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American Apparel warns it may go out of business

American Apparel warns it may go out of business
American Apparel is struggling to stay afloat and issued a "going concern" warning on Monday. (David McNew / Getty Images)

Beleaguered American Apparel Inc. said it is hanging on by a thread.

With sales sliding and cash dwindling, the Los Angeles company warned Monday it may not have enough liquidity to keep operating for the next 12 months, according to a filing with the Securities & Exchange Commission. The losses may continue through the rest of 2015, the company said.

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All these factors, American Apparel said, "raise substantial doubt that we may be able to continue as a going concern."

The warning comes as the company reported a second quarter in line with its original estimates filed with the SEC last week. The quarter was marked by bad news: Sales fell 17% to $134 million and net loss widened to $19.4 million, or 11 cents a share.

American Apparel's shrinking cash position is pushing it closer to filing for Chapter 11 bankruptcy, analysts said. The clothing manufacturer could then get out of leases for under-performing stores, which is crucial for slashing costs and turning around the business.

"It's very hard to envision a save here without exiting many or most of the leases," said Craig Johnson of Customer Growth Partners. "It has to be done."

The company has been on a rollicking ride since the board ousted Dov Charney as chief executive and chairman last year.

Despite the best efforts of Paula Schneider, the chief executive who took over in January, American Apparel's troubles are too numerous to continue without drastic restructuring, Johnson said. That could include selling off assets and looking at alternative distribution, such as carrying American Apparel clothes in department stores overseas.

"You are trying to save the Titanic when the bow is already 10 feet underwater," he said. "It's not impossible, but it's a very tall order to do."

On Monday, American Apparel said it had put out an immediate fire by amending an agreement with lender Capital One. A group of creditors, including hedge fund Standard General, is replacing the Capital One credit line of $50 million with a $90-million one instead.

But American Apparel's situation is still dire, observers said.

It is still facing several lawsuits from Charney and his allies. The company has nearly $235 million in long-term debt, and must come up with $13.9 million for a bond payment in October.

As of June 30, American Apparel had $6.9 million in cash.

Twitter: @ByShanLi

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