American Apparel stores will probably close as it is unlikely anyone will step up to buy the store leases during the bankruptcy proceedings.
The bankruptcy filing obtained by FORBES showed that out of 53 potential suitors identified for American Apparel by Houlihan Lokey Capital, only three parties decided to move forward with letters of intent. Only one of the three stepped up. Canadian-basedGildan Activewear agreed to spend $66 million to buy American Apparel’s intellectual property, but not the stores.
Gildan will also purchase some of the wholesale assets and the opportunity to maintain all or a portion of the Los Angeles manufacturing. Gildan isn’t buying the retail inventory or the below-market leases. While another party could come in and make a competing offer as the auction process proceeds, it’s highly unlikely and in the meantime, the debtors have locked in at least one $66 million deal. American Apparel will probably end up liquidating the stores.
“I can’t imagine anyone wants those leases unless they are super cheap,” said retail expert Jan Kniffen Rogers. He added, “I assumed it would go to liquidation. There really is nothing there but the brand.”
The company disagreed saying, “The company has been evaluating several bids, some of which involve interest in retail. We see great potential for the retail business to continue under a possible new buyer during the auction process.”
American Apparel entered into its first bankruptcy with $300 million worth of debt. They were able to renegotiate the debt with its noteholders and emerge from bankruptcy. However, part of the deal included the ability to get an additional $40 million in new capital. With the departure of the CFO, no one wanted to throw good money after bad and the company couldn’t raise the much needed $40 million.
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The existing shareholders and lenders ponied up another $57 million to keep things going.. In total, the secured lenders funded American Apparel with $122 million of which they will probably only recover a fraction of that amount. The company was borrowing more than $2 million each week prior to the latest filing just to keep the company afloat. That certainly doesn’t entice many buyers.
Gildan seems to have picked off the best parts of American Apparel. In 2015 the wholesale business generated $167 million in net sales. The restructuring officer said that the company’s intellectual property assets were one of the company’s most valuable assets. American Apparel had registered more than 120 trademarks including American Apparel, Classic Girl, Standard American and Classic Baby. All great names.
“$66 million is not much of an investment,” said Kniffen. “I did not think that there would be a buyer for American Apparel other than for the brand name itself, which still has some edgy, cool mind share equity with a young customer.”
There is little appetite to pick up a troubled retailer. Even the court filing displayed a list of zombie retailers including Pacific Sunwear, Aeropostale and more recently Nasty Gal as evidence of the difficulty in the retail market. “The value they’re placing on these assets is definitely a value that reflects the fact that teen retail is a very difficult market,” said bankruptcy expert Joel Levitin of Cahill Gordon & Reindel. He went on to say, “You had a business that was cash flow negative. You need money and a strategy to turn it cash flow positive. That didn’t work before so your next alternative is to try to generate some value off of whatever assets you have and get the best deal out there. Cut your losses.”
The retail stores are still generating sales, but they aren’t enough to keep the company alive. While founder Dov Charney loaded up the company with debt and set in motion the turn of events to bankruptcy, his prophecy that it wouldn’t last without him seems to have come true.