• by Thom Forbes  @tforbes, October 5, 2015

Still bruised from its legal battles with ousted founder Dov Charney and battered by competitors in the fickle teen market, Los Angeles-based American Apparel filed for bankruptcy protection in U.S. Bankruptcy Court, District of Delaware, early Monday morning.

“But before visions of American Apparel stores with tumbleweeds in them start flashing in your head, understand that this doesn't mean the chain will be disappearing,” writes John Jannuzzi for GQ. “Under this agreement (still pending approval by bankruptcy court), the company will be allowed another — perhaps last — chance to right themselves. Stores would remain open, and at this time, no layoffs have been announced.”

Indeed, the company vowed to “revitalize the business and brand, while keeping its production and operations in the U.S.” in a statement announcing an agreement with 95% of its secured lenders to implement the financial restructuring.

“This process will ultimately benefit our employees, suppliers, customers and valued partners,” says CEO Paula Schneider. “American Apparel is not only an iconic clothing brand but also the largest apparel manufacturer in North America, and we are taking this step to keep jobs in the U.S.A. and preserve the ideals for which the company stands.”

The deal with lenders will “reduce its debt by swapping bondholders’ debt for shares in the company. The deal also included extra financing from the participating bondholders,” reports Amie Tsang for the New York Times. 

The very fact that GQ is on top of a filing that took place in the wee hours would indicate that there is still perceived value in the brand even as it battles “competition from the likes of COS, Zara, and the other fast-fashion retailers of the world” which have “slowly but surely … become the go-to for teens in malls across America,” as Jannuzzi observes.  

Not to mention H&M, which Shan Li does in her report for the Los Angeles Times. Sales at American Apparel have continued to fall “from the 2013 peak of $633.9 million, despite a turnaround plan announced this year that included reaching out to a broader age range and $30 million in cost cutting,” she writes. 

“In the three months that ended June 30, American Apparel suffered a 17% decline in revenue to $134 million, the fourth straight quarterly drop. At the same time, the company is shelling out at least $10 million a quarter in interest expenses,” Li reports.

“The bankruptcy would wipe out American Apparel’s current shareholders, including Mr. Charney, whose stake in the retailer that he founded in 1989 was worth about $8.2 million as of Friday,” points out Hiroko Tabuchi for the New York Times. “It would instead put the company’s creditors in full control, including Standard General, the little-known hedge fund that is also leading the turnaround at RadioShack, which went bankrupt in February.”

Anticipating the filing in a story published on Forbes.com Friday, Debtwire’s Pat Holohan wrote: “As the prospects of bankruptcy for American Apparel have shifted from ‘if’ to ‘when,’ the company is faced with mounting legal baggage. A bankruptcy filing would automatically pause all lawsuits against the company, but its docket has grown in recent months with complaints from vendors, employees, shareholders and its infamous former CEO, Dov Charney — himself the target of a series of sexual harassment suits.”

Charney, who started the company in 1989, has filed several lawsuits against the company since his dismissal for alleged misconduct last December. He alleges “defamation, representation in false light and claims for securities fraud,” reports Reuters’ Supriya Kurane.

“Problems at the company started well before Mr. Charney’s ouster,” Suzanne Kapner and Matt Jarzemsky remind us in the Wall Street Journal. “American Apparel hit a setback in 2009, when it was forced to lay off more than half its Los Angeles factory staff after a probe by immigration authorities found those workers weren’t authorized to be in the U.S.”

The cost of hiring new workers and a spike in cotton prices a year later hit the bottom line. “American Apparel wound up borrowing money at high interest rates,” Kapner and Jarzemsky write. “Mr. Charney’s exhibitionism — he spoke openly about sex, staged racy photo shoots in the basement of his mansion and sometimes walked his factory floor in his underpants — scared off some lenders altogether, other people familiar with the matter said.”

Charney has not yet publicly commented on the developments.