American Apparel rapidly grew its retail footprint. Did that strategy contribute to its collapse?
January 21, 2017
American Apparel opened its first stores in 2003, with locations in Echo Park, New York and Montreal. Within three years, it had mushroomed into a global chain with more than 140 locations in 11 countries. By 2009, that figure had doubled to 281 stores.
It was, founder Dov Charney once boasted, “the fastest retail roll-out in American history.”
This rapid expansion helped turn what had been a little-known wholesale basics brand into a household name synonymous with colorful U.S.-made cottonwear, racy advertising and sleek-and-simple stores that dotted trendy neighborhoods across the globe. But it also saddled American Apparel with a load of debt that ultimately helped contribute to its downfall.
After filing for bankruptcy protection for the second time last year, the company sold its brand and some manufacturing equipment this month to Canadian clothing maker Gildan Activewear for $88 million. Its remaining 110 stores are expected to close by April.
Real estate experts said that American Apparel initially enjoyed success by opening stores in up-and-coming neighborhoods in the U.S. in which its target demographic of young customers lived. As it grew, the chain expanded into traditional shopping malls and added multiple outposts within cities.
That early retail success spurred the company to quicken its pace of store openings. But such moves came just as fast-fashion rivals, including Forever 21 and H&M, which unlike American Apparel manufactured mainly overseas, started courting the same customers.
It was a “real estate strategy that initially worked,” said Peter Lynch, a partner at A&G Realty Partners. “But then with all this other competition you had to deal with, the productivity of those stores dropped.”
The company lacked an overall retail strategy backed by testing different markets around the country. Charney, who was intimately involved in every aspect of the business, picked locations based more on instinct and recommendations from friends, said Ilse Metchek, president of the California Fashion Assn. “There was no strategy whatsoever,” she said.
Metchek said that Charney had a good nose for the next hip neighborhood — American Apparel, for instance, was one of the first brands to open in downtown Los Angeles’ now-booming Arts District.
“All it takes is one hot store to create a hot street,” she said. “You have to give him credit” for sometimes guessing correctly.
But American Apparel ended up opening too many stores too close together in some of the highest rent areas in the country. In 2008, for example, American Apparel had 16 stores in Manhattan alone. Many stores clustered in expensive areas failed to generate enough sales to justify the high rents, analysts said.
“You can’t have that many stores in the same city in a small radius,” said Jessica Ramirez, retail research analyst at Jane Hali & Associates.
Ramirez said she used to have five American Apparel shops within walking distance from her New York office. That can work, she said, if the stores set themselves apart with a different mix of products to entice shoppers — something American Apparel failed to do.
“It was the same thing over and over again,” she said.
In an interview, Charney disputed that the number, location and funding of stores posed problems and said “almost all the stores were profitable” at the time he was ousted in 2014. He said the company was forced to take on debt after it fired more than 1,500 skilled workers in 2009 when an immigration inspection uncovered questionable employment documents.
“We racked up a lot of debt not for the stores but because we were trying to transition” after the immigration audit toward hiring and training new staff and dealing with a drop in production, he said. “Store productivity was one of the highlights of American Apparel at the time of my firing.”
However, by 2008, same-store sales — an important gauge of stores that have been open for at least a year — had plunged 10%. The company flirted with filing for bankruptcy protection as about $101 million of its long-term debt, taken on in part to fuel its store expansion, came close to maturing.
That forced American Apparel in early 2009 to accept an $80-million cash infusion from British investment firm Lion Capital, which also got two board seats and the right to buy 18% of the company.
The twin problems of mounting debt and falling sales continued to plague the company, as additional crises hit. In 2013, a disastrous start at the company’s new distribution center in La Mirada — which suffered inventory mix-ups and delayed orders — ultimately cost American Apparel an additional $15 million in expenses and lost sales.
In early 2014, Charney’s share of American Apparel plunged to 27% from 43% after the company issued new shares to cover an interest payment due on a bond. That ultimately gave the board enough wiggle room to oust him as chairman, and later chief executive, citing allegations of sexual misconduct with employees and misuse of company funds.
A year later, American Apparel — which was still stuck with crippling debts and interest payments — filed for Chapter 11 bankruptcy protection for the first time.
That cut down its debts, but analysts also were expecting the company to shutter many under-performing stores. American Apparel did close some, but not as many as it should have, analysts said.
“They could have done it then — get out of the bad stores and consolidate the merchandise,” Metchek said. “But they wouldn’t do it.”
Metchek said she doesn’t think the stores alone were a death knell for the company, which was plagued by other pressing problems. She points to the board’s refusal to adequately fund the turnaround plan following its bankruptcy as the final nail that sealed the company’s fate. After Charney’s firing, 90%-off sales were instituted storewide, which caused sales to plunge and inventory to be depleted on the most popular items, she said.
Other retailers, including Gap and Macy’s, have survived having too many locations, she said, in part by closing stores and revamping their merchandise. But history has not been kind to those that failed to keep pace with changing shopper preferences or let their retail business stagnate, such as Wet Seal, which is reportedly filing for bankruptcy again after filing for Chapter 11 last year and closing 300 stores, and the Limited, which began closing all 250 of its stores this month.
“The mantra of more and more stores,” she said, “obviously some chains have survived it.”
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