Clothing Maker Fashions New Management Team

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American Apparel Inc. has been trying to grow up. The downtown L.A. company has been expanding its line to include midlength flannel skirts and other items for its maturing customers.

But sales didn’t exactly didn’t take off for the apparel manufacturer and retailer, better known for spandex leggings, lace bodysuits and basic T-shirts.

That’s where things are with style. Now on to the substance.

American Apparel has been trying to streamline its business operations, cut costs and, above all, manage its stubborn debt – which has forced the company to report that its ability “to continue operations as a going concern” is at risk.

So the company has been stocking its shelves with more sophisticated clothes to appeal to its base of aging twentysomethings, offering discounts through the Groupon website and restructuring its corporate ranks.

American Apparel announced last week that it appointed John Luttrell, a former chief financial officer at Old Navy and Wet Seal, to serve as executive vice president and CFO. He replaces Adrian Kowalewski, who was named executive vice president of corporate strategy.

That C-suite shuffle comes as American Apparel is renegotiating the terms of a credit agreement with one of its largest lenders, London private equity firm Lion Capital LLP, to avoid defaulting.

Peter Schey, an attorney and spokesman for American Apparel, said the company doesn’t comment on its business strategies. However, American Apparel is optimistic about its future.

“We are continuously optimizing our efficiencies and strengthening the executive team,” Schey told the Business Journal. “We think that we are going to have a positive year and look forward to building and strengthening the brand.”

But others are skeptical.

“The way out for American Apparel is to shrink,” said Jim Edwards, a columnist for CBS Interactive’s online business publication BNET who follows the company. “It’s overbuilt many of its stores. So it needs to shrink its footprint, make it smaller and more exclusive. Then it needs to raise prices to get its margins back.”

Chief Executive Dov Charney built American Apparel into the largest clothing company that manufactures in the United States. He did so by turning basic T-shirts, sweatshirts and leggings into trendy garb for the new millennium.

In a marketing move, the company offered a $25 voucher through the popular online discount site Groupon that could buy $50 in merchandise, and Reuters reported that it offered a similar deal in Europe, Brazil and Mexico in December for the holiday shopping season.

It also has expanded its merchandise to offer more accessories such as sunglasses, watches and fingerless gloves.

Meanwhile, the company has made its advertising even more provocative than in the past. The new campaign features topless photos in addition to the usual seminudes.

Last summer, the company started making clothes such as button-down shirts, pleated pants and sweaters to capture American Apparel’s core clientele of young hipsters as they started to get older. But there hasn’t been an immediate impact. For the three months ended Sept. 30, sales declined 11 percent to $135 million, compared with the same period a year earlier. The company reported a net loss of nearly $9.5 million for the quarter, compared with net income of $4.2 million the same period a year earlier.

Ilse Metchek, president and executive director of downtown-based California Fashion Association, said American Apparel needs to focus on producing even more fashion-forward clothes to gain an edge. That’s because the company is facing increasing competition from discount retailers such as Target and Wal-Mart, and fast-fashion chains such as H&M and Forever 21.

“What is driving people somewhere is new fabrications, new product,” Metchek said.

Another recent development: Billionaire Ronald Burkle reduced his 6 percent stake in American Apparel to 4.7 percent last month; he remains the largest individual shareholder after Charney.

Most significantly, American Apparel’s been under debt pressure – the company’s debt as of Sept. 30 was $134 million, compared with $120 million three months earlier.

The company announced last week that lender Lion Capital temporarily waived through Friday a credit agreement requiring it to maintain a minimum level of profitability over a 12-month period. Now, American Apparel executives are working to make the temporary waiver permanent in addition to negotiating further amendments.

Meanwhile, Schey has been quoted as saying that American Apparel is working with consultants to streamline operations.

Edwards said if American Apparel isn’t able to improve margins and cut costs soon, then its major lenders, Lion and Bank of America, are going to get antsy.

“If we don’t see that in the fourth quarter,” Edwards said. “Lion and Bank of America have to ask some serious question about when that turnaround is going to occur.”

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