American Apparel

LOS ANGELES — American Apparel LLC rolled the dice, placing its bets on a future without founder Dov Charney. Instead what occurred was a business that spiraled out of control, with a second bankruptcy filing Monday less than a year after emerging from its first and a deal with a buyer for only a portion of the business.

Company chairman Bradley Scher told workers the news of the bankruptcy and sale to Canada-based Gildan Activwear Inc. for $66 million in a letter sent out Monday, which was obtained by WWD. The potential to keep some of the company’s manufacturing, distribution and warehouse operations in and around Los Angeles was also mentioned in that letter.

“Although we have reached an agreement with Gildan, [a bankruptcy] filing with the court allows us to hold an auction process, where other buyers who might propose a better deal than Gildan’s can submit competing offers, including for the retail business,” Scher said in his letter. “Ultimately, we will be able to get the best deal done, by requiring various other bidders to compete to buy our iconic, valuable brand.”

The deal with Gildan includes the company’s intellectual property along with some of its other assets, but leaves out the 110 U.S. retail stores.

“The brand obviously has a very rich history and significant value has been created in the Made in the U.S.A. component in the brand over the years,” said Gildan spokesman Garry Bell. “We very much intend on continuing that.”

The asset purchase agreement does not include the headquarters and main American Apparel factory in downtown Los Angeles, but does include some of the equipment in the building, Bell said. The company’s manufacturing facilities in Garden Grove and South Gate, which are leased, are included in the agreement, with Gildan also contemplating the La Mirada distribution center, Bell added.

On the subject of jobs, it’s too soon to say, he said.

“If we choose to move forward with facilities, we’ll have to fill them with workers….The short answer is we really don’t know at this point without having gone through the evaluation [of the assets] and have the bankruptcy run its course. It’d be premature for us to give any kind of direction in relation to the workforce.”

As a result of the bankruptcy, Gildan now becomes the stalking horse bidder in an auction. If a sale is not closed within 80 days of the filing, the company would likely begin liquidation proceedings.

For Charney, there’s disbelief in the latest turn of events.

“I went to war since December of 2014 to buy the company. The first offer was for $550 million [with Irving Place Capital in late 2014],” he said. “The subsequent offer was for $300 million [in early 2016 with Hagan Capital Group and Silver Creek Capital Partners]. Now they’re taking something sub-$100 million? And what happens to the jobs and the workers and the stockholders? All the stakeholders got burned and they didn’t even make money for themselves.”

Charney, who is launching his own T-shirt brand, said he hasn’t been approached by executives at Gildan and declined to speculate about whether he would entertain any offers to work with them if the sale is closed. “I have great respect for them but I’d have to evaluate any offer,” he said.

American Apparel ceo Chelsea Grayson, who took the helm of the company following the departure of Paula Schneider in October, was unavailable for comment.

The turnaround that was supposed to be ushered in with Charney’s firing in late 2014 was dubbed a failure in chief restructuring officer Mark Weinsten’s declaration filed in court Monday, where he added the company had been borrowing more than $2 million weekly just to keep the business going in the months leading up to the second filing.

American Apparel filed for bankruptcy in October 2015 and emerged from it in February of this year. Since that time sales have fallen nearly 33 percent, with earnings before interest, taxes, depreciation and amortization down $40 million compared with a year ago, according to court documents. The company’s net sales last year were $497 million.

American Apparel’s secured lenders — a group led by Monarch Alternative Capital LP and also includes Standard General LP, Goldman Sachs Asset Management LP and Pentwater Capital Management LP — have loaned it more than $122 million of which they “will likely recover only a fraction of the funds that they have advanced,” Weinsten said in his filing.

Standard General is listed as the company’s top unsecured creditor in its bankruptcy petition, with a claim of $15.19 million.

American Apparel’s planning process—inefficiencies of which were often pegged to Charney under Schneider’s leadership—appear to have only worsened, with Weinsten describing any attempts to improve those processes either failed or came too late causing sales declines. Other troubles that befell the business was a decline in online sales, issues related to quality control and an inconsistent marketing plan “that lacked focus and did not attract or interest the company’s core customer base.”

Weinsten went on to say that “by summer 2016 the turnaround strategy contemplated in the prior [bankruptcy] plan had completely failed and the company’s liquidity challenges hastened.” That’s when American Apparel began shopping for a buyer and said it reached out to 53 prospective suitors, of which 30 signed non-disclosure agreements bearing out in seven indications of interest and ultimately three letters of intent. It’s unclear whether this latest development will bear out in additional parties interested in buying just the stores.

American Apparel also sought court approval Monday to begin using $30 million in debtor-in-possession financing from Encina Business Credit LLC.