel files Chapter 11 amid ‘failed’ turnaround strategy; future uncertain

Beleaguered American Apparel has filed its second Chapter 11 bankruptcy protection in just a little over a year. But this time around its future as a retailer looks even more uncertain.



In a separate announcement, Canadian T-shirt and apparel maker Gildan Activewear Inc. said it has it agreed to buy the intellectual property rights of the American Apparel brand and certain assets from the company for about $66 million in cash, including the chance to maintain some or all of American Apparel’s Los Angeles production and distribution operations. Gildan said it will not be not be purchasing any retail store assets.



American Apparel, which listed assets and liabilities in the range of $100 million to $500 million, said its cash would run out by year end. It hopes to stay in business by securing a deal to keep its stores open, but some industry experts say such a scenario is unlikely.



"The emergence of Gildan Activewear, a Canadian apparel manufacturer, as a buyer is a sensible route forward. In our view despite its many challenges, there is still some value in the American Apparel brand,” said Neil Saunders, CEO of retail research and consulting firm Conlumino. “However, that value is simply not sufficient to support the existing store network and its associated costs, hence Gildan’s decision not to buy out any of the store based leases or assets. Using its own network Gildan will be able to distribute the brand in a cost effective and profitable way. The deal with Gildan, which is subject to approval by the bankruptcy court, will inevitably result in the closure of American Apparel’s 117 U.S. stores.”



In a court filing, American Apparel chief restructuring officer Mark Weinsten said the brand’s turnaround strategy “completely failed.” The retailer reported a 33% decrease in same-store sales for its latest quarter.



"The company faced unfavorable market conditions that were more persistent and widespread than the debtors anticipated," Weinsten said. "These market conditions were particularly detrimental to retailers."



The bankruptcy court may require American Apparel to hold an auction for its assets and business under which Gildan's proposed acquisition would constitute the initial bid.



“We are confident that this decision is the best strategic move forward, in order to preserve the legacy of the American Apparel brand,” American Apparel chairman Bradley Scher said in a copy of a letter to employees obtained by Bloomberg News.



American Apparel filed its first bankruptcy in 2015 amid a sharp decline in sales and court battles with its controversial founder Dov Charney, who was ousted in 2014 amid allegations of misconduct.



It emerged from bankruptcy in February with an ambitious turnaround strategy led by new CEO Paula Schneider, and under the ownership of a group of former bondholders led by hedge fund Monarch Alternative Capital LP. Schneider resigned from the chain in September.