American Apparel Scouts for New Management

American Apparel's stocks rallied Friday on news of amended loan agreement.

American Apparel Inc. won some breathing room from its lender, Lion Capital, but will have to ramp up profitability to keep within the terms of its new deal.

This story first appeared in the October 4, 2010 issue of WWD.  Subscribe Today.

Lion also gave the company’s controversial chief executive officer, Dov Charney, a vote of confidence, but said it would be bringing in some new senior executives.

“Lion Capital has enormous admiration for both American Apparel and its founder, Dov Charney,” said Lyndon Lea, founder and partner of Lion. “We are working together with Dov to realign the capital structure of American Apparel to support a number of key initiatives within the business, including the hiring of several new senior executives.”

Lion also voiced support for the company’s “Made in USA” philosophy and its 7,000 Los Angeles workers.

Reached by phone, Charney said the amendment showed Lion’s willingness to work with American Apparel as it strives to improve operating results.

“Retail is hard right now,” he said. “I’m not alone in this. You have to work for every dollar, you have to work on the merchandise, make sure the product mix is perfect and the allocation is right. It’s a tough market right now.”

Charney noted American Apparel is focused on improving business in its existing store base. The company does continue to open stores sporadically as opportunities arise. A new unit opened in Paris two weeks ago and another store is slated to open in St. John’s, Newfoundland, next week, Charney said. The company employs 10,000 people and operates more than 280 stores in 20 countries.

Asked about the hiring of new senior-level executives to help lead a turnaround at the company, Charney demurred on any details. “If we hire a new C-level executive, I will let you know,” he said.

American Apparel is working with a number of consulting firms in its efforts to improve operations, including West Palm Beach, Fla.-based FTI Consulting, PriceWaterhouseCoopers and Deloitte & Touche, which continues to work with the company in Canada despite having resigned as its corporate independent auditor.

“We work with consulting firms all the time on a project basis,” said Charney.

The loan deal eliminates a condition that the company keep earnings before interest, taxes, depreciation and amortization above a certain level through the end of this year. In August, American Apparel warned it would likely break the covenant and that its ability to continue as a going concern was in doubt.

Although many questions remain, investors greeted the news of a new deal on Friday with a hearty rally, pushing the stock up 16.3 percent to close at $1.43. Over the past year, the stock has traded as high as $3.88 and as low as 66 cents. At its height in December 2007, the issue traded at more than $15 a share.

To meet the terms of its tweaked loan agreement, American Apparel now has to register consolidated EBITDA of $20 million for the 12 months ending Jan. 31. The threshold rises over time and by September 2013, the company will need to pull in EBITDA of $80 million to remain in compliance.

American Apparel’s EBITDA was $45.9 million for the 12 months ended March 31, but the business weakened over the spring. Preliminary results for the second quarter, ended June 30, revealed a 16 percent comparable-store sales decline, on a constant currency basis, and operating losses of $5 million to $7 million.

A dark cloud still hangs over the American Apparel books, and the NYSE Amex LLC gave the company until Nov. 15 to file its official second-quarter results and avoid being delisted from the exchange.

Deloitte & Touche resigned as the retailer’s auditor in July and indicated it had “certain information” that could impact the reliability of the firm’s 2009 financial statements. The U.S. Attorney’s office in Manhattan subpoenaed documents related to the auditor shuffle.