Before it became embroiled in lurid boardroom scandals, American Apparel used to be cool.
Not only did it add a stylish twist to seemingly plain t-shirts and jeans, but it championed human rights through slogans on its products and won friends by basing manufacturing in America, rather than the far east. The company built an empire of 260 shops in 19 countries around the world, including the UK.
However, the fashion brand is now trying to make a fresh start after filing for Chapter 11 bankruptcy protection in the US. American Apparel has agreed a deal with its lenders whereby they will write off roughly $200m (£132m) of bonds in exchange for equity in the company, reducing its $300m debt to no more than $135m and cutting annual interest payments by $20m.
The agreement will wipe out existing shareholders, including the controversial Dov Charney, who founded the company in 1989.
Charney has been at the centre of the downhill spiral that American Apparel has found itself in since Deloitte quit as auditors in 2010 after raising doubts about the reliability of the retailer’s accounts.
The American Apparel founder has faced a string of law suits over sexual harassment allegations, which include claims that he used a former employee as a “sex slave”, masturbated in front of a female journalist, and sent explicit text messages to staff.
Charney was suspended as chief executive last summer by the company’s board for “alleged misconduct and violations of company policy”. After an investigation, a special committee then ruled last December that “it would not be appropriate” for American Apparel’s founder to return.
However, this has sparked a bitter legal battle between Charney and American Apparel. Charney has denied the claims and is suing the company for $20m for defamation, while the company took out a restraining orderthat prevented Charney from criticising it in public and attempting to overhaul the board.
A key aspect of the Chapter 11 filing, which needs to approved by a court in Delaware, is that it will temporarily block the legal claims against American Apparel.
Not only has the controversy surrounding Charney led to significant upheaval in the boardroom and a string of costly legal claims, but it has damaged the American Apparel brand. Sexually explicit adverts featuring young models do not connect well with the public when the boss of the company faces harassment allegations.
At the same time, American Apparel has faced growing competition in the US from cut-price overseas competitors such as H&M, who have effectively replicated the brand’s fashion for a lower price. The company’s sales are down by almost a fifth compared to a year ago and it has recorded a loss for ten consecutive quarters, which was unsustainable given its debts.
The downfall of the brand is not just a pivotal moment for fashion, but a setback to the entire US industry. American Apparel is the country’s biggest manufacturer of clothing and it is based in downtown Los Angeles. The company claims to pay experienced factory works more than $30,000 a year, compared with $600 a year for workers in Bangladesh factories.
Paula Schneider, an industry veteran who was parachuted in earlier this year as the new chief executive of American Apparel, said: “This process will ultimately benefit our employees, suppliers, customers and valued partners.
“American Apparel is not only an iconic clothing brand but also the largest apparel manufacturer in North America, and we are taking this step to keep jobs in the US, and preserve the ideals for which the company stands.”
Schneider said that American Apparel will re-emerge as a “stronger, more vibrant company” by strengthening its finances. However, industry analysts are not so sure.
Neil Saunders, chief executive on retail consultancy Conlumino, said: “Big questions remain around both brand and product. On the former, it is still not clear what American Apparel is trying to change to.
“We know that the company is looking to be more ethical in its marketing, relying far less on the sexual overtones it has used in the past. However, as welcome as this may be, it does mean that a fresh viewpoint is needed in order to give the company a clear and cohesive brand image.
“The search for a point of view and a handwriting for its ranges is also a crucial one, and is something that American Apparel needs to sort out as quickly as possible.
“This is especially so with competition intensifying, with the expansion of players like Forever 21, H&M and now, albeit on a smaller scale, Primark. Without a distinct identity, we fear American Apparel will simply remain lost in the murkiness of the teen apparel market.