After a couple of years of tumultuous bankruptcy proceedings, American Apparel LLC has officially announced it will begin a mass layoff, which includes firing 2,400 of its roughly 3,400 workers in Southern California, Reuters reported.
Mired in financial struggles
American Apparel hasn’t been immune to the consumer transition from brick-and-mortar shopping to online browsing. It first filed for Chapter 11 bankruptcy protection in October 2015, according to Fortune magazine. It was able to emerge from bankruptcy to return to full operations nearly a year later.
But in November 2016, Fortune reported the company was saddled with about $177 million in debt, and once again filed for Chapter 11. This led to the company putting itself up for auction. According to Bloomberg News, the company had a bid of $66 million at the time from Gildan Activewear Inc., a Canadian retailer.
In mid-January 2017, that bid had risen to $88 million, wherein Gildan would be purchasing the brand—synonymous with “Made in the U.S.A” clothing—rather than the full operations. But, Reuters reported that Gildan had withdrawn the offer, forcing American Apparel to take a long, hard look at closing its 110 American stores.
A look at what could have been
American Apparel did well to emerge from its 2015 bankruptcy by using a $20 million loan from hedge fund Standard General LP as well as $30 million borrowed from Encina Business credit, a post-bankruptcy unsecured creditor, The Wall Street Journal reported.
Seemingly immediately after the company emerged from the financial umbrella in February 2016, following a $200-million debt restructuring, it had failed to secure enough funding for its turnaround plan created, in part, with chief executive officer Paula Schneider.
Schneider had taken over for founder Dov Charney, who created the business as a college student, and who was financially forced out under the first bankruptcy. His entire allotment of shares was purged, and he found himself subject to a lawsuit from SG LP since he was the one who took out the $20 million loan, according to Bloomberg.
American Apparel’s troubles seemed to stem from a lack of financing in its plan to jump back into the market. It comes as no surprise that immediately after the Gildan bid was removed from the table, the company began layoffs. Bloomberg reported that in November 2016, the company reached out for a $10 million operating loan to stave off Chapter 7 bankruptcy.
The company wasn’t the first, and certainly won’t be the last, retail outlet to suffer from a well-documented change in consumer behavior. It was initially able to shed the $200 million in debt from the first Chapter 11 filing, showing the business’ attorneys had a handle on the situation but were unable to return to the market after the fact.
Although the end result is unfortunate, the case goes to show that even companies with dismal futures are able to emerge from Chapter 11 bankruptcy with experienced lawyers at their side.