American Apparel Heads For Bankruptcy

In response to The Trojan Business Journal's post on the near bankruptcy state of American Apparel (AA), I have to point out that there are other reasons other than its American Made goods business model that are contributing to AA's downfall. I agree with TBJ's assessment that AA's "failure to conform to outsourcing its manufacturing operations" can be a major setback. Yet,  AA's aversion to sweat shops was its leading marketing campaign to attract the so-called "hipster cult" crowd. Now, here are some conclusions based on my own observations.

First of all, AA has tarnished its reputation when the founder Dov Charney was sued by a former worker for sexual abuse:

Last month a former worker sued founder Dov Charney, alleging he sexually abused her. American Apparel has said that it expects the lawsuit will be tossed out because the former employee signed an agreement not to sue and to settle disputes in arbitration when she left the company.
The lawsuit is the latest in a string accusing Charney of inappropriate sexual conduct with female employees. In interviews, he has acknowledged having sexual relationships with female workers, but said they were consensual.

Second, Deloitte resigned as AA's external auditor in July 2010. According to WSJ, AA's stock dropped after the announcement. Like most cases where the auditors quit suddenly, the main concern points to "retail store impairment, inventory reserves and the provision for income taxes" on the balance sheet. Based on my knowledge from accounting and business management classes, this typically happens when there is material fraud happening at the client company that Deloitte doesn't want to get involved with and/or major clash between the Deloitte team and the client head team.

Third and lastly, as the economy continues to lag indefinitely, AA refuses to drop its prices. Sure, their clothes are made of higher quality but a plain, basic t-shirt should not cost the amount that AA charges. Especially when you have giant retailers such as H&M and Forever 21 chasing after you. As the Consumerist puts it, 

Something about [American Apparel] being overpriced, bland, and enshrouded in hipster mystique and social activism really pisses our pants off.

Now that AA has completely exploited the royal consumers and destroyed its image, who is willing to pay for their overpriced merchandises? After all, not every company can get away with it like Apple can.