American Apparel Files for Chapter 11 Bankruptcy Protection

On Oct. 5, American Apparel, one of the largest clothing retailers in the country, announced that it had filed for Chapter 11 bankruptcy protection, according to USA Today. Following a rapid decline in sales since 2011, the company sought bankruptcy protection after it became insolvent.

American Apparel declines into debt

In court papers, American Apparel cited an increase in competition from lower-cost retailers like H&M and Forever 21 that captured more of the market share for millennials. According to a Fast Company report, the company also stated that its business model designed around clothing made in the U.S. was a factor in its revenue dropping in five consecutive years.

American Apparel stated in bankruptcy documents that it had lost more than $300 million in revenues from 2009 to 2014. Since last year, the company has restructured its business model to reduce costs and streamline product offerings. However, the changes have not prevented the company from realizing losses, as its sales revenue slumped by 17 percent to $134.4 million this year, which dropped its market value to only $20.5 million.

One of the main issues cited in American Apparel’s bankruptcy petition was that it had failed in seasonal planning, which resulted in offering the same clothes all year round. Another major issue was the fact that the company had only received 11 percent of sales revenues online, whereas competitors averaged approximately 20 percent.

The company listed assets of $199.3 million, with $397.6 million in debts, including $15 million owed to its largest creditor, Standard General LP, according to an American Lawyer report. American Apparel also cited $38.4 million outstanding on its credit facility, with only $6.9 million in cash on hand.

The company’s reorganization plan calls for a debt-for-equity deal

The company said in its court filings that it will need to close several underperforming store locations because it has only kept them open due to recent cash infusions. American Apparel has also secured $90 million in financing from secured creditors to maintain operations through the bankruptcy period.

The proposed restructuring plan, subject to court approval, calls for a debt-for-equity exchange, where $200 million in senior secured notes will be converted into equity shares. American Apparel negotiated a deal with 95 percent of its secured creditors to reduce its $300 million debt load to $135 million.

The company plans to emerge from the restructuring process as a viable business in the U.S., although its international locations will remain unaffected.

The significance of the filing is a disturbing industry trend

American Apparel’s Chapter 11 filing is the latest in a recent trend of teen fashion retailers that have sought bankruptcy protection. Competitors like Wet Seal, Cache Inc., Deb Shops, Body Central Corp. and dELiA’s have filed for Chapter 11 bankruptcy protection this year. Even its competitors H&M and Forever 21 have struggled in recent years due to online retailers like Amazon.com Inc. undercutting store locations.

Are you a creditor in a bankruptcy?  Have you been sued by a bankrupt?  If you have any questions about your rights, please contact me, Joel Glucksman, at 201-806-3364.