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American Apparel Goes From Bad to Worse

On the plus side, things could be worse for beleaguered American Apparel (NYSEMKT: APP  ) -- it could be the beginning of Ragnarok, the Norse end times when the world and gods die. That would really cut into sales. Apart from the appearance of Loki, though, it couldn't get a whole lot worse than it already is. Yesterday, the Associated Press reported that the company has had a $10 million loan called up by Lion Capital, which is claiming that American Apparel defaulted when it changed its management structure by ousting former CEO and founder Dov Charney.

According to Lion Capital, the terms of the loan included language allowing the loan to be recalled if management changed. So when American Apparel ditched Charney on June 18, Lion saw a chance to get off a sinking ship earlier rather than later and called in its $10 million -- the loan was supposed to come due in 2018.

American Apparel's pinch
In an SEC filing, American Apparel disputed Lion Capital's claim, saying that the loan cannot be called up until July 19. American Apparel argues that the loan cannot default until Charney is actually out, and right now he's merely suspended. The company also said that it was in talks with its revolving creditors to allow it to repay the Lion Capital loan early.

If it does default, it could trigger a whole host of bad news, including a default on other loans that the company has. Right now, American Apparel has about $250 million in debt and less than $20 million in cash, making this a very sticky situation. That's probably why investors are fleeing the business. 1832 Asset Management used to own 6.6% of American Apparel, but according to a filing from the retailer this week, it now owns 0% -- no shares.

It's just too much
I like a lot of things about American Apparel, but its business is in a horrific place. Charney's personal shenanigans are a problem, but the bigger problem is that the company has been poorly managed. Sales have fallen as the business has seemingly refused to acknowledge a wider audience, focusing instead on people who already like the brand. That's left it open to competitors mimicking the brand's strong points while offering a wider range of popular products.

American Apparel isn't going to die, I don't think, in part because there are a few level heads still in the room. A report from Reuters has suggested that Standard General, which now controls 43% of the company on behalf of Charney, might be able to help the company out of its current bind.

American Apparel needs to plow through its Charney issues, get this loan repayment sorted out, and then start rebuilding its brand. It needs to broaden its customer horizons a bit and bring in some new folks who may have been tempted away by other companies. If it can do that, then this time next year things should be looking much better. Don't look for a miracle, but don't expect Loki to show up anytime soon, either.

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  • Report this Comment On July 10, 2014, at 3:36 PM, XMFRedRam wrote:

    Thanks for reading.

    Yeah. Roth Capital has been bullish on APP since 2012, I think. In their June 2012 coverage announcement, they said buy with a price target of $3. the stock was at $0.83 at the time. Now they say buy with a $1 target. Okay. They might be right this time -- we'll see in a few years, I guess -- but I'm unimpressed by the track record.


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Andrew Marder

Andrew Marder worked in retail for years, holding jobs ranging from bookseller to bank strategy analyst. He has worked for the Motley Fool since 2012, and loves coffee.

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9/1/2015 4:01 PM
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