In what appears to be an eventuality some analysts have expected, American Apparel filed for Chapter 11 bankruptcy protection almost a year after the company's founder and CEO, Dov Charney, was booted out as chairman of the board.
In August, investors of the clothing brand were already warned that it had doubt it could sustain its business, thus giving them time to rethink casting their lot with the homegrown label.
"In its latest quarter, the company reported a loss of $19.4 million," Forbes reported. "In an attempt to shore up its finances, American Apparel will convert over $200 million in debt into equity stakes in the reorganized company."
"Lenders will also provide some $90 million in debtor-in-possession financing, plus $70 million in new financing," it added.
The company is using the bankruptcy as an opportunity for financial restructuring.
"This restructuring will enable American Apparel to become a stronger, more vibrant company," CEO Paula Schneider declared in a statement. "By improving our financial footing, we will be able to refocus our business efforts on the execution of our turnaround strategy."
American Apparel's financial problems did not come out of the blue; in fact, they dated a couple of years back.
"The chain has posted deficits every year since 2010. Chronic losses strained its balance sheet to the point that, as of end of June, American Apparel had $161 million more liabilities than assets, meaning the company had a negative book value," Bloomberg revealed. "The company, which began trading publicly in 2007, peaked at $16.80 in December of that year. The shares closed at 11 cents on Friday."
The company was started by Charney while attending Tufts University in Massachusetts in 1989.
" e never graduated, setting off instead for South Carolina, where he employed 20 women to make T-shirts in a barn with no air conditioning," the news source recalled. "Ten years later he moved the company to Los Angeles, where there was greater manufacturing capacity."
Charney's brand was later known for its raunchy ads that involved young models. Later, he faced a series of lawsuits claiming that he sexually harassed some of his female employees and an internal investigation that revealed he "had misused company money and had allowed an employee to post naked photographs of a woman who was a former employee who had sued him," according to The New York Times.
"The board also pointed to the mounting expense of defending Mr. Charney in the lawsuits filed against him, and said that his reputation was making lenders skittish about working with the company," the publication said, adding that he was later ousted by the company's board of directors.
In the wake of the Chapter 11 filing, Charney will lose his 42% stake in the company, as well as those held by other shareholders.
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