American Apparel this week won a plea for an extension to its period for filing a reorganisation plan

American Apparel this week won a plea for an extension to its period for filing a reorganisation plan

Seeing in the New Year might not have been the only reason American Apparel felt like popping the champagne last week after it won a plea for an extension to its period for filing a reorganisation plan. But while now on a cautious road to recovery, the bankrupt US teen fashion retailer may have stopped short of celebrating as it considers the questions that need answering if it is ever to be taken seriously again as a competitor in its space. 

It is fair to say that American Apparel has had something of a tumultuous two years, which ultimately began with the ousting of former CEO Dov Charney for sexual misconduct and ended in a filing for bankruptcy protection. During this time, the company has navigated a triumvirate of falling sales, a balance sheet laden with debt, and several lawsuits, damaging not only the group's reputation but its bottom line. 

News of the bankruptcy will have been grim reading for Charney, who will see his 40% of American Apparel stock, currently worth some US$8.2m, completely wiped out, as well as a delay to his legal proceedings against the company. 

For American Apparel, however, Chapter 11 and the 90-day extension gives the company, and its new CEO Paula Schneider, some breathing space to devise a recovery strategy, some of which was revealed in July and included a new autumn line, a streamlining of costs, and a strengthening of the leadership team. The moves: all aimed at reviving revenues and profits. 

Tarnished image

It is the company's image, however, that will be key to American Apparel's salvage operation if it returns from bankruptcy, and if it is to begin trading effectively once again. 

The group has suggested it is attempting a more ethical approach to marketing, relying less on the sexual overtones it used in the past. Indeed, some of the confrontational images used under Charney's leadership included female mannequins with full pubic hair and a T-shirt featuring a menstruating vagina.

This may be of little surprise given the former chief executive's shenanigans during his tenure, which led to his firing. There were the allegations of misuse of company funds, sexual harassment of workers, and reports he threw dirt at, and nearly choked, a former store manager. Similarly controversial were reports of Charney roaming the factory floor in just his underwear and conducting a meeting wearing just a sock – and it wasn't on either of his feet.

As Conlumino CEO Neil Saunders put it: "Bankruptcy may appear a pretty sedate affair for the company relative to its tumultuous history". 

The retailer, however, appears to have still not yet learned its lesson after it came under fire in November for suggesting employees wear a T-shirt emblazoned with the phrase "Ask me to take it all off", for Black Friday.

Nonetheless, Schneider appears to have a steely determination to ensure the company returns to the heights it once enjoyed. At its peak in December 2007, American Apparel shares hit $16.80, shortly after it went public. They dropped as low as 11 cents in May last year and are now at around two cents.

The company built its cool reputation by defying many social norms, but it could be argued that it also got too big, too fast, taking on too much debt, like others in the US teen apparel space. Rival Abercrombie & Fitch is now closing stores, enhancing its organisational structure and addressing design and merchandising processes after expanding too quickly. Its trademark was creating stores that gave the feel of a nightclub rather than a clothing shop.

Both are operating in a category that has suffered somewhat as teen shoppers increasingly favour fast fashion players like Hennes & Mauritz (H&M) and Forever 21, as well as online players such as Asos, whose on-trend styles contrast with the classic preppy look and more pricey yet basic lines of the teen apparel firms.

The teen market, however, appears to be in a more favourable position than it was, with American Apparel rivals starting to report improved results. In its third-quarter Abercrombie & Fitch nearly doubled earnings, while American Eagle Outfitters saw earnings soar 723.3%, thanks to record sales and margin growth.

Questions remain

With this in mind, it will be crucial for Schneider to use American Apparel's 90-day extension to plan wisely if she wants to lift the company out of bankruptcy by February. Chapter 11 has offered the firm a chance to reinvent and re-establish itself.

However, as Conlumino's Saunders pointed out late last year, big questions remain around both brand and product. On the former, it is still not clear what American Apparel is trying to change to, other than be more ethical in its marketing. The company, he believes, needs "a clear and cohesive" brand image.

On the latter, with the expansion and popularity of players like Forever 21 and H&M, it will be crucial that American Apparel finds a point of view and a handwriting for its range, Saunders says. Without such a distinct identity, the company risks remaining "lost in the murkiness of the teen apparel market". 

The early initiatives set out last year, and the management reshuffles, suggest the retailer is certainly serious about a revival, but Chapter 11 buys time only. Schneider and her management team will need to use this time wisely to try and solve the company's deep rooted issues while retaining the brand's cool factor.