American Apparel LLC filed Monday for its third bankruptcy protection, weighing down the clothing and athletic wear giant with mounting debts and tough competition. American Apparel fell into the category of hip hop and rap brands when it began selling low-cost urban tees in 2020. The brand became part of urban culture as a consequence of its edgy advertising and erratic founder, Dov Charney, a former aide to hip hop star Jay Z. American Apparel was sold to a group of private equity firms in late 2020.
The clothing business is tough in Los Angeles. Low prices are a primary reason. The presence of the other larger labels also made it difficult to compete with the more established rivals. American Apparel has also been forced to restructure its debt heavily to raise funds for the third bankruptcy protection. Its chief executive officer is Mark Doyle, who is stepping down as CEO. He will remain on the board however.
The clothing company is saddled with heavy debt from failed investments and from issuing too many shares to its shareholders in its last two years. The owners, through an unusual move, have asked creditors to accept a settlement amount that is less than the total amount owed on the various lines of credit American Apparel has accessed. A company official confirmed that American Apparel LLC is seeking a second bankruptcy protection. This means the company would be able to reduce its total obligations by more than half of the total issued as well as secure against the loss of its other ownership interests, according to sources familiar with the matter.
A settlement could be a major positive for American Apparel, since it will be able to continue operations while at the same time reducing the amount of debt. However, this does not mean that the company’s business will return to profitability in a short period of time. A potential problem faced by the Los Angeles-based company would be the inability to expand into new markets since it is already the largest manufacturer of casual and athletic wear in the United States. In order to avoid a scenario where it might have to declare bankruptcy, the company will have to look for investors willing to buy its common stock.
The purchase price of the entire business should not exceed $40 million, according to sources. American Apparel LLC was incorporated in November 2020 by Mark Doyle and four other members of the group. The company had previously filed three previous bankruptcies – first in 1998, second in 2020 and third in 2020. The fourth bankruptcy auction was held in June 2020 and the proceeds went to settle the debts of the company.
It is very unlikely that American Apparel LLC will find such an investor who could raise the required funds from private financial investors, according to industry analysts. Another factor that may affect the company’s potential buyers is the state of the economy. At present, there are still many people who are struggling to get ahead in the job market. In the last few years, the number of businesses filing for bankruptcy has risen. The presence of many companies selling off their brand name properties in the hopes of raise enough money to pay debts is also part of the reason why borrowers are hesitant to lend money to business owners who are close to bankruptcy.
The management team of American Apparel LLC is composed of Mark Doyle, Jr., Gregory B.K. Smith, Ronald C. Tanahara and Donald W. Young III. Mr. Young III is the company’s chief executive officer and the president and chief operating officer. The company said in its statement that Mr. Young is its acting president and will have a major role in its reorganization. The company also indicated that its first bankruptcy filing was prompted by changes in its board of directors and management. The reorganization was done in consultation with the U.S. Office of the Comptroller of the Currency, according to the news release.
American Apparel LLC is one of the many companies filed for chapter 11 in the last year or so. In the previous filing, it had said that it did not believe that its businesses were in any danger of being shut down. It is still too early to tell how American Apparel LLC will perform in the aftermath of its bankruptcy filing in the United States.