American Apparel files for bankruptcy, wipes out Dov Charney’s stake in the company.

American Apparel Filed for Bankruptcy. That Could Be Just What the Company Needs.

American Apparel Filed for Bankruptcy. That Could Be Just What the Company Needs.

Moneybox
A blog about business and economics.
Oct. 5 2015 9:11 AM

American Apparel Filed for Bankruptcy. That Could Be Just What the Company Needs.

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The vestiges of Dov Charney.

Photo by Spencer Platt/Getty Images

American Apparel, whose shares last week closed at a paltry $0.11, filed for Chapter 11 bankruptcy protection early Monday. The move was a long time coming for the once-trendy retail chain, which has not turned a profit since 2009, is hemorrhaging sales, is facing worker allegations of intimidation, and, most importantly, is still struggling to keep its founder and jilted former CEO Dov Charney in check after firing him more than a year ago “for cause.”

Per the deal struck in the bankruptcy filing, American Apparel will shrink its debt to $120 million from $311 million by swapping bonds for equity, as well as gain some extra financing from its bondholders. The practical implications of that are threefold. First, American Apparel will be able to keep its Los Angeles manufacturing operations and 130 U.S. stores open, and has not yet announced any layoffs. Second, the company’s creditors, such as hedge fund Standard General, will gain full control of the retailer. Third, the stakes of American Apparel’s current shareholders—including Charney, who retained an $8.2 million investment as of Friday—will be eliminated.

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Since losing his post as CEO last June, Charney had made every effort to regain control of his company, or at least heckle its new leadership. In March, Charney gathered hundreds of current and former workers at a secret meeting in L.A., where he implored them to reinstate him as chief executive. Shortly after that, two workers filed complaints about American Apparel with the National Labor Relations Board. In early June, the company took out a restraining order against Charney, which barred him from “directly or indirectly seeking the removal of any member of the Company’s board of directors, including by instigating, encouraging, acting in concert with, or assisting any third party seeking to do so.” A few weeks later, Charney filed a lawsuit accusing American Apparel and Standard General of conspiring to push him out, and demanding $100 million in damages.

Paula Schneider, American Apparel’s new CEO, had repeatedly attempted to downplay Charney’s attacks. “I can’t concern myself with Dov’s agenda,” she told the New York Times in early April. Even so, Charney had been at best a nuisance, and at worst an active problem for a retailer already piled with debt and fighting to stay afloat in a competitive fashion market. “Every day, we would make choices on what we were going to buy, even though we needed more for everyone. Every day, I have to pick between what I’m buying for retail or wholesale, or giving e-commerce enough money to develop a mobile app,” Schneider told the Times. “Not having the nuisance lawsuits, not having this massive debt, these are all extremely important things for the company to thrive.”

Translation: Yes, we filed for bankruptcy. But we also maybe, finally found a way to shake off Charney. And that’s one thing American Apparel definitely wants.

Alison Griswold is a Slate staff writer covering business and economics.