American Apparel may default on loans.Just a few years ago, American Apparel (APP) was held up as a model for American clothing retailers, thanks to hip marketing campaigns, profitable earnings, a high-flying CEO in Dov Charney and products entirely made in the USA.

But now a series of financial troubles coupled with allegations of shoddy labor practices leaves the company's future in serious doubt, with signs American Apparel may go away sooner rather than later.

On Tuesday, according to CNNMoney, American Apparel said it may default on loan agreements with its lenders, citing ongoing weakness in its business. This news comes just months after negotiating a $94 million loan from British private equity firm Lion Capital and is a far cry from more profitable times as recent as February 2009. While American Apparel is in talks with creditors to avoid a default, if it does come to pass, the company warns that it may not have sufficient liquidity to stay in business for the next 12 months.

Falling Profits, Ballooning Debt

The news of a potential loan default also comes the same day that American Apparel reported provisional second-quarter earnings for the period ended June 30. As was the case for the first quarter, the stats are especially grim. The company expects same-store sales to drop 16% compared to same period last year and will report an operations loss of between $5 million and $7 million for the quarter, compared with a $7.3 million in profit earned 12 months ago.

Debt is expected to balloon by almost $30 million to total $120.3 million. So far the stock market has responded accordingly, with shares currently trading just over $1.

American Apparel's financial problems have persisted for quite a while. Though the company filed a provisional first-quarter report in May, it released the official numbers only today -- and they included an additional impairment charge of $4.2 million on top of the already pretty dismal previously reported results.

American Apparel had to release its 10-Q filing for the first quarter by yesterday in accordance with an agreement it struck with the New York Stock Exchange, which had threatened to delist the company. (Delisting from a stock exchange is often considered to be a prelude to bankruptcy.)

The retailer's longtime accounting firm, Deloitte & Touche, also quit at the end of July, but it's still tasked with investigating the clothing firm's consolidated financial statements for all of 2009 and current and projected earnings for 2010. And the once-hefty advertising budget for its racy campaigns has been chopped by more than 40%.

Settling With Woody Allen

American Apparel has also faced criticism for its hiring practices -- specifically targeting attractive young women and freezing out anyone who doesn't fit that bill -- and for Charney's personal behavior, which has seen him slapped with a number of sexual harassment suits. The company also recently settled with Woody Allen for $5 million in the wake of Allen's lawsuit for using his image on billboards without his permission.

All these factors add up to the likelihood of American Apparel's bankruptcy, a fate that Jezebel attributes to the company expanding "beyond the point of rationality or even sanity." All of the marketing and brand awareness can only go so far to compensate for mismanagement and endless legal battles. For American Apparel, they may not be enough to save it from doom.

Increase your money and finance knowledge from home

Investment Strategies

What's your investing game plan?

View Course »

Understanding Stock Market Indexes

What does it mean when people say "the market is up 2%"?

View Course »

Add a Comment

*0 / 3000 Character Maximum

8 Comments

Filter by:
Robin

I am in the retail and imprint business. I am hoping American Apparel finds their way out of this and does not go bankrupt, as I stock their products for my retail business and use them all the time for my imprint business. I buy directly from teh company. My rep is a great woman and she says that although Dov is not your typical boss, his reputation is blown way out of proportion. Say what you want...there is no other company in America that makes the same type of product in so many different styles. I work mainly with childrens and womens--and unlike some of the comments below--they are good quality. And the childrens line is not racy at all. I am very concerned that if American Apparel closes its doors, I may have to look overseas for a similar product. I am certain it will be cheaper overseas, but I would absolutely rather buy from a company in America than anywhere else!

August 23 2010 at 7:36 AM Report abuse rate up rate down Reply
t4chngemb

Haaaa...Haaa....Made in USA by illegals....check the records...this guy was bagged over a year ago for hiring something to the effect of 1,800 illegal immigrants....I would suspect half his debt comes from fines...

August 22 2010 at 4:02 PM Report abuse rate up rate down Reply
fjhooperbrown

I use to only buy things made in the USA or Canada. But times have changed and it has become almost impossible to do that so when I saw this online (the news artical) I thought I would check it out. I would never ever buy from this company. When they say Risque they mean it. It also looks very cheap, trashy and most of the things I would never ever let my children wear. The look belongs in a strip club. Then, hearing how they treat their workers chinched the deal. I hope they "leave town" fast. Even the models look cheap. (nothing personal to them, just the look). We DO need more people to produce things in the USA but they need to be quality, good looking and with fair treatment to their staff. I have a uniform company (medical) and the only fabric I use are fabrics printed in the USA.

August 18 2010 at 10:09 AM Report abuse +5 rate up rate down Reply
Sylvia

Not surprised they're going under. Salespeople are routinely rude and 'hipper than thou." And the clothes have become increasely flimsly and poorly made.

August 18 2010 at 10:03 AM Report abuse +9 rate up rate down Reply
Susan

I am in the imprinted clothing business and have done some business with AA. However, I had started steering my customers away from them a few years back, when I became aware of Dov Charney's filthy business practices. I told customers "I will do anything you ask, but you might want to know about this company's owner's ethics first". I think it's arrogant for Charney to feel he can do anything he wants to do to women, and still think women will buy his clothing. He deserves everything he gets.

August 18 2010 at 9:40 AM Report abuse +5 rate up rate down Reply
Chelle

You know.... if the CEO wasn't such a complete pig, I'd be upset because the premise of the company is very good and my daughters love the product. Read about his antics -- I've done my best to NOT have my daughters buy clothing from someone who has such disrespect for women. Boot Charney... reoganize.

August 18 2010 at 9:17 AM Report abuse +3 rate up rate down Reply
baydolphins2003n

I just want to know where the seamstresses they use are located. I can never find enough and only sell products made in the USA; yet when I try to find them in south Florida, guess what? none around....amazing

August 18 2010 at 8:33 AM Report abuse +3 rate up rate down Reply
1 reply to baydolphins2003n's comment
Susan

Their sewing facility is in DT LA, they say. I've heard stories of their locking the workers in, that most are undocumented, and of course, all the models look underage and possibly, as if they're some of the undocumented workers. American has some stores in S. FL (I'm in S. FL too) but of course, if you're in the garment decoration business, you dont' buy from a store - you buy from the company directly.

August 18 2010 at 9:48 AM Report abuse +3 rate up rate down Reply