American Apparel once used to be the trendy store that was too cool for school. However, now the store may be too cool to even stay open.
As of September the company’s debt was $133.6 million.
American Apparel’s journey to a state of near bankruptcy was driven by its eccentric CEO Dov Charney.
In the past eight years it has had lawsuits filed against it by employees over compensation, working conditions and sexual harassment and in the last few months it has received subpoenas by the SEC and NYSE.
It has been in a sales slump for several quarters and last August Charney said he was not sure if the company was going to survive for 12 more months.
Former GAP CFO John Luttrell took over this week as CFO of American Apparel in an attempt to restructure the company. But he’s got quite a mess on his hands.
Though Charney has been praised for his outspoken passion for the brand he is mostly known for his unusual business strategy and for allegedly sexually harassing employees.
Charney led the company's rapid expansion, which was financed by debt during the real estate bubble. The company now owes $121.5 million in debt to Lion Capital and Bank of America.
Charney even went so far as to personally guarantee more than $2 million in leases for five stores in New York, Chicago and Los Angeles.
In 2010 the company received subpoenas from the SEC and the U.S. Attorney's Office in New York.
In July 2010 its auditors Deloitte & Touche informed the company that there may be a problem with its 2009 financial reporting. Deloitte later quit. The SEC investigated the firm, and the Fed's filed a subpoena.
The company received a letter from NYSE noting its failure to comply with rules about filing quarterly documents.
American Apparels' ads managed to piss off Woody Allen and the UK Advertising Standards Authority and an entire neighbourhood in Harlem.
In 2009 Woody Allen won $5 million in a settlement after he claimed the store used his image for an ad without his permission.
Also in 2009 the UK's Advertising Standards Authority criticised the company for an ad depicting a model who looked younger than 16-years-old though the company claimed she was of legal age.
In an immigration investigation in 2009 it was discovered that 1,600 of the 5,600 workers in American Apparel's California factory were possibly illegal immigrants. The investigation found 1,500 undocumented employees who then had to be layed off.
Charney promised to rehire the workers once they got their 'immigration papers in order.'
In 2009 the firm was also accused of having a policy of firing employees that were deemed not attractive enough to work for the brand. The company was requiring job applicants to send in full-body photos.
In response to the leak about the full-body photo policy it invoked a policy requiring employees to sign a confidentiality agreement prohibiting workers from speaking to the media about company practices. The policy has a $1 million fine.
Despite branding itself as a pro-worker/anti-sweatshop company a wage-and-hour class action was filed against it in 2009. It was filed by employee Guillermo Ruiz, who claims that, 'the company failed to pay certain wages due for hours worked, to provide meal and rest periods or compensation in lieu thereof and to pay wages due upon termination to certain employees.'
In 2009 three women also filed sexual harassment suits against Charney and claimed he created a hostile work environment. Another lawsuit filed by an employee claimed he kept naked photos of female employees and held meetings in his underwear.
The company is still pushing its whole ironic 80's-look featuring neon colours and shiny spandex despite the fact that the customers who were sporting those looks 10 years ago are now approaching their 40's.
The brand has not evolved its brand to a preppier customer base even though Charney made claims that it would be moving in this direction soon.
The store has also been falted for not making many of its clothing products in sizes larger than a six.
Sales for the three months ending in September fell 11% to $135 million from the same period the year before. Gross margin decreased significantly dropping 6% to 52.2%. The company reported a net loss of nearly $9.5 million for the quarter.
In the last month alone the firm received a credit waiver with Lion Capital to help it avoid defaulting on its loan. The company said it was hoping to obtain a permanent waiver. Investor Ron Burkle also recently cut his stake in the company by 1.7%.
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