American Apparel files for bankruptcy

American Apparel files for bankruptcy

American Apparel Inc is completing plans to file for bankruptcy protection as soon as Monday morning, people familiar with the situation said, the latest setback for a company that was thrown into chaos after a battle to oust founder Dov Charney. 

The Los Angeles-based clothing manufacturer and retail chain has struggled with shrinking sales and an outsize store footprint, as well as litigation tied to Mr Charney, who left the company in December. 

American Apparel plans to restructure its debt and close stores in bankruptcy, one of the people said. Creditors have agreed to commit more money to fund the company's operations in bankruptcy and finance its exit from chapter 11, the person said. 

To be sure, companies and their creditors often use the threat of bankruptcy to complete deal making and bring parties to the table. Plans can sometimes change at the last minute, causing bankruptcy filings to be pushed back one or several days. 

The company, which had about 10,000 employees in June, had $US6.9 million in cash and $US38.4 million outstanding on its credit facility as of June 30. It has been staving off bankruptcy through a series of cash infusions. 

One question is where a bankruptcy filing would leave the hedge fund Standard General, which through a deal with Mr Charney became the company's largest shareholder. Shares of American Apparel, which peaked at $US15.80 in December 2007, finished Friday at 11 cents. 

Mr Charney created a following with twentysomethings, who clamored for his T-shirts and leggings. But a series of allegations of improper behavior eventually led to his removal from the company. Through a lawyer, Mr Charney has in the past denied the allegations. 

Paula Schneider, the new chief executive officer, has been trying to overhaul the company by streamlining product offerings and cutting costs. But those efforts have so far failed to stem a string of losses. In the quarter that ended June 30, American Apparel lost $US19.4 million as sales fell 17 per cent to $US134.4 million. 

Problems at the company started well before Mr Charney's ouster. American Apparel hit a setback in 2009, when it was forced to lay off more than half its Los Angeles factory staff after a probe by immigration authorities found those workers weren't authorised to be in the US The company had to replace them and train the new workers, which caused costs to soar and delayed shipments to stores. A year later cotton prices spiked, causing expenses to jump further. 

American Apparel wound up borrowing money at high interest rates. Mr Charney's exhibitionism -- he spoke openly about sex, staged racy photo shoots in the basement of his mansion and sometimes walked his factory floor in his underpants -- scared off some lenders altogether, other people familiar with the matter said.