The document is a case study on the bankruptcy of American Apparel. It discusses the company's losses over several years due to scandals, lawsuits and changing consumer trends. It analyzes the impact on stakeholders like shareholders, employees and suppliers. Alternatives for addressing the company's financial troubles are considered, such as selling assets, rebranding or new ad campaigns. The conclusion is that selling underperforming stores and assets would help generate working capital while reducing costs.

1. “A Case Study on American Apparel Bankruptcy”
By
Khalil, Maybin, Monalisha, Samreen, Sanyukta
Under the Guidance of
Dr. Sangeetha Vinod
In (Partial) Fulfilment of the Requirements for the Degree of
Bachelors of Business Administration
SCHOOL OF BUSINES
MANIPAL UNIVERSITY DUBAI
November, 2015

2. Executive Summary
The case taken into consideration involves American apparel’s Bankruptcy. Despite losing
$750 million in shareholder value over the last seven years, a 2014 scandal, and myriad
questions the company’s competitive prospects in an increasingly fickle market.
Despite amidst sagging share prices, high-profile lawsuits, media coverage, and the
restructuring, the 5 members were able to handle the situation and come to a conclusion.
But this did not last for long as the company’s image was tarnished once again as there were
some allegations towards the company being very sexist and used exposing models for their
clothing adverts portraying women in a negative way.
The case study discusses these issues and helps us get an insight into the company’s problems
and the solutions that were selected by people to stabilize these issues.

3. American Apparel
Introduction of American apparel:
American apparel was founded in 1989. The founder was DOV CHARNEY. The American
apparel is the one of the biggest retail manufacturing company based on Los Angeles,
California in United States. The product is clothing. The company has over 273 stores till
2010 December. American apparel is a worldwide company and the number of employees is
11300 till December 2011.
Problem:
The company did not make any profits from 2009 and the company got bankrupt. In United
State chapter11 or tittle11 is the United State code for the bankruptcy. Tittle11 is available for
individual’s sole proprietorship Partnership Corporation. American apparel is unable to pay
their debt and their creditors file with federal bankruptcy court for the protection. In 2011
they have secured $14.9 million and right after that they have sold their share near about
$15.8 million.
In June 2014, managing directors decided to ask the chairman or CEO of the company DOV
CHARNEY to leave. Right after that Lion capital demanded their repayment of $10 million
and company was default on $50 million with Capital One Financial. American apparel is
trying to avoid the bankruptcy and repay the loan of $15.8 million which was due in October
2015. The other retailers already informed to the management that they could have faced not
having enough cash.
Stakeholders’ perspective:
Shareholders - The Company’s shareholders, depending on the type of stock they hold, may
be entitled to a portion of the liquidated assets, if there are any left over after bankruptcy.
However, the stock itself will become worthless, leaving shareholders unable to sell their
defunct shares as it would be considered worthless. Therefore, in the case of corporate
bankruptcy, the only recourse is to hope that there is money left over from the firm's
liquidated assets to pay the shareholders.

4. Upon bankruptcy, a firm will be required to sell all of its assets and pay off all debts. The
usual order of debt repayment, in terms of the lender, will be the government, financial
institutions, other creditors (i.e. suppliers and utility companies), bondholders, preferred
shareholders and finally common shareholders. The common shareholders are last because
they have a residual claim on the assets in the firm and are a tier below the preferred stock
classification. Common shareholders often receive nothing at all, as there is usually very little
left over once a firm has paid its debts.
Employees - According to recently released figures, the company employed about 10,000
workers at the end of the first quarter of 2015, but only 9,000 employees six months later,
meaning that the company has laid off 10 percent of its employees during that time.
In addition to these layoffs, the company has already seen significant cuts in wages along
with increased workforce casualization.
The American Apparel union, the General Brotherhood of Workers at American Apparel,
(GBWAA) claims that workers have received pay cuts of up to 50 percent since the takeover
took place. From American Apparel’s web site, the typical sewer with experience can now
make around $12 per hour, basically a poverty wage for the employees, especially in a city as
expensive as Los Angeles.
Workers have also reported furloughs and reduced hours. Sometimes, they won’t know their
schedule from one week to the next.
Suppliers - It was reported that The Knit House has filed legal action against American
Apparel to recover nearly $81,000 of an order worth more than $134,000. Reports said the
lawsuit was “for a relatively small amount,” but that the timing of the lawsuit for the retailer
“couldn’t have been worse,” considering the chain’s ongoing economic woes.
The Knit House reportedly claims that American Apparel has “refused” to pay the rest of the
bill on its outstanding invoice just three months after the supplier entered into an agreement
with the firm regarding invoice payments.

