How American Apparel Lost its Ass, and How it Can Get Back on its Feet

Last Updated May 21, 2010 6:08 PM EDT

It's been a wild ride to stardom for 13-year-old American Apparel (APP). CEO Dov Charney proved a wizard at grabbing attention for the brand with notoriously porn-y advertising, and the company grew to 280 stores. But now it's all coming crashing down because along the way, the company got distracted by the glamour and forgot to make a profit.

In the past week, American Apparel dropped multiple bombshells. To start, it lost so much money in the first quarter that its total debt soared over $90 million.

This put the company out of compliance with one of its credit facilities, so if it can't reach an agreement with the lender, a chain reaction may cause all its loans to be called. In that case, the company would need a cash infusion -- pronto -- to stay afloat. Amidst the chaos, American Apparel couldn't manage to file its quarterly financial statements on time, so now it has until August to straighten up or it will be kicked off the American Stock Exchange.

With this news, American Apparel officially passes into its awkward adolescent phase. Like a rebellious teen, it's stuck out its lower lip and it's not following the rules. Investors want American Apparel to start acting like a responsible, grown-up company fast, or Charney's porn party could be over in a few months.

American Apparel got into this mess by believing its own hype about how easy it would be to profitably make clothing in the States. It expanded hither and yon, both geographically and merchandise-wise, into 20 countries and into lingerie, eco-clothes, and more. In the swirl of store-openings and press from its racy ads, managers didn't seem to care that debt was piling up. Then came the recession and sinking sales, but the company plowed on without slashing expenses to fit market conditions.

Just over a year ago, the company averted a similar crisis by getting an $80 million loan from Lion Capital, for working capital and to pay off a $51 million loan. Though there's lots of doomsayers out there on American Apparel, a rescuer will likely be found this time, too.

Why? We love having American Apparel to kick around. The apparel industry has a vested interest in seeing this homegrown manufacturer succeed -- nobody wants to admit, "Yeah, clothing just can't really be made in the United States anymore." Most likely, an industry player will bail them out.

Options at this point include getting a straight-out cash infusion again in exchange for an equity stake or taking the company private again with a private-equity bailout. Another possibility is an acquisition by a deep-pocketed apparel conglomerate such as VF Corporation (VFC), which already owns casual brands such as Wrangler, Vans and lucy.

American Apparel will survive, but, Charney may find himself out on the street, or at least on a shorter leash, under new owners. Given the sexual-harrassment lawsuits he's facing, that might be just as well.

Photo via Flickr user Lomo-Cam Related:

  • Carol Tice

    Carol Tice is a longtime business reporter whose work has appeared in Entrepreneur, The Seattle Times, and Nation's Restaurant News, among others. Online sites she's written for include and Yahoo!Hotjobs. She blogs about the business of writing at Make a Living Writing.