Advertisement
Business

With debt payment looming, American Apparel is running out of options

American Apparel employees have been venting their frustrations at protests in the parking lot outside the company's headquarters and sewing factory in downtown L.A.
(Brian van der Brug / Los Angeles Times)

It’s easy to find symbolism in American Apparel’s newest design: a 5-foot-high barrier erected last month to shield the entrance of the troubled retailer’s downtown Los Angeles headquarters.

The clothing maker put up the chain-link fence shortly after warning that its ongoing losses and poor outlook raised “substantial doubt” it could stay in business much longer. The company is now under siege on multiple fronts.

Unhappy workers, who have endured layoffs and reduced hours, are attempting to unionize and staging weekly protests, including one during which a pinata representing Chief Executive Paula Schneider was beaten into scraps. One supplier has sued the company for unpaid bills, and many others are complaining about lack of payment.

SIGN UP for the free California Inc. business newsletter >>

Advertisement

But the most pressing problem: American Apparel Inc. is running out of money.

On Oct. 15, it must make a $13.9-million interest payment. As of Aug. 11, the company had only $11.2 million in cash.

And it doesn’t have many options, retail analysts said.

The company recently delayed its quarterly earnings report because it failed to meet requirements of a credit line from Capital One.

Advertisement

The stock has dipped so low — about 16 cents a share Friday — that if American Apparel issues new shares under a program announced in May, it can raise only about $1.8 million.

“If there is no white knight that arrives on the scene between now and the next 30 days, I absolutely see them filing for bankruptcy,” said Lloyd Greif, chief executive of Los Angeles investment banking firm Greif & Co. “As soon as the cash dries up, this company is gone.”

American Apparel’s public relations representative declined to make company executives available for an interview.

American Apparel’s net losses have reached nearly $384 million over the last 5 1/2 years.

Advertisement

Last year, the company’s board of directors fired founder Dov Charney after an investigation found evidence of inappropriate behavior with employees and misuse of company funds.

Charney alleged in a lawsuit that his ouster was part of a plot to get him out of the way so the company could be sold.

Sales continue to slip from the 2013 peak of $633.9 million, despite a turnaround plan announced this year that included reaching out to a broader age range and $30 million in cost cutting. In the three months that ended June 30, American Apparel suffered a 17% decline in revenue to $134 million, the fourth straight quarterly drop.

American Apparel has struggled to hold on to its core young customers, who are increasingly turning to fast-fashion retailers such as Forever 21 and Zara. In May, Schneider said that slow-moving products had been cleared out at fire-sale prices, depressing sales and profit.

Advertisement

At the same time, the company is shelling out at least $10 million a quarter in interest expenses. Long-term debts total about $235 million.

“They have no ability to pay that because they are not even covering costs with margins on their products,” said Josh Arnold, an equities analyst and contributor to financial site Seeking Alpha.

To replace Capital One, American Apparel got help from a new creditor group, helmed by Standard General, the hedge fund that already lent the company $25 million last year.

But the new credit line, Arnold said, is hamstrung because money that is repaid can’t be borrowed again. And American Apparel has told regulators that its losses might continue for the entire year.

Advertisement

“So they can’t float their inventory costs anymore,” he said. “If they are going to turn things around, they have to fund it upfront, sell the clothing and hopefully they have enough to pay back” costs.

Interested in the stories shaping California? Sign up for the free Essential California newsletter >>

Beyond its precarious cash position, American Apparel is showing other money strains.

Several suppliers have complained that the company is behind on paying bills.

Advertisement

Knit House Corp. sued American Apparel last month for nearly $81,000 owed for fabric. The Vernon company said American Apparel has “refused” to pay.

Another vendor, Terry Abrahamian, said he is owed more than $50,000 for work done by his Los Angeles sign-making firm Signograph USA.

Abrahamian said he’s been doing business with American Apparel for more than a decade. The clothing maker has sometimes been late paying bills over that stretch but has always been responsive to his questions about payment, he said. Now, Abrahamian said, nobody responds to his emails or phone calls.

“Previously every other day I was at the factory talking to the graphics people to see what they wanted,” he said. “Now they are all behind closed and locked doors. They don’t allow anybody to go in to talk to the accounts department.”

Advertisement

American Apparel’s relationship with its employees also has taken a nosedive.