5. Current situation:
American apparel can’t even afford a lawyer because they do not have enough cash and all
shareholders interest have been wiped out and he depleted the savings. American apparel in
2014 had amid charges of sexual misconduct and financial mismanagement.
Paula Schneider, the new CEO of American apparel took the first step to formalize an
internal process and follow ad hoc policies. Her second step would be selling a product online
or store which should be at same rate and it should be acceptable.
Connection to theoretical and Empirical Research
1. Anchor Blue
Anchor Blue is a clothing store that went bankrupt, a similar case to that of the
American apparel. The anchor blue had to close all 117 stores, most of them in
California. Founded four decades ago as miller’s outpost, specialised in selling jeans,
casual wear and accessories, later on renamed as Anchor Blue by expanding to 300
stores by 1989. In May 2009, Anchor Blue filed for chapter 11 bankruptcies due to
the economic downfall and consumer spending.
2. Wet Seals
Wet Seal, similar to the other two clothing stores mentioned above, filed for chapter
11 bankruptcies by December and closed around 338 stores by January 7.
“The continuing fundamental shift in consumer behaviour away from traditional mall
shopping towards online only stores and increased competitions throughout the
speciality retail fashion industry have created a difficult operating environment”, this
was said by the chief financial officer, Thomas Hildebrandt.[1]

6. 3. Fashion Bug
Fashion bug is another clothing store that went bankrupt and was owned by Lane
Bryant Company, which was headquartered in Margate, Florida. The fashion bug was
one of the Charming Shoppes Company’s biggest brands with nearly 1000 stores
nationwide. By the end of June 2012, Charming Shoppes Company announced that
the Fashion Bug stores will be closed. At the end of February 2013, almost all the
stores closed of the Fashion Bug, due to the economic downturn that occurred in the
recent years which hit many businesses very hard. They experienced a decline in
profitability and sales and found it hard to maintain business as usual for very long.

7. SWOT Analysis
Strengths Weaknesses
 Uses less environment damaging chemicals in production.
 Simple and effective store layouts in fashion-forward locations.
 Has proven to be profitable company prior to troubles.
 Very strong political views demonstrated through “Legalize
LA” and “Legalize Gay” programs as well as support for
immigration reforms.
 High quality products.
 High exposure with low cost advertising.
 Strong customer and brand loyalty despite controversies that
have taken place in American Apparel.
 Providing debt for equity conversion, wherein bond holders
swap their debts for shares.
 Providing clothes manufactured locally in Los Angeles.
 Liquidity from the bondholders will give the company required
cash at hand.
 The CEO Dov Charney is considered a liability because he is
known for having quite an eccentric behaviour (such as arriving
to meetings wearing nothing but boxers) and also faces several
sexual harassments in lawsuits which gives a rather bad image
of American Apparel as it astounds the public how he is still
kept in charge.
 American Apparel has been the face of many controversial ad
campaigns which feature women in little to no clothing posing
in sexual positions.
 Huge dependence on immigrant labour
 Compared to rivals, American Apparel have higher production
costs and prices.
 Took on large amounts of debt with expansion from 2010-2013
and were forced to default on credit line with Lion Capital and
restructure with a higher interest rate.
 Public fallout between the founder Dov Charney and the
management of American Apparel.
 Employee dissatisfaction and large fall in sales
 Manufacturing process was affected in states other than Los
Angeles.
 Shares worth $8.2 million wiped out.
 17.7% fall in second quarter sales as compared to the previous
year.

8. Opportunities Threats
 In order to subdue controversy, American Apparel can offer
plus-size clothing since the plus-size consumer market growth
has been increasing and many companies who do offer plus-size
clothing earn some credibility.
 Expand online and catalog business sectors by offering
worldwide shipping since consumers are opting to shop online
even if branches are available in their city.
 Retract controversial ads and publish ads which focus more on
American Apparel’s positive attributes such as American
Apparel’s positive political activism.
 According to American Apparel’s financial reports, AA often
underperforms in quarter 3 and quarter 4 while other retailers
thrive so AA should bring across more seasonal sales providing
discounts and other promotions.
 Financing from bondholders will help in keeping all the 130
stores in the US, open.
 Bondholders will convert $200 million bonds into equity.
 Debt is to fall from $ 311 million to $120 million.
 Fall in debt will help the company in turning around and starting
fresh.
 Other low cost foreign clothing manufacturers
 Constant change in style and fashion which poses a problem for
AA’s designers as well as affecting production
 AA’s brand image due to numerous controversies which poses
an opportunity for competitors to use AA’s tarished image to
promote their brand.
 Investors may be unwilling to assist AA in getting a loan since
American Apparel hasn’t been able to turn a profit since 2009.
 Rise in raw materials especially cotton.
 Strong political views may drive away potential customers who
disagree with views.
 Anti-American culture may affect sales overseas.
 Mistrust of general public towards the company.
 Company focuses on teenagers, that demographic is considered
to be extremely fickle.
 NY stock exchange announced that American Apparel will be
delisted shortly.

