Boutique retailer Oak has now parted from former parent company American Apparel Inc. But this might be a rough time to go it alone.
On a recent afternoon, a sign on the window of the high-end chain’s downtown L.A. store near the corner of Ninth Street and Broadway boasted 50 percent markdowns on clothing. But the store was empty of customers and a trendy passerby walked on without even a casual glance at the offerings within.
That could be a bellwether for times ahead.
The small chain, which has two stores in Los Angeles and two in New York, was acquired in 2013 by American Apparel but split from the troubled retailer in January when its former co-owners – who had stayed on in management roles – closed a deal to buy the business back for approximately $600,000 as part of American Apparel’s bankruptcy proceedings.
But going it alone might not be any easier. The boutique must now manage its bicoastal operations and rebuild infrastructure without the manufacturing resources of its former parent and, most importantly, find new financial backing, if it has not already.
“It’s not a bad thing not to be part of American Apparel, but in some ways being separate isn’t great either because they don’t necessarily get the scale that American Apparel had,” said Neil Saunders, managing director of Conlumino, a New York retail consultancy. “It’s a double-edged sword.”
Meanwhile, American Apparel is working to rebuild its own business after emerging from its recent Chapter 11 reorganization.
Unsteady past
After struggling in the years after they formed Oak in the early 2000s, Louis Terline and Jeff Madalena sold the business to American Apparel in July 2013, according to court documents. The deal, the value of which was not disclosed, allowed both co-founders to stay on and steer the brand.
For American Apparel, Oak’s more expensive avant-garde outfits, including a $115 T-shirt and $800 bomber jacket, allowed the company to expand its reach without siphoning off business from its primary line of trendy, affordable clothing.
But the newcomer soon found itself part of a dysfunctional family, one beset by sagging business and a fight for control. Within a year of the acquisition, American Apparel’s board ousted founder and Chief Executive Dov Charney. By December 2014, he had been formally fired; the company filed for Chapter 11 bankruptcy protection in October 2015. Its reorganization plan was approved in January.
“It was almost doomed from the beginning,” said Houman Salem, chief executive of ArygleHaus, a San Fernando fashion design and development firm.
For Oak, however, American Apparel’s bankruptcy gave Terline and Madalena a chance to buy back their former company as American Apparel decided “to divest the Oak business” rather than “devote additional resources and management to turnaround,” according to court documents.
Terline and Madalena did not respond to requests for comment. Representatives of American Apparel were likewise not responsive.
Uncertain future
But as Oak faces a new period of uncertainty, it will likely need outside capital to compensate for losses, and that could pose a problem.
“I don’t think this is the kind of brand that any major investor will step up to the plate for,” said Salem, adding that institutional investors would be unlikely to take a risk on a boutique that has not previously fared well alone or under American Apparel.
Potential investors are also unlikely to support a company led by the same team that has guided it through its troubled life.
“If the company was really successful and had loads of forward potential, I think American Apparel would have been able to sell it to someone else, but there wasn’t anyone else,” said Conlumino’s Saunders.
Even with a source of private equity, managing the chain could prove difficult, analysts say.
¨While in some ways it will be better to be independent given American Apparel’s troubles,” Neil Stern, a senior partner at Chicago retail consulting firm McMillanDoolittle, said in an email, “being a bicoastal, four-store company is incredibly difficult to manage.”
Marketing a collection for customer bases on opposite sides of the country, distributing merchandise without the support of American Apparel and redefining the target audience of the brand and its price points are also pertinent issues to address.
“They need to figure out who their customer is. The American Apparel customer isn’t spending $100 for a shirt,” said Dwight Hill, a retail analyst also at McMillanDoolittle, who noted that Oak is neither a luxury nor low-cost retailer.
That might be evident at the downtown L.A. location, which is still hoping to rid itself of months-old stock before offering a new collection.
Early last week, a store manager who asked to remain anonymous because he was not given permission to talk, said that the boutique had seen roughly 25 to 45 shoppers come through during lunch.
“I think we’re just waiting to become the cool kids again,” he said.
