American Apparel's main lender has agreed to cut the company a break. That just leaves a Department of Justice investigation, an accounting scandal, an SEC investigation, avoiding delisting, late quarterly filings, plummeting sales, and overall un-profitability on the to-do list!
"Retail is hard right now," says Dov Charney.
It's harder for him than it is for most. His company has been wracked by declining sales and allegations of financial irregularities that have drawn federal subpoenas, as well as an immigration raid that cut his Los Angeles workforce by one third and made American Apparel's production schedule go haywire. Most of the company's troubles are the fall-out of a massive, ill-advised expansion Charney embarked upon at the height of a real estate bubble — an expansion that he chose to fund almost entirely with debt.
In its deadline-busting financial report from the first quarter of this year, American Apparel was forced to admit it was incurring "substantial losses" and cop to a risk of bankruptcy. "For the remainder of 2010, the Company may not have sufficient liquidity necessary to sustain operations for the next twelve months," it wrote. American Apparel also had to warn investors that it was close to breaching the terms of its $120 million debt, around $80 million of which is held by one company, Lion Capital.
Today, Lion and American Apparel announced they have reached an agreement on renegotiated terms. Essentially, for the rest of 2010, Lion is waiving the requirement that American Apparel maintain a certain level of profitability in order to continue receiving credit.
This will give Dov Charney's company a breather, and it means that Lion still believes American Apparel can one day becoming a functional, money-making company. Of course, it also means that Lion, having already invested so much in the company and seen so little for it, sees more value in American Apparel as a live entity than it does as a bankruptcy. This is, after all, the fourth time Lion has relaxed the terms of American Apparel's debt; at most of these renegotiations, Lion also ups American Apparel's interest rates in exchange.
Lion affirmed its commitment to both Charney and to American Apparel's U.S.-based manufacturing model. But it is requiring the company to hire "several" new executives to try and help correct its slump.
American Apparel's stock rose to $1.43 when the announcement was made; it's now trading at around $1.32.