So Many Caught With Their Pants Down

Add a prestigious lineup of distressed investors and professionals to the roster of folks pantsed by American Apparel.  

In October 2015, American Apparel filed for bankruptcy. It converted $200mm of secured debt into (a) equity and (b) a $120mm post-bankruptcy exit Term Loan (subsuming $30mm of new money). The Company was supposed to benefit from $10mm of new equity and a new $40mm asset-backed lending facility. But sometimes things don't go according to plan: on November 14 2016, the Company again filed for chapter 11. Now it wears the "Chapter 22" label (see what we did there?).  

The company's bankruptcy filings are riddled with incriminating statements about misguided management expectations and professional performance. The company suffered from "unfavorable market conditions" that were "more persistent and widespread than the Debtors anticipated" and "particularly detrimental to retailers." This is called tunnel vision. 

Post-bankruptcy, the Company suffered from 32.7% YOY sales decline and $40mm EBITDA decline. It could never nail down the $40mm of asset-backed lending that its business plan depended upon. The Company blames this, in part, on the CFO leaving the business. Maybe they should blame it on the reasons why the CFO left the business, i.e., the business sucked. Apropos, the Company notes that it failed in myriad ways: (i) it could not optimize its product and merchandizing, (ii) it suffered from chronic quality problems and defects (ah, American production!), (iii) it had no unified and consistent marketing plan (give founder Dov Charney this: there used to be one!), and (iv) it failed to improve its e-commerce platform. Wait what? FAILED TO IMPROVE E-COMMERCE?! Indeed. Its sales declined post-bankruptcy and amounted to only 10% of sales - 10% LOWER than the industry average. 

And so the plan is to sell the Company for parts. Gilden Activewear SRL, a Canadian company, is spending $66mm mostly for, among some other things, the company's intellectual property. The company's previously secured lenders - Monarch Alternative Capital LP, Coliseum Capital Management LLC, Goldman Sachs Asset Management LP, Pentwater Capital Management LP, and Standard General - "will likely recover only a fraction of the funds that they have advanced." (emphasis added). Somewhere Charney is smoking a cigar, sipping bourbon and laughing his a$$ off. 

Restructuring professionals are also getting burned here. Among the company's largest unsecured creditors this go-around are prestigious firms like FTI Consulting and Moelis & Co., owed $2.03mm and $645k, respectively. 

We are ripping on this a bit but, jokes and jabs aside, there is a sad social commentary here. First, the restructuring process clearly failed this Company. We could spend time digging into the millions that were surely paid out in fees but why bother? It's safe to assume it was a lot. Second, clearly the Judge got duped into thinking the company's plan of reorganization was feasible. Expect more scrutiny from judges on this point go-forward - and not just in the oil and gas space. Third, this is yet another example of US manufacturing being uncompetitive in the world market. Notably, Gilden is buying the intellectual property only. This is why Shark Tank's Kevin O'Leary is constantly telling entrepreneurs to ship their manufacturing to China: Los Angeles simply doesn't make sense - regardless of who is President. Finally, popularity doesn't last forever - particularly, in the retail space. Undoubtedly retail is suffering lately - a point exemplified by the onslaught of recent retail filings, e.g., Golfsmith, Nasty Gal, etc., - but failures there will only be amplified when quality slips, e-commerce is ignored, and execution is poor.

As for Carney? His new startup venture is featured on Gimlet Media's newest "Startup" podcast...