A Turnaround Done to a Tee

American Apparel

Retail & Consumer Products

March 9, 2015

t shirt stack

Situation: Bleeding cash and losing credibility with its lenders, American Apparel was close to being forced into bankruptcy.

In early 2010, clothing manufacturer and retailer American Apparel’s fortunes took a dramatic turn for the worse. Burning through cash, the company drew down $50 million from its revolving credit line. Then its auditors resigned.

Concerned by these developments, the company’s Board of Directors asked FTI Consulting to assess the situation and rule out the possibility of fraud.

Following a deep-dive liquidity analysis, FTI Consulting was able to assure the Board that the company’s financial problems were not due to fraudulent activity. Instead, FTI Consulting began with an investigation with the U.S. Immigration and Customs Enforcement agency (“ICE”) that found that over one-third of the company’s workers lacked appropriate identity documents to work in the United States. Citing a lack of federal guidelines for handling the situation, in 2009, American Apparel terminated about 1,800 employees — a quarter of its workforce. The company continued to lose money as it struggled to rebuild.

Reassured that no fraud had occurred, primary lender Bank of America (“BOA”) agreed to negotiate a loan amendment that permitted American Apparel to avoid a default. Unfortunately, the company’s financial performance continued to deteriorate until American Apparel had no credit availability and a trailing 12-month EBITDA loss of $7 million. If the company was to avoid bankruptcy, BOA said it needed to bring in an outside consultant to act as Chief Restructuring Officer. American Apparel asked FTI Consulting to fill that role with full decision-making authority over every aspect of the business.

"FTI Consulting worked seamlessly and cooperatively with the American Apparel management team and was very effective in helping drive our turnaround efforts.”

- John Luttrell CFO, American Apparel

FTI Consulting's Role: Negotiate a financial lifeline, lead the company back to profitability

To implement a new business plan and create a turnaround template, FTI Consulting negotiated another amendment with American Apparel’s lenders that enabled the company to resist a bankruptcy filing, avoiding reputational damage to its brand and buying time to address its operational problems.

FTI Consulting took control of disbursements and purchasing, assembling a production and merchandise planning team that enabled American Apparel to do a better job of forecasting its production needs and avoid stockouts of its core products (tee shirts and hoodies). This was critical due to the company’s long cash-conversion cycle and its lack of a liquidity cushion. With FTI Consulting’s guidance, the company also closed down some underperforming and unprofitable retail locations.

Outcome: Lower borrowing costs, stronger fundamentals

A few months after FTI Consulting began assisting American Apparel’s management, store sales began climbing at close to 10 percent. The company’s wholesale business increased by 25 percent, and its Internet business grew by 50 percent. By the end of its 2011 financial year, American Apparel was generating $16 million of EBITDA.

During this period, American Apparel’s creditors became anxious over allegations of personal misconduct swirling around the company’s CEO. The lenders demanded a refinancing, so FTI Consulting managed to negotiate a new facility despite the fact that many prospective lenders avoided the deal due to perceived reputational risks.

At this point, FTI Consulting scaled back its involvement. American Apparel seemed to be on solid footing. Operational performance had improved, and in 2012, EBITDA reached nearly $40 million. With the financial picture looking bright, FTI Consulting was able to work with American Apparel’s investment banker to refinance both the company’s senior and mezzanine debt, thus lowering its borrowing costs.

In 2013, American Apparel’s financial performance once again took a turn for the worse. As a result, FTI Consulting was asked to resume a financial advisory role in 2014 to assist with liquidity and business planning.

In June 2014, the Board decided to remove the CEO and hired FTI Consulting to investigate allegations of financial improprieties and personal misconduct. Given the high profile of the CEO, the Board felt the need to hire a firm such as FTI Consulting that had extensive experience in conducting investigations of this nature. That investigation is ongoing.

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