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Comment: Lack of leadership to blame for American Apparel’s latest crisis

Conlumino’s Neil Saunders takes a look at the problems facing American Apparel, which has filed for Chapter 11 bankruptcy protection in the US again and entered administration in the UK.

Just over a year on since its last foray into Chapter 11 and American Apparel is, once again, in trouble. Its second petition for bankruptcy protection comes amid a very similar set of circumstances to the first: a combination of falling sales, an unprofitable business, and a lack of leadership to drive the brand forward.

American Apparel

American Apparel

American Apparel

This unfortunate dynamic comes at a time when competition in the apparel space in general, and the teen apparel space in particular, is sharper than ever. Against this backdrop American Apparel has struggled to reconnect its brand with fickle consumers and, as a consequence, has lost market share and sales to rivals.

That the brand no longer has the cool or cachet it once did, has left many consumers unwilling to pay the premiums it once commanded. This has meant the acceptance of lower margins. These have been further eroded by excessive discounting across the teen fashion segment, driven both by competition and by the failure of other players like Aeropostale. Ultimately, this has put the company, with its more expensive US manufacturing base, at a distinct financial disadvantage.

Worryingly, these problems, while a core part of the latest filing for protection, are not new. They are the general causes of the first entry into Chapter 11. It is concerning that, a year on and minus around $200m (£160m) of debt, which was wiped out as a result of the first entry, the company still has not got its act together.

In our view this comes down to a lack of leadership. On the management front the company seems to have stumbled from one crisis to the next with the resignation of Paula Schneider as CEO leaving it rudderless at a time when it most needed direction. While the bondholders which took control deserve credit for rescuing the company, their intention appears to have been for American Apparel to tread water while they searched for a buyer. In a market as fast paced as fashion this was always a risky option for a business that actually needed a long term turnaround plan.

The emergence of Gildan Activewear, a Canadian apparel manufacturer, as a buyer is a sensible route forward. In our view, despite its many challenges, there is still some value in the American Apparel brand. However, that value is simply not sufficient to support the existing store network and its associated costs, hence Gildan’s decision not to buy out any of the store based leases or assets. Using its own network Gildan will be able to distribute the brand in a cost effective and profitable way.

The deal with Gildan, which i subject to approval by the bankruptcy court, will inevitably result in the closure of American Apparel’s 117 US stores. This comes at an unfortunate time with the shuttering of other brands, like Aeropostale, hitting shopping destinations. However, given that a lot of AmAp outlets are in fairly vibrant and high traffic locations, the gaps should, in our view, soon be reoccupied.

This disappearance of the American Apparel brand from malls and from Main Street represents the end of a turbulent period for a once controversial and iconic, but now just troubled, brand.

Neil Saunders is chief executive of retail consultancy Conlumino and based in the US.

 

 

 

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