How can American Apparel avoid bankruptcy? (AMEX:APP)

It’s too late for anything but a Hail Mary from American Apparel Inc. (AMEX:APP), but here are three things the company possibly do to avoid bankruptcy.

Icebergs are looming for the cotton T-shirt shipwreck otherwise known as American Apparel Inc. (AMEX:APP). The company warned on Friday that it may need to file voluntary Chapter 11 bankruptcy. Things look so bad, in fact, American Apparel may be forced to liquidate its assets if it can’t find bankruptcy financing or put together a Hail Mary reorganization plan.

It all comes down to cash, of course, and American Apparel has gotten very good at losing it. During the company’s Q4 earnings report out Friday, APP reported a loss of $19.3 million ($0.27 per share). A year ago, they actually made $3 million during the same quarter.

Revenues have been plummeting alongside profits for the retailer. They were down 9 percent from $158.1 million to $144 million for the three months ended Dec. 31, according to ABC.

Just when things look like they can’t get any worse, American Apparel is also getting squeezed by surging cotton prices. Costs for the key ingredient in APP’s soft tees has doubled in six months. The vultures are circling, and there don’t appear to be many bullets left in the corporate gun.

How can American Apparel save itself from bankruptcy?

It might be too late. Shares in American Apparel are down 45 percent since the start of the year. Over the past 12 months, shares are down more than 70 percent, and they now trade at a mere $0.90. If there is a pool of capital out there looking for a home, you can bet it won’t land in American Apparel’s hands without a lot of cotton strings attached.

Here are three key things American Apparel could do to move toward profitability:

1) Hog-tie the CEO. CEO Dov Charney runs American Apparel like he’s at the helm of a tech company in 1999. He’s most definitely not. He’s in one of the most cut-throat retail markets known to man: t-shirts. Negative press from a string of female employees alleging Charney of inappropriate sexual conduct just doesn’t engender confidence with Wall Street bankers – and those bankers are the ones with checkbooks. If Charney’s out of the picture, the company looks a little less ugly.

2) Trim the fat. When an individual’s having trouble paying off their mortgage, they stop buying those triple-pump caramel macchiatos at Starbucks (in theory, anyway). American Apparel is unable or unwilling to do the same. The company’s spending madly on new stores, administration and marketing even as revenues are sagging. “Selling and admin costs were all up (last year),” writes Jim Edwards at BNET. “Even advertising costs — at $18 million — returned to the level they had been in 2008, up from $11 million in 2009. Ask yourself: Who increases their marketing costs when they know their revenues are declining?”

3) Close the ugly ducklings. The time for hard decisions has come and gone. Now, the company needs to make the gut-wrenching decisions: mass layoffs, mass closings of unprofitable retail outlets and wage freezes would be a good start. Last year, American Apparel closed 14 stores and opened six new ones. And the CEO seems to think opening more new stores is the answer. That’s the last thing they need to do. If an outlet’s sales are suffering, that outlet needs shuttered and every effort from here on out should focus on making the profitable stores even more profitable.

The only saving grace in all this is I don’t feel like the public’s soured on American Apparel’s brand. The company makes the most comfortable t-shirts known to man, and their brand name has the power to bestow cachet on any run of the mill mall. If American Apparel does go bankrupt, I expect a lot of holding companies might be game for gobbling up the brand, re-working it under new, untainted management and – who knows – signing paperwork for a brand new IPO in 2015.



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