Mentally prepare yourself to say goodbye to the legendary disco shorts, disco pants, the unisex ‘Flex’ fleece zip-up jacket, and all the high-waisted ‘Easy’ jeans from American Apparel Inc. (APP). The well-known and well-loved United States based clothing manufacturer and retailer that has been consistently praised for its high-quality but simplistic clothing pieces from one-piece bodysuits to multi-way dresses has been suffering from a steady decline in stock prices since 2008. The company is on the verge of defaulting on the debt that has accumulated and plummeting into bankruptcy as a result of corporate mismanagement from its previous Chief Executive Officer Dov Charney, the company’s overall debt, and rivalry within the industry. Could this be the end of American Apparel?
Hmm, What happened?
1. CEO Dov Charney was fired.
2. The company has massive debt with high interest rates that may not be able to be repaid.
3. EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is not enough to help with the debt load.
4. The company has continuously yielded unimpressive portfolio returns.
Before Charney Was Fired
Dov Charney is a Canadian businessman who founded the brand and pioneered the refusal to outsource manufacturing and the “Made In USA” sweatshop free model of fair wages. In 2009, Charney had been named as one of the Top 100 Most Powerful People in Southern California by the Los Angeles Times. In addition, he was nominated as a Time 100 finalist by Time Magazine. Recently, he has been involved in various legal issues including a $10 million lawsuit from film director Woody Allen and sexual harassment lawsuits involving ex-employees. Prior to Charney being released from his position, one particular investor saw a vast amount of potential in American Apparel, Inc. (APP) and viewed Charney as a “visionary.” Despite all the debt that the company was facing, FiveT Capital AG, a Zurich-based Swiss firm, was intrigued and found American Apparel endearing enough to be worthwhile of an investment. Johannes Minho Roth, a founding father and Chief Executive Officer of FiveT, purchased roughly half of the shares available in American Apparel’s stock offering, which heavily assisted the clothing chain to pay off a portion of its increasing bills. At a roughly 13% stake, FiveT is currently American Apparel’s largest outside investor.
Unfortunate Company Outcomes
American Apparel has also experienced a shortcoming in sales with larger losses after a new distribution center was not operated to its expected performance standards. This unexpected situation left the company in a hole with a $13.4 million interest payment. Following this circumstance, the NYSE (New York Stock Exchange) Annex had threatened American Apparel about delisting their stock since the chain was incapable of meeting obligations as a result of its financial state. Roth had been keeping a close eye and following American Apparel for around 4 years as these events continued to occur. The retailer’s stocks appeared even more savory to Roth this year when the shares sank to a price below $1.
Can FiveT Revive American Apparel?
Roth’s company has ultimately been known to invest in small companies or businesses that begin struggling to stay afloat. FiveT Capital is aiming to help American Apparel improve its finances through possibly lowering the interest rate of the frightening amount of debt. In the past, FiveT has come to the rescue to TheStreetInc. (TST) in 2011. When experiencing a heavy money loss, the financial news website had 6.3% of its shares obtained by FiveT. Jim Cramer, the host of CNBC’s “Mad Money” is still currently the fifth largest investor in TheStreet, possessing 5.8%.
Although the chain has progressively piled up a debt of $270 million since the early months of 2010, American Apparel has consistently reigned as one of the go-to retail brands for high-quality clothing for both men and women for the past several years. The company prides itself in its U.S. manufactured pieces that cater towards a generation of young adults who appeal to a slightly more hipster style. After evaluation of the stock trends of the company, it is duly noted that the retailer cannot afford to take another major blow if it wants to maintain its livelihood.
What kind of effect would the end of American Apparel’s simple but hipster clothing pieces have on consumers? Do you think this could be the end of the only brand that manufactures all of its items within the country? Let me know what your input on this situation is and be sure to stay well-involved in other enticing finance discussions here.