“One of the best known and most relevant brands in the world,” according to American Apparel’s interim Chief Executive John Luttrell, is in free-fall. The sweatshop-free retailer has failed to turn a full-year profit since 2009, its controversial marketing practices have dealt it a reputational knock or two along the way, and its founder and CEO Dov Charney has been ousted by a board brought to the end of its tether.
“Dov Charney created American Apparel, but the company has grown much larger than any one individual and we are confident that its greatest days are still ahead,” wrote an optimistic Co-Chairman, Allan Mayer in a June announcement. “We take no joy in this, but the board felt it was the right thing to do.”
A brief history of Charney
Starting out with the ambition to spark an industrial revolution in the apparel industry, Charney’s focus on American-made garments earned him a respectable reputation in industry circles. In 2003, the Montreal-born entrepreneur was listed alongside Bill Murray, Jon Stewart and Johnny Depp in GQ’s Men of the Year, and a year later was named in Details’ 50 Most Powerful People, alongside Frank Gehry, Steven Spielberg and even Arnold Schwarzenegger. Renowned for his philosophy-first mentality and voracious appetite for expansion, Charney quickly came to be seen as a pioneering name in the retail space.
Although Charney has proven himself to be an incredibly capable entrepreneur, he has likewise shown himself to be an incapable CEO
In the immediate aftermath of the Dhaka factory collapse, Charney offered his condolences to those affected and reasserted the importance of a sweatshop-free future for retail. “It is critical for us to know the faces of our workers,” he wrote in a company blog post. “The apparel industry’s relentless and blind pursuit of the lowest possible wages cannot be sustained over time, ethically or fiscally.” In a time where many in his field saw little other option than to outsource manufacturing to developing countries, American Apparel’s LA factory stood as living proof that the garment industry need not necessarily look abroad.
However, despite Charney’s admirable philosophy and various industry accolades, he is perhaps better known for his various run-ins with trouble. Since he started the company at age 20, his career has been punctuated by controversy, not least when in 2009 a probe found that a third of the company’s workforce were ineligible to work in the US, and again in 2012 when a former employer alleged Charney had choked and derided him.
Perhaps most characteristic of the executive’s quarter century-long stint at the helm, however, is a string of sexual harassment lawsuits, which have collectively tarnished the retailer’s reputation and caused no small degree of discomfort for those at the top.
Addressing the losses
Charney’s dismissal, therefore, is unsurprising, given the damages, financial or otherwise, that his endeavours have inflicted on the retailer. “Your conduct has required the company to incur significant and unwarranted expenses, including expenses associated with litigation and defence costs, significant settlement payments, substantial severance packages that were granted to employees, and unwarranted business expenses that you incurred for personal reasons,” read Charney’s termination letter, which was leaked shortly after his dismissal and posted on Buzzfeed. “The resources American Apparel had to dedicate to defend the numerous lawsuits resulting from your conduct, and the loss of critical, qualified company employees as a result of your misconduct cannot be overlooked.”
The now-former CEO’s unflinching focus on sex and unconventional management style has split opinion among observers, employees and board members alike. Last year, when a company warehouse in La Mirada struggled to keep its doors open, Charney made the place his home for three months; when he regularly paraded his factory in only his underwear he quickly acquired the nickname ‘pants optional’; and when he was forced to lay off 30 workers without the paperwork to work in the US, he offered them each $30,000 in company stock as compensation. Whereas some say his methods are responsible for the company’s high profile and iconic status, others cite those same methods as reasoning for the retailer’s continued losses and managerial deficiencies.
Although Charney has proven himself to be an incredibly capable entrepreneur, he has likewise shown himself to be an incapable CEO. American Apparel’s stock peaked at an impressive $15 in 2007, only for the company’s overreliance on debt and penchant for micromanagement to land the retailer with a debt burden of over $200m, and for its share price to come in short of 50 cents.
After losing $270m in the space of only four years, it’s little wonder that the board’s patience with Charney has worn thin – although it insists the decision to oust him was not financial-related. What has come as a surprise to some, however, is that the hedge fund Standard General has stepped in so readily to revive the company’s fortunes.
Jumping to the rescue
The New York-based hedge fund and major shareholder agreed that it would grant the retailer a $25m loan on the condition that it reshuffled management and used the money to repay Lion Capital on a $9.9m defaulted loan – originally not due to be paid until 2018. The key points of the agreement included a reconstitution of the company’s board, in which five of the seven members would be replaced, a continuation of the investigation into Charney’s alleged misconduct, and a guarantee that prohibited Standard General from acquiring additional shares.
“This truly marks the beginning of an important new chapter in the American Apparel story,” said Mayer in a company statement. “With the support of Standard General, we are confident the company will finally be able to realise its true potential.”
To add another twist to the rescue effort, Standard General has also struck a deal with Charney to acquire shares on his behalf and then loan him the money – $20m with a 10 percent interest rate – to purchase the shares from them. The deal leaves Standard General with a 43 percent stake in the company and Charney still on American Apparel’s pay scale as a ‘strategic consultant’, pending the results of the investigation. Of the pre-dismissal seven-member board, only the Co-Chairmen Allan Mayer and David Danziger remain, representing something of an overhaul for American Apparel, though not without a lingering whiff of the old Charney-inspired mentality. On speaking to Bloomberg Businessweek in July, Mayer appeared to have quite the same philosophy as Charney on what makes American Apparel unique. “I think it’s the tension between the transgressive part of the brand and the idealistic part of the brand that gives it its special place in the culture,” said Mayer.
“If you took out the sex, it would be kind of boring. And if you took out the idealistic component – our commitment to the sweatshop-free, made-in-USA philosophy – it would just be sleazy. But you put them together, and you have something that’s interesting.”
Among the company’s new additions to the board is the former CEO of Fischer Communications, Colleen Brown, which in many ways represents a major leap forward for the company. Known primarily for her management and operations expertise, the managing director of Newport Board Group and longtime media executive also looks to add a much-needed measure of diversity to American Apparel’s board. All things considered, the deal marks the beginning of a period of relative stability for American Apparel, although it also raises the question of why an investor would go to such lengths in order to revitalise a – some-would-say – broken company.
The repair job
Irrespective of the company’s corporate governance standards and dire financial straits, its influence among young, hip and affluent consumers remains very much intact. Little other than the company’s sexually charged imagery and ‘Made in USA’ philosophy set the retailer apart from its competition, yet willing consumers have propped up the company’s bottom line for years. The fact that the retailer’s success is resting on factors aside from financial stability, however, poses a potential problem in that consumers could just as easily wake up to the company’s fragility and flee in much the same way investors have.
Granted, American Apparel’s managerial oversight and lacklustre financial performance leaves a lot to be desired, although the retailer’s clout among its target demographic remains an asset worthy of investment. Whether Charney keeps on at American Apparel or not, the fact that he was once ousted from the top spot means that there is a serious commitment from those on the board to instigate a turnaround and realise what potential there is.
Whether the company will rid of jobs, outlets or even its ‘Made in USA’ philosophy remains to be seen, but it’s almost certain that American Apparel without its figurehead will be an altogether different beast. If the retailer had a more conservative head on its shoulders, it could well be in a better financial shape than it is now; however, few can argue that without Charney the company would not be the world recognised and – some-would-say – iconic brand it is today.
