Less than a year after controversial American Apparel CEO and founder Dov Charney was permanently booted from the company on charges of sexual harassment and misuse of company funds, his successor, Paula Schneider, has filed for Chapter 11 bankruptcy protection.
According to the New York Times, the retailer’s debt will be reduced through a process called debt-for-equity conversion, in which bondholders exchange their debt for shares in the company. If the filing is approved by the bankruptcy court, this will completely remove the company’s current shareholders—Dov Charney included—in favor of the company’s creditors, all investment firms or hedge funds (most notably the hedge fund Standard General, whose newfound influence on the board of directors following Charney’s ouster caused some employees significant distress).
The beleaguered company has lost over $340 million over the past 5 years, including $45 million just this year. Debts, sales struggles and a stock decline (which accelerated after Charney’s departure), angry workers, and an extremely litigious ex-CEO have made this bankruptcy filing appear all but inevitable, especially after an August announcement that the company had “substantial doubt” it could stay in business for another 12 months.
According to the Times, last week the New York Stock Exchange warned that American Apparel was close to being delisted. Currently, its shares are at just 11 cents. “Our debt load simply wasn’t sustainable. You can’t do a turnaround plan without cash,” CEO Paula Schneider told the Times on Sunday.
Charney has filed a number of lawsuits against American Apparel and Standard General since December 2014, who have responded in turn. Charney has been, depending on who you ask, either a rallying figure or a resentment-stoker amongst the company’s distressed factory workers, whose jobs have become increasingly unstable (and who recently destroyed a piñata likeness of Schneider). Within the terms of this bankruptcy, many of Charney’s lawsuits against the company will be frozen, and American Apparel will effectively erase his remaining shares in the company—likely eliminating any remaining hope Charney and his supporters had of his being returned to power.
The filing will allow the company to keep its L.A. factory and 130 U.S. stores open, shrinking its debt from $311 million to $120 million. No layoffs have been announced yet, and Schneider is expected to stay on as CEO. In a statement on the filing, Schneider said:
“This restructuring will enable American Apparel to become a stronger, more vibrant company. By improving our financial footing, we will be able to refocus our business efforts on the execution of our turnaround strategy.”
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