American Apparel Is Close to Defaulting on Loans

American Apparel may default on loans.
American Apparel may default on loans.

Just a few years ago, American Apparel (APP) was held up as a model for American clothing retailers, thanks to hip marketing campaigns, profitable earnings, a high-flying CEO in Dov Charney and products entirely made in the USA.

But now a series of financial troubles coupled with allegations of shoddy labor practices leaves the company's future in serious doubt, with signs American Apparel may go away sooner rather than later.

On Tuesday, according to CNNMoney, American Apparel said it may default on loan agreements with its lenders, citing ongoing weakness in its business. This news comes just months after negotiating a $94 million loan from British private equity firm Lion Capital and is a far cry from more profitable times as recent as February 2009. While American Apparel is in talks with creditors to avoid a default, if it does come to pass, the company warns that it may not have sufficient liquidity to stay in business for the next 12 months.

Falling Profits, Ballooning Debt

The news of a potential loan default also comes the same day that American Apparel reported provisional second-quarter earnings for the period ended June 30. As was the case for the first quarter, the stats are especially grim. The company expects same-store sales to drop 16% compared to same period last year and will report an operations loss of between $5 million and $7 million for the quarter, compared with a $7.3 million in profit earned 12 months ago.

Debt is expected to balloon by almost $30 million to total $120.3 million. So far the stock market has responded accordingly, with shares currently trading just over $1.

American Apparel's financial problems have persisted for quite a while. Though the company filed a provisional first-quarter report in May, it released the official numbers only today -- and they included an additional impairment charge of $4.2 million on top of the already pretty dismal previously reported results.

American Apparel had to release its 10-Q filing for the first quarter by yesterday in accordance with an agreement it struck with the New York Stock Exchange, which had threatened to delist the company. (Delisting from a stock exchange is often considered to be a prelude to bankruptcy.)

The retailer's longtime accounting firm, Deloitte & Touche, also quit at the end of July, but it's still tasked with investigating the clothing firm's consolidated financial statements for all of 2009 and current and projected earnings for 2010. And the once-hefty advertising budget for its racy campaigns has been chopped by more than 40%.

Settling With Woody Allen

American Apparel has also faced criticism for its hiring practices -- specifically targeting attractive young women and freezing out anyone who doesn't fit that bill -- and for Charney's personal behavior, which has seen him slapped with a number of sexual harassment suits. The company also recently settled with Woody Allen for $5 million in the wake of Allen's lawsuit for using his image on billboards without his permission.

All these factors add up to the likelihood of American Apparel's bankruptcy, a fate that Jezebel attributes to the company expanding "beyond the point of rationality or even sanity." All of the marketing and brand awareness can only go so far to compensate for mismanagement and endless legal battles. For American Apparel, they may not be enough to save it from doom.