American Apparel's slump prompts fears of bankruptcy

WOES at clothing chain American Apparel deepened yesterday as it raised "substantial" doubt over its ability to continue as a going concern and warned it could breach a loan covenant, sending its shares down 22 per cent to a lifetime low.

Fears mounted that the fashion retailer was on the brink of bankruptcy after it flagged up losses of as much as $7 million (4.5m) for the three months to June, with debts amounting to $120.3m. This means it is likely to breach the terms of its agreement with its main lender, private equity firm Lion Capital, next month.

The company told US markets overnight on Tuesday: "Based on this, and trends occurring in the company's business after the second quarter and projected for the remainder of 2010, the company may not have sufficient liquidity necessary to sustain operations for the next 12 months. "These factors, among others, raise substantial doubt that the company will be able to continue as a going concern."

American Apparel, known for its bright cotton basics and shiny spandex leggings, employs around 10,000 people at 280 stores worldwide, of which 14 are in the UK, including one in Glasgow.

The Los Angeles-based company also told financial markets that it last month received a subpoena from the US Attorney's Office for the Southern District of New York, as well as inquiries from the US Securities and Exchange Commission regarding the resignation of its former auditors. Deloitte resigned as its auditor in March after warning of problems with the company's financial reporting, and the subsequent reliability of its financial statements for the year to 31 December 2009. Newly-appointed auditor Marcum is in the process of completing a review of American Apparel's accounts.

Dov Charney, the company's chief executive, also its largest shareholder, has been repeatedly sued for sexual harassment and the company has faced several problems in recent months from underperforming results due to mass lay-offs of illegal workers.

American Apparel dodged a potential breach of debt covenants earlier this year at the expense of higher interest payments.

For the second quarter, the company forecast sales of about $132-$134m, down from $136.1m a year ago. Same-store sales, which fell in 11 out of 12 months in 2009, were down 16 per cent in the quarter.

The company said it expected to have clocked up substantial operating losses and negative cash flows for the six months to 30 June.

That trend was expected to continue during at least the third quarter of 2010, leading to insufficient liquidity for the firm to continue to trade next year.

Popular with urban "hipsters" for its "Made-in-USA" retro clothing, American Apparel opened its first store in 2003. It has attempted to re-brand its image in recent seasons, moving away from the trendy hipster look favoured by east London trendsetters, towards a more timeless, preppy style.

It shares were down 26 per cent at $1.03 on the American Stock Exchange on Tuesday, and continued to plummet yesterday, hitting as low as $0.73 by London's close. At their peak, the stock touched $16.75 in December 2007, after blank-cheque company Endeavor Acquisition took the company public through a reverse merger.