American Apparel (NYSE:APP) needs some advice. The Wall St. Journal reported Thursday that the retailer and clothing manufacturer is seeking assistance from restructuring advisors on account of its inability to offset weakening sales and poor demand for its products. Add that to an impressive debt load and the retailer has a big problem on its hands.
American Apparel’s debt issues are hardly breaking news, considering the company has already come dangerously close to breaching loan contracts and breaking deals, but what is significant to investors is American Apparel’s evident inability to turn its struggles around. The Journal says that the once highly popular clothing retail is now sitting under about $240 million in debt, and there is no apparent end in sight. The only reason it hasn’t already breached loan covenants — those terms designed to protect lenders — is because the company refinanced the majority of its debt in 2011, a reality American Apparel admitted to in late January.
That’s why the Journal reports that the Los Angeles, California-based retailer is now tapping lawers at Skadden, Arps, Slate, Meagher & Flom LLP to help it consider restructuring options, and decide what its strategy will be for the future. Insider sources say that it was the company’s bondholders that agreed to organize and enlist the restructuring advisors, and they turned to those at Skadden because the firm has already served as American America’s outside corporate counsel.
According to the Journal, American Apparel now employs about 10,000 workers and operates 247 retail stores in 20 countries, including the U.S., Brazil, Australia, and Japan. It is still unclear how these employees and their locations will fare if the company goes ahead and orchestrates a total restructure, but more details may be uncovered if and when the company’s executives confirm their plans.
American Apparel released its latest round of earnings earlier this month and said that comparable-store sales for January were down 4 percent, compared with an increase of 10 percent in the year-earlier period. Comparable-store sales are generally considered a good indicator of a company’s health because the metric doesn’t take into account the volatility of newly opened or closed locations. Such a disappointing decline in same-store sales thus has even more implications for American Apparel. As a whole, the Journal reports that total sales fell 1 percent in January, compared with another 10- percent increase in January 2013. Those figures are illustrative of the retailer’s current woes and why it is imperative — now more than ever — that American Apparel gets itself figured out before further moving forward.
Like many retailers, American Apprel has blamed its recent sales pitfalls on the frigid weather this winter, but the cold is due to evaporate soon, and the company has to ensure its business hasn’t frozen up for good.