American Apparel says it’s facing Chapter 11 — or 7

By Dow Jones Newswires
Posted April 1 at 10:48 a.m.

Los Angeles-based retailer American Apparel Inc.  warned that it could seek Chapter 11 bankruptcy protection, or even be forced to liquidate under Chapter 7, as its financial woes  deepen.

The company, known for its risque marketing campaigns and colorful basic clothing, is experiencing “significant liquidity constraints,” according to a Thursday filing with the Securities and Exchange Commission. If its efforts to shore up its balance sheet and turn around its business fail, a bankruptcy filing — possibly prepackaged, with support from some creditors secured in advance — could be on the horizon.

“If we are not able to timely, successfully or efficiently implement the strategies that we are pursuing to improve our operating performance and financial position, obtain alternative sources of capital or otherwise meet our liquidity needs, we may need to voluntarily seek protection under Chapter 11 of the U.S. Bankruptcy Code,” American Apparel said.

“If we were unable to implement a plan of reorganization or if sufficient debtor-in-possession financing were not available, we could be forced to liquidate under Chapter 7 of the U.S. Bankruptcy Code,” the company said.

American Apparel painted a grim picture of its finances and its future, noting there was “substantial doubt” it will be able to continue as a going concern.

“We incurred a substantial loss from operations and had negative cash flows from operating activities for the year ended Dec. 31, 2010,” the company said, adding that global economic conditions and steep increases in yarn and fabric prices have exacerbated the company’s struggles. American Apparel also acknowledged that it could be barred from tapping funds under its revolving credit agreements, which “could have an immediate and significant impact on our liquidity.”

The company, which has long struggled with declining sales and mounting debt, reported a fourth-quarter loss of $19.3 million, or 27 cents a share, compared with a profit of $3.05 million, or 4 cents a share, a year earlier. The drop reflects sharply lower same-store sales, higher payroll costs and store-closure-related charges. Sales dropped 8.9 percent, to $144 million.

Still, American Apparel says it’s seeing signs that 2011 could be a better year. Its same-store sales are improving and it expects first-quarter same-store sales to fall by a percentage in the mid to high single digits, easing from the 11.5 percent decline in the fourth quarter. The company expects positive same-store sales for 2011.

“Our principal goal in 2011 is to stabilize the business and create a platform for renewed growth and increasing sales,” acting President Tom Casey said in a statement released Friday.

The company’s shares recently were trading down 25 percent, at 73 cents. The stock has fallen 77 percent in the last year.

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