American Apparel executives and board members regained a measure of control this week: A bankruptcy court judge approved their plan to move forward with a reorganization strategy that transfers ownership of the company from shareholders to lenders, and in doing so, strips founder Dov Charney of any stake of the company.
Charney has been aggressively fighting to return to American Apparel since he was ousted as its chief executive amid allegations of sexual misconduct and misuse of company money, and the court’s move deals a serious and perhaps final blow to his efforts. Plus, it restructures a crushing debt burden that was making it hard for the clothing chain to do business.
“This is as much of a clean slate as they’re going to get,” said Liz Dunn, chief executive at retail consultancy Talmage Advisors.
So now what?
The battle with Charney has no doubt been a distraction for American Apparel, but it is hardly the retailer’s only problem. Sales have been in a tailspin, dropping some 17 percent in the last quarter in which the company reported earnings. (It has not reported sales since filing for bankruptcy in October, but the company says the holiday season was “tough.”) Experts say consumers have relatively low awareness of the lurid accusations against Charney and the corporate fireworks that followed. And Paula Schneider, the executive who replaced Charney at the top of American Apparel, has said the retailer’s weak sales are a symptom of more routine retailing missteps: The merchandise has missed the mark with customers, stores were not placed in the right locations and often were crowded with too much merchandise.
And so now, Schneider hopes American Apparel — a destination for wardrobe basics and youthful, edgy pieces such as bodysuits and crop tops — is able to proceed with a new focus on the strategy she outlined months ago to turn things around.
“It feels like a little bit of a rebirth, having the ability to be in the first inning,” Schneider said in an interview Wednesday.
When it comes to the clothes, Schneider has been on a mission to pare back the number of styles the company sells. But she said the company was so cash-strapped last year that it’s been hard so far to inject much newness into its line-up. The company was only able to buy about 1o percent of the new designs it cooked up for last fall, and those designs made up only about 6 to 8 percent of what was in stores. That should change after the reorganization, so for the spring season, she expects the chain will be able to bring many more new items to stores, likely 125 to 130 new pieces.
For spring, she said American Apparel will be focused on selling a new women’s “Best Fav” T-shirt, a wardrobe staple that it hopes will bring back customers who have tired of T-shirt designs that Schneider says feel outdated. How does Schneider know the existing women’s T-shirts aren’t hitting the mark?
Even in American Apparel corporate offices, she said, “I don’t ever see anyone wearing it.”
Still, it may not be quick or easy for American Apparel to make these kind of design updates, especially given that the company is trying to widen its appeal beyond teens and the college set to young women in their 20s and early 30s.
“It’s going to take a very savvy, creative merchant and planning team to identify ways to evolve the American Apparel product” for someone who dresses for the office and then wants to go out for the evening, said Ann Paulins, who teaches retail merchandising and fashion product development at Ohio University.
Schneider has also moved to close under-performing stores, trimming the chain’s portfolio from 240 locations to 204 as part of a broader cost-cutting initiative it announced last summer. Now that the closures are complete, she said the plan is to make the remaining stores easier to shop. For the stores that remain, the company is now piloting new merchandising tactics at its New York outposts. In SoHo, for example, the team has taken 40 percent of the fixtures off the store floor and axed slow-selling pieces. Schneider said that it seems to be fueling a favorable sales trend in that location and is helping customers more easily find what they’re looking for.
Schneider arrived at American Apparel after it had lost more than $300 million over five years under Charney. And yet investors continued to sell off the stock after her arrival, driving it down to just pennies a share before it was de-listed in October. That may suggest they weren’t confident that the changes she has outlined will be enough to revitalize sales.
Some employees, too, have staged protests outside American Apparel’s offices to register dissatisfaction under the new leadership.
And it doesn’t help that the company is trying to mount a comeback in what has generally been a tough environment for clothing retailers, given the gloomy holiday season sales results.
Yet analysts say they think Schneider has a solid chance of staging a turnaround now that American Apparel’s financial position has been shored up.
“They are addressable challenges, they just haven’t been able to be addressed because there’s been essentially no fuel in the tank,” said Craig Johnson, president of Customer Growth Partners, a retail research firm.
Analysts said one of American Apparel’s strongest assets in its revival could be that its clothing is made stateside. If leveraged right, that could resonate in a moment when shoppers are eager to know where their goods come from.
“Authenticity really matters to the millennials a lot,” said Kirthi Kalyanam, a professor at Santa Clara University who researches retail.
This is one reason why the company’s slate of upcoming marketing efforts emphasizes its made-in-America ethos, including a competition for local artisans to score an accessory-making partnership with the retailer.
Johnson said his firm routinely surveys mall shoppers, and he finds that the American Apparel brand still has plenty of cachet with customers.
“This isn’t a busted brand,” Johnson said. “It’s a busted company.”