9. Alternatives
Alternative 1-:
American Apparel can try to sell some assets of the company. For example, close down and
sell a few American Apparel branches. Look at the revenues coming from different branches
of American Apparel and close down the ones that are garnering the least revenues.
Advantages Disadvantages
Reduction in wasting already scarce
resources.
Company can have clearance sales in wide
open areas such as parks in order to get rid of
stock.
A lot of employees would have to be made
redundant.
If clearance sale does not work out,
American Apparel would have to increase
warehouse costs as stock from closed
branches have to be stored somewhere.
Alternative 2-:
Rebranding American Apparel’s target segment by aiming to target a different age group i.e.
American Apparel’s primary target market are young adults of 20-35. American Apparel
could increase the age segment by attempting to target the 35-45 age brackets which were
something they steered clear from but in an attempt to gain more business, American Apparel
can go in this new direction after doing a feasibility study in the target market.
Alternative 3-: Launch new ad campaigns
Advantages Disadvantages
Helps rebrand the company’s image as
compared to past ad controversies
The company will have to dip into the
contingency reserves which would reduce the
reserve money that could have been used for
research and development
Launching a new ad campaign would help
grab new customers
In the case where the ad campaign would
fail, there’ll be a loss on the part of the
company
Advantages Disadvantages
Re-establishing trust amongst the target
market
False demand would mean increasing
production and if there’s decreased sales, it
would mean waste of already depleting
resources
Wider target market with much higher
purchasing power
The target segment may not want to purchase
from American Apparel because of hearing
past controversies of the company

10. Conclusion
Taking into consideration the case and the alternatives, we have concluded by selecting the
alternative of selling the assets (alternative 1). Since the company did not make any profit
since 2009, selling of some assets like closing down a few stores in countries which are not
doing well was the better option. So selecting the first alternative was the most viable option.
Selling of shops that are turning in less profit would reduce excess expenditure on the part of
the company as rent, employee etc. cost will be cut down and also stock levels will increase
without spending money on producing new stock for sale in other shops making profits.
Subletting the less revenue generated shops would bring in more working capital for the
company which can be used for other activities such as using the money for new ad
campaign, paying off some debts etc.

11. References
 Julia Rubin and Meredith Haggerty (2015), “ American Apparel worker revolt” ,
http://www.bloomberg.com/news/articles/2015-11-05/american-apparel-founder-says-
he-s-broke-and-can-t-afford-lawyer
 https://en.wikipedia.org/wiki/American_Apparel
 Henzi (2011), “Segmenting and Targeting Markets”,
http://staybasic.blogspot.ae/2011/05/ch8-segmenting-and-targeting-markets.html
 Mark Gronowski (2013), American Apparel Case Study
http://www.slideshare.net/mcgronow/american-apparel-case-study
 Dawn McCarty and Sophia Pearson(2015), “ Wet seal Bankruptcy” ,
http://www.bloomberg.com/news/articles/2015-01-16/wet-seal-joins-parade-of-
clothing-retailers-filing-bankruptcy[1] [page ]
DOR: 24/11/2015
 Andrea Chang(2014), “ Anchor Blue Bankruptcy” ,
http://articles.latimes.com/2011/jan/14/business/la-fi-0114-anchor-blue-20110114
DOR: 24/11/2015
 Kelly Ballard(2012), “ Fashion Blog Bankruptcy”,
http://www.businesssmartly.com/bankruptcy-news/fashion-bug-gone-out-of-business-
32.html
DOR: 24/11/2015
 Matt Lee (25th
November 2015) “What happens to the stock of a public company that
goes bankrupt?”
http://www.investopedia.com/ask/answers/06/bankruptpublicfirm.asp

12.  Adam Mclean (2015) “Wages and jobs cut as American Apparel files for bankruptcy”
https://www.wsws.org/en/articles/2015/11/04/amer-n04.html
 Pymnts (2015) “Late Supplier Payments Bite American Apparel”
http://www.pymnts.com/in-depth/2015/late-supplier-payments-bite-american-apparel/