The Threat of Fast-Fashion: American Apparel in Peril

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Sweater at American Apparel: $98.00

Almost identical sweater at H&M: $24.99

The fashion industry is changing and, as a consumer, I love it. I can scope out my favourite stores for ideas and then wait a few weeks for similar styles to become available elsewhere for less. Fast-fashion retailers, such as Zara, H&M, and Forever 21 have become extremely popular with the young and hip. Styles change too quickly and tuition costs too much for us to spend a significant amount on any one piece of clothing; such is the beauty of fast-fashion.

Unfortunately for traditional clothing retailers, consumers can only appreciate this beauty. Today’s youth just aren’t as willing to pay for quality clothing, which has meant troubled times for many retailers. One of the more recent examples is American Apparel, which filed for bankruptcy on October 5, 2015. How did they reach this new low? Is a turnaround possible? What’s next for American Apparel?

The company started with great brand image. I’m talking about a company that offers jobs to hardworking Americans rather than outsource production; that features real women in its ads rather than today’s stick-thin supermodels; that designs, produces, distributes, and sells all of its clothing to ensure quality is maintained every step of the way. It seemed like American Apparel could do no wrong.

And then came the scandals. A 2009 audit revealed that the company employed 1,800 illegal immigrants. In 2011 American Apparel paid $1 million to settle a civil suit regarding a worker’s death. The following year, a series of racy ads were met with backlash. Finally, in 2014 Dov Charney, founder of the brand, was ousted after masturbating in front of a reporter, saying the c-word in the office, and being sued for sexual harassment a number of times during his tenure as CEO.

Through it all, American Apparel prevailed.

So why now…after every scandal, controversy, and lawsuit imaginable has the company opened its book to Chapter 11? Fast-fashion. It’s a trend that’s been creeping up on the industry for years and American Apparel isn’t the first to be overpowered. Gap, J. Crew, Abercrombie & Fitch, Quiksilver, Wet Seal, and Aeropostale (just to name a few) have been struggling recently. Meanwhile fast-fashion retailers continue to churn out cheap, trendy clothing for the masses. American Apparel simply can’t keep up; especially considering it pays its workers about five times more per hour than companies that outsource production overseas. In fact, American Apparel has posted a loss each year since 2010, cumulating to about $340 million. Its recent bankruptcy filing was a long time coming – the company is finally attempting a turnaround.

Since the bankruptcy filing, Paula Schneider, who was appointed CEO after Charney left, has been working with American Apparel’s board members and lenders to negotiate financing deals. Thus far the company has managed to reduce its debt from $300 million to $135 million through debtor-in-possession and debt-for-equity financing, as well as by selling over $200 million in bonds. Additionally, the company announced the launch of a 6-month restructuring program, which it can now afford to put into action thanks to its debt-reduction plan and an additional $70 million in liquidity from lenders.

Schneider believes that this restructuring program will be enough to turn the company around and leave some of the drama of the past few years behind. Will it really? It’s perhaps too soon to tell, but if American Apparel fails to address the growing competition from fast-fashion retailers a successful turnaround is unlikely.

In last year’s annual report American Apparel stated that it would aim to add newer, trendier pieces to its line in an effort better respond to changes in style. The question experts now ask is whether the company will be able to compete with fast-fashion retailers who are already doing this given that American Apparel’s production costs are so much higher. That being said, “Made in USA” is American Apparel’s identity – the company can’t simply move production overseas to cut costs.

So what then? One possibility is an investment in cutting edge technology, similar to that used by Zara, which uses robotics to automate production and reduces the amount of labour required. While this could help American Apparel financially, it would mean letting a significant number of workers go, as well as a sizable initial investment. Another option is for the company to focus more on its wholesale operations. Last year that section of the business grew 5.1% to $209 million. It may be time for American Apparel to shut down its stores and sell through other retailers instead.

Despite the challenges it faces, American Apparel’s board remains optimistic with regards to its turnaround plan. Whether it will be enough to distinguish the brand from so many cheaper fast-fashion retailers only time will tell. The fashion industry has become a volatile, dynamic place where traditional retailers will have to fight to stay relevant, keep up with trends, and, ultimately, survive.

Written By: Samantha Schmidt


 

References

“American Apparel Reaches Agreement with Lenders to Significantly Reduce its Debt and Interest Payments.” American Apparel, 5 Oct. 2015. Web. <http://www.americanapparel.net/aboutus/investorrelations/pressreleases/>

“American Apparel seeks bankruptcy protection, Canada stores unaffected.” Global News, 5 Oct. 2015. Web. <http://globalnews.ca/news/2258560/american-apparel-seeks-bankruptcy-protection-canada-stores-unaffected/>

Arvisais-Hamilton, Justine. “A Guide to American Apparel: Scandal, controversy, and the move into Chapter 11 bankruptcy.” The Strand, 22 Oct. 2015. Web. <http://thestrand.ca/a-guide-to-american-apparel-scandal-controversy-and-the-move-into-chapter-11-bankruptcy/>

Bradford, Harry. “A Brief History of American Apparel’s Dov Charney Allegedly Doing $%&*@# Up Things.” Huffington Post, 19 June 2014. Web. <http://www.huffingtonpost.com/2014/06/19/dov-charney-fired_n_5512312.html>

Howland, Daphne. “Can American Apparel make a comeback?” Retail Dive, 8 Oct. 2015. Web. <http://www.retaildive.com/news/can-american-apparel-make-a-comeback/406945/>

Lutz, Ashley. “American retail as we know it is dying a slow and painful death.” Business Insider, 15 June 2015. Web. <http://www.businessinsider.com/gap-closing-stores-as-abercrombie-and-j-crew-struggle-2015-6>

Stoel, Leslie. “Can American Apparel save itself?” Fortune, 21 Oct. Web. 2015. <http://fortune.com/2015/10/21/american-apparel-bankrupt-domestic-production/>

Tabuchi, Hiroko. “American Apparel Files for Bankruptcy.” New York Times, 5 Oct. 2015. Web. <http://www.nytimes.com/2015/10/06/business/american-apparel-files-for-bankruptcy.html?_r=0>

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