Charney had championed workers’ rights, including paying a livable wage and providing fringe benefits like on-site masseuses.

In April, the company laid off about 180 workers, mostly in its Southland manufacturing operations, after reducing the number of hours that many employees worked. American Apparel, which had employed about 10,000 workers worldwide, has subsequently fired employees in the corporate office and in manufacturing, but hasn’t revealed how many.

Management said months ago that it would pay holiday bonuses and roll out paid holidays. But several workers interviewed said that the company has yet to follow through.

Advertisement

Guards no longer allow employees to hang out in the factory cafeteria except at lunchtime, many said, and groups of five or more are dispersed.

A push to unionize workers is well underway. Employees have registered with the U.S. Labor Department as a union and have put in a request to management to recognize the group, called the General Brotherhood of Workers of American Apparel, said Nativo Lopez, a senior advisor with Hermandad Mexicana, which is helping workers organize.

Employees have vented their frustration at protests held each Wednesday in the parking lot outside American Apparel’s salmon pink headquarters and sewing factory in downtown L.A.

Last month, one rally escalated into a surreal scene.

Advertisement

Some participants hoisted a larger-than-life pinata, topped with blond paper hair; it resembled Schneider, the 59-year-old apparel executive who became CEO after Charney was fired in December. Using a large stick, a succession of men and women took whacks at the effigy, smashing in the smiling face and buckling its legs.

In a memo, Schneider condemned the pinata-bash as “truly appalling.” A YouTube video of the event defends the beating of a pinata effigy as a common form of political expression in Mexico, where many American Apparel workers are from. The video notes the recent popularity of Donald Trump pinatas to back up its argument.

Shortly after the incident, the extra fence went up around the downtown building.

Since then, four workers filed lawsuits accusing the company of unlawful termination and failing to pay bonuses, salaries or other compensation, said Keith Fink, a lawyer representing the workers. An additional nine employees have filed complaints with the National Labor Relations Board alleging they were fired for participating in organizing activities. Several were involved in the pinata incident, he said.

Advertisement

“People are scared,” said Cipriano Vilchis, a sewing machine mechanic. “If you say something, they fire you.”

Vilchis, 55, said he hasn’t been fired but has been told by management to stop coming to work unless he is called. That decision, Vilchis said, came shortly after he wrote a comment criticizing Schneider on an online story about the company.

“It’s all dirty tactics,” he said. “They are trying to scare people from organizing.”

In a statement, American Apparel said the NLRB complaints were “examples of the habitual nuisance lawsuits that Dov Charney’s lawyer and associates continue to file.”

Advertisement

“We are confident we will succeed on each and every one of these,” the company said. “This has been reflected by the numerous rulings and dismissals in our favor — including the dismissal or withdrawal of all other 25 filed NLRB charges to date.”

------------
FOR THE RECORD:

An earlier version of this story quoted a statement from the company as saying NLRB complaints are examples of “habituational nuisance lawsuits” brought by Dov Charney and his associates. It should have said habitual nuisance lawsuits. 
------------

The next several weeks are crucial to American Apparel.

If the company files for bankruptcy, a private equity firm that specializes in troubled businesses could swoop in, Greif said. He pointed to a company like Oaktree Capital Management, the L.A. firm that will be the majority owner of surfwear brand Quiksilver after it emerges from bankruptcy.

Advertisement

A new owner probably would get rid of some or all the stores and move production offshore, Greif said. Or a purchaser could license out the brand to other companies and stop production.

“There is the ability to slice and dice the company in a bankruptcy,” he said. “All the damage has been done in terms of employee morale. If you lay them off it solves the problem.”

In all the tumult, American Apparel recently got a piece of good news.

As part of the many lawsuits flying back and forth in the company’s dispute with its founder, Charney had asked a Delaware judge to force American Apparel to pay his legal fees, which amount to hundreds of thousands of dollars. On Sept. 11, the judge ruled that American Apparel is off the hook for those fees.

Advertisement

shan.li@latimes.com

Twitter: @ByShanLi

ALSO:

VW cheated on U.S. pollution tests for ‘clean diesels’

Advertisement

Azusa plastics firm that makes shade balls has its moment in the sun

How a rich water district beat the federal government in a secret deal

 

 


Advertisement