While American Apparel Inc. explores the possibility of a sale, it has a new legal headache on its hands.
Attorney Keith Fink filed a lawsuit this week in Los Angeles Superior Court against the company on behalf of two former, longtime factory workers, Jeremias Pablo and Rene Ramos. Pablo oversaw sewing operations and Ramos was the sewing supervisor. They alleged wrongful termination, failure to pay overtime and retaliation for expressing concerns about working conditions and discrimination among other charges.
The issues appeared to have arisen from events on Feb. 26 when a work stoppage occurred following a meeting that included Pablo and Ramos and other supervisors to discuss safety issues at the factory. The complaint alleged that the work stoppage was born out of workers’ frustration over the removal of stitch guards on sewing machines. Pablo and Ramos, according to the complaint, were then fired “several hours later” and alleged the two were “terminated in retaliation for their complaints of racial/national origin discrimination and/or complaints of unsafe working conditions.”
“Despite repeatedly complimenting Pablo and Ramos on their performance over the years, these model employees were abruptly terminated for ‘substandard work’ — a reason inconsistent not only with their employment history, but also with what they were told in-person by HR director Craig Simmons,” the court document said.
A spokeswoman for the company declined comment on the matter.
The lawsuit is the latest in a series of legal tangles that have involved American Apparel. Fink is also the attorney for Dov Charney, who founded the company.
Charney was dismissed from the company in late 2014 and spent much of 2015, along with a cadre of supporters, trying to get reinstated at the company he founded. The year was marked with a series of protests outside of headquarters, attempts to unionize by factory workers and a raft of litigation lodged by Charney and former workers against certain members of the board and hedge fund Standard General.
The next chapter for American Apparel is unclear, now that it has hired Houlihan Lokey to sell the Los Angeles-based firm. The sale effort comes just six months after the company exited bankruptcy proceedings.
One source raised the specter of Chapter 22 bankruptcy — when companies who have exited bankruptcy head back in for their second tour of duty — should the company be unable to ink a deal. “I think the pressure’s on,” this individual said, adding the latest revenue target for the business is not expected to clear $350 million. An American Apparel spokeswoman, reached Thursday, declined to comment on the figure or if the company’s financial performance is expected to be in line with the forecast provided in its bankruptcy disclosure statement.
The company had said in that document it expected sales for first-quarter 2016 to come in at $120.8 million followed by a total of $396.3 million for the remainder of the year when it expected, at the time, to have emerged from bankruptcy.
The big question is who would buy it, although sources said it’s being pitched to the “usual suspects.” And while just who will get to see the “book,” is unclear, one should expect the list to include private equity firms.
The brand is still said to have some appeal in the marketplace. And brands that have operating issues, but still have some resonance for the consumer, are ideal for many of the brand management firms out there.
Kathy Gersch, executive vice president and chief marketing officer of leadership consulting firm Kotter International, said, “I think that through its trials and tribulations, the company has lost focus of the brand in the marketplace and where it should be positioned relative to its competitors. But because it’s still got the business and customers, it can be repositioned with the right team and communication to the marketplace.”
Gersch said the executive team at American Apparel can help with the sale by generating excitement internally among the employees — to keep morale up — about the opportunities that could come with a sale of the company, such as reinventing the model to appeal to Millennial shoppers.
“Ultimately a sale of the company will come down to pricing, and ultimately to brand equity in the marketplace. The issues American Apparel has are fixable,” Gersch said.
Whether Charney still sees value in acquiring the business and merging it with a new Los Angeles-area venture he’s looking to launch in the coming months remains to be seen. The American Apparel founder went in on a $300 million bid for the company in January with Hagan Capital Group and Silver Creek Capital Partners.
Charney confirmed to WWD he has not been approached by anyone about a possible deal and appeared on the fence about his interest.
“I would say I would have to see. They crashed the company. They destroyed it,” he said of whether he would try his hand at another bid.
Chad Hagan, chief executive officer of Hagan Capital, confirmed to WWD he is still working with Charney.
“It looks like we were mark-on with our assessments of the management and the strategies behind the business, but at this point we have not yet reached out to Houlihan,” Hagan said.
The last valuation on the company, based on research conducted by Moelis & Co. in October, pegged the value at $180 million to $270 million. The bid could likely be lower if the business has indeed deteriorated.