Everything seems to be running short at American Apparel Inc. — time, money, even the number of shares.
While that last issue might be addressed at the company’s annual meeting Thursday, observers see a murky and difficult road ahead for the cash-strapped retailer.
For one, after the meeting, ousted and disgruntled founder Dov Charney and his one-time partner Standard General are both free to try to buy the company — something they haven’t been able to do under the terms of a standstill agreement inked last year. That could inject a new urgency to the battle for American Apparel, which thus far has included a boardroom coup, a snap financial marriage and breakup, a tentative takeover offer from Irving Place Capital and lawsuits galore.
The latest, filed Monday, was Standard General suing Charney for breach of contract.
During it all, chief executive officer Paula Schneider has been making big and at times controversial changes: moving the brand away from its racy image, closing stores, cutting costs and reworking operations.
But before any of that can really take hold, the company has to get its financial house in order — and many observers are starting to see bankruptcy as a viable option.
“The possibility of anyone coming in here at this point and wanting to loan the company money is remote,” said one debt expert, who requested anonymity. “Even the tone of [a recent statement detailing the company’s cost-cutting efforts] was kind of, like, ‘We’re desperately trying to fix this thing, but we hear the clock ticking.’ They have to stop the bleeding.”
This is not exactly a new situation; the rating agencies have long noted that American Apparel is in a precarious position. Almost a year ago, Standard & Poor’s downgraded the company’s debt to “CCC-minus” and said “a debt restructuring appears inevitable within the next six months.”
The company made it through that time frame but is still on the hunt for cash.
When shareholders gather for American Apparel’s annual meeting in Chicago, they will vote on whether or not to allow it to double the number of shares outstanding to 460 million.
If the proposal gets the go-ahead, the company could start to issue additional shares, raising money to fund its turnaround while diluting the holdings of current investors. Even if shareholders don’t approve more shares, the firm said it might sell preferred stock, which has already been approved but never issued.
It’s not clear how far additional stock sales would get the company, which has seen its shares drop to 35 cents on Wednesday, giving it a market capitalization of just $63 million.
More debt financing could also be a tough sell. The company already has a heavy debt burden with about $220 million in long-term bonds outstanding.
Standard General gave American Apparel an unsecured $15 million loan in March, helping it make its $13.8 million interest payment on the bonds the following month. But the company has another interest payment coming up in October and it’s unclear whether Standard General is ready to pony up more cash.
The investor, led by Soo Kim, linked with Charney after he was ousted last July and loaned him money to rebuild his stake in the firm to 43 percent. That led to a deal with American Apparel that reshaped the company’s board, giving Standard General significant sway.
For a time, the waters seemed to have calmed. Charney was back as a consultant with a hand in the business, but he was ultimately fired in December and had a falling out with Standard General, with both parties suing the other.
Standard General is in prime position to increase its influence at the company or make a play for more equity if American Apparel has to reorganize in bankruptcy court.
In addition to its loan to help with the interest payment, Standard General has a deal with Capital One that could result in it purchasing American Apparel’s $34 million asset-backed revolving credit facility by Sept. 30 or earlier. It is also believed to own some of the outstanding bonds.
A source familiar with Standard General’s thinking said that, “The firm has made substantial investment in and remains committed to the company’s success.”
Schneider did not immediately respond to a request for comment.
With the financing state up in the air, the ceo is rushing to demonstrate that her turnaround has legs. On July 6, the company said it had redesigned its line and is making a push for fall while cutting about $30 million in costs over 18 months.
But the company was clear-eyed about the challenges it faces, noting in its July 6 statement: “Even if American Apparel increases revenue and cuts costs, there can be no guarantee that the company will have sufficient financing commitments to meet funding requirements for the next 12 months without raising additional capital, and there can be no guarantee that it will be able to raise such additional capital.”