What happened to American Apparel?

The company filed for bankruptcy in October 2015 and then again in November 2016. Almost 2,500 employees were terminated in January 2017 as the company began shutting its factories and over 100 stores worldwide. 

Background

American Apparel is a former bricks-and-mortar fashion retailer now available exclusively online.

The company was founded in 1989 by Canadian businessman Dov Charney. At its peak, the retailer was synonymous with provocative advertising, hipster-cool fashion, and supporting social issues around immigration and LGBT rights. 

American Apparel also manufactured its products in Los Angeles. It became celebrated for paying its workers a proper wage in an industry notorious for poor working conditions.

Following is a look at how a company championing social issues, worker rights, and with revenues topping $211 million fell from grace.

Sexual harassment lawsuits and company culture

By 2007, three former employees had filed sexual harassment lawsuits against Charney alleging he had used crude language and gestures in the office and hired women for whom he had a sexual interest. In one case it was even alleged that Charney conducted job interviews in his underwear. 

Lawsuits became somewhat of a regular occurrence for Charney, with claims of racial discrimination added to the various sexual harassment lawsuits in 2011.

American Apparel was also known for its controversial staff-hiring practices. Potential employees were required to attach photographs to their applications, with Charney approving or vetoing each application based on perceived attractiveness. Charney also encouraged store managers to fire any employee they deemed not good-looking enough to work there.

This created a hostile work environment and an extremely toxic culture. American Apparel’s brand image suffered significant and irreparable damage.

Cultural shift

American Apparel became successful by identifying the elements that made hipsters attractive and then recreating that aesthetic in their stores.

But as the hipster counterculture began to lose its allure, so too did American Apparel. Its customers migrated to fast-fashion retailers such as Zara that had a focus on inexpensive clothing with a high-end, designer-like feel.

Much of American Apparel’s downfall can be attributed to a failure to evolve. As its competitors expanded their product range, the company stuck with a handful of different styles and never really deviated from its core offering.

Illegal workforce

Despite the company claiming it paid Los Angeles workers a fair wage, an investigation by U.S. Immigration and Customs Enforcement found 1,600 American Apparel employees were not authorized to work in the United States.

Most of these workers were fired immediately, but the brand suffered further damage as the company appeared to contradict its own values around worker rights.

Charney is fired

Charney was fired in 2014 after more claims of sexual harassment and also misuse of company funds.

Distancing Charney from the American Apparel brand was seen as a pathway to future success. However, the company’s rapid expansion until that point meant it had considerable debt with little cash to fund operations.

This was highlighted when it failed to produce enough liquidity to release its new fashion line for the spring of 2015. In response, 40 underperforming stores were closed and worker overtime entitlements cut. 

American Apparel then filed for bankruptcy after revealing it had not made a profit since 2009.

Gildan acquisition

American Apparel was acquired by Gildan Activewear Inc. in 2017 for $88 million after the company filed for bankruptcy for a second time.

Several changes have been instituted by Gildan. Gone are the overtly sexual culture and advertising campaigns which harmed the brand’s reputation. The company also acquired the American Apparel brand but not its stores, so clothing can now only be purchased online.

Much of American Apparel’s clothing range is also sourced from developing nations such as Honduras and Nicaragua and not the United States. 

Key takeaways:

  • American Apparel is an American fashion retailer originally founded by Dov Charney in 1989. The brand championed social issues and locally made products but soon faltered and entered into two separate bankruptcy proceedings.
  • American Apparel was frequently associated with sexual harassment lawsuits filed against Charney by female staff which damaged its brand reputation. The company also lost market share as the hipster counterculture began to weaken.
  • American Apparel was found to be employing illegal workers after a governmental investigation. Charney was fired in 2014 to revive the brand, but mounting debts and a lack of liquidity meant the company would never recover.

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Published by

Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which reached over a million business students, executives, and aspiring entrepreneurs in 2020 alone | He is also Head of Business Development for a high-tech startup, which he helped grow at double-digit rate | Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy | Visit The FourWeekMBA BizSchool | Or Get The FourWeekMBA Flagship Book "100+ Business Models"