American Apparel’s Unhip Finances

Aug 9th, 2010 | By businessnews | Category: Business

The retailer’s mounting problems suggest the company may need more sophisticated management than its controversial CEO, Dov Charney, can muster

Illustration by Sophie Kern

Allison Abell Schwartz

“Hipster is over” says Dov Charney, who, as the founder and chief executive officer of American Apparel (APP), rode the trend as far as anyone. Starting the company in a dorm at Tufts University in Medford, Mass., he built a worldwide empire of 280 stores by boldly leaping out ahead of mainstream fashion. Over and over again he remade the hipster wardrobe, sensing the demand for neon nylon bike shorts and lace-thong leotards long before the competition. For better and for worse, he personified the racy, risk-taking aesthetics of his business and is now facing the consequences—skittish lenders and investors who doubt his ability to oversee his own creation. American Apparel shares trade at less than $2, down from a high of $16.80 in December 2007. The company teeters on the verge of being delisted from the New York Stock Exchange (NYX) Amex because it has been late filing quarterly reports, and last week its accountant, Deloitte & Touche, quit, saying American Apparel’s 2009 numbers may not be reliable. The mounting problems suggest the company may now need more sophisticated management than its controversial founder can muster.

Charney, 41, admits the recent troubles have tested him—”It’s been a major sweat, a real hard job”—but insists he will stick it out and that there will be no dialing back of ambition. His plan is to plunge straight into the storm, doubling the sales of the 11,500-employee company over the next six years by improving productivity and implementing better technology to more quickly move product from the company’s Los Angeles factory into stores. Down the road, American Apparel, which owns and operates its own stores, might also sell its products through other retailers.

The biggest challenge of all may be stylistic. After outfitting the world of 18- to 30-year-olds in all manner of T-shirts and leggings, which still rank among the company’s best-sellers, American Apparel is going preppy, diving into more sophisticated garments such as blazers, pleated pants, button-down shirts, and more formal lace tops. “Kids are moving away from piercings,” Charney says. “We want to grow old with our customer. We want to be a traditional American clothier.”

Even as American Apparel has grown, Charney, who owns 53 percent of the company and dresses exclusively in his own product, down to socks and underwear, has kept management small and personal. He makes it a priority to walk through his factory most days, talking to employees, handling fabrics, and seeing garments being made, a process he says takes more than two hours of his day. His mobile number is available to all employees, he says, and he prides himself on returning all calls. He spends much of his time with a circle of about 15 people who help him look at fabric and evaluate new designs.

Lately, though, the business is much less about fabric than finance. The NYSE Amex threat to delist American Apparel could become reality if it fails to file its most recent quarterly report by Aug. 16, the second delay in little more than a year. The delay stemmed from renegotiations on its second-lien loan with Lion Capital. That has since been settled, but another problem burst into public view when Deloitte notified American Apparel that certain information had come to its attention, that, if investigated, could impact the reliability of the company’s 2009 financial statements. Charney says he’s confident the accounting issues will be straightened out by the deadline.

Lion Capital, a London-based private equity firm, agreed in March 2009 to loan American Apparel $80 million maturing Dec. 31, 2013. As part of the agreement, Lion received detachable warrants amounting to 16 million shares of the company’s common stock, equal to about 18 percent ownership.

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