American Apparel was on the verge of collapse in 2010. The fashion retailer was buried in debt, same-store sales were plummeting, and an investigation by Immigration and Customs Enforcement uncovered it employed undocumented workers at its facilities in Los Angeles, forcing it to lay off a quarter of its workforce. If that wasn’t bad enough, its flamboyant founder and CEO, Montreal native Dov Charney, was facing a series of sexual harassment lawsuits.
Today, American Apparel is in better shape. It may not be a turnaround story just yet, but at least the company isn’t at immediate risk of bankruptcy. Same-store sales have increased for 21 consecutive months, and the company turned its first profit since 2009 in the past quarter, booking US$4.9 million. It’s even attracting analysts again, who abandoned the stock as it fell from roughly $10 in 2008 to less than $1. Eric Beder, an analyst with Brean Capital in New York, recently initiated coverage with a Buy rating, calling American Apparel an “unsinkable” brand.
Many of the company’s problems can be traced back to Charney. As successful as he’s been at creating an iconic—though mildly sleazy—brand, he’s proven to be an erratic, free-spending CEO. Charney once called his chief financial officer a “complete loser” in The Wall Street Journal (the CFO resigned shortly after) and over-expanded the company’s retail presence to 259 stores in 2008. He thought he could reach 800 within a few years.
American Apparel may now have the financial discipline it needs in the form of John Luttrell, a former Wet Seal and Old Navy executive who joined as CFO and executive vice-president in 2011. Beder credits Luttrell as a “key piece” of the burgeoning turnaround. Since his arrival, the company has cut costs, slashed inventory and closed unprofitable locations. “Luttrell is Dov’s adult supervision,” says Andy DeFrancesco, founder of private equity firm Delavaco Capital, an American Apparel investor. “Dov’s the genius that’s bringing people to the stores, and Luttrell is the one who says, ‘No, Dov, you can’t spend that.’” Other seasoned retail executives have tried to contain Charney’s excesses in the past, but none of them lasted very long. “Dov sometimes forgets that he doesn’t own 100% of American Apparel,” DeFrancesco says. Luttrell is willing to push back, however. (The company declined to comment, citing a quiet period.)
|American Apparel’s earnings (US$) in its most recent quarter, its first profit since 2009.|
DeFrancesco was part of an investment syndicate led by Yogen Früz co-founder Michael Serruya that bought $15-million worth of shares two years ago, providing the company with desperately needed cash, and later exercised another $15 million in warrants. “A lot of people questioned our investment strategy,” Serruya says, especially because Charney was facing a handful of sexual harassment lawsuits. “For the most part, these claims have proven to be meritless,” Serruya insists. One case was settled with no monetary liability to the company, and American Apparel prevailed in another, according to its annual report filed this month. Another is still in arbitration.
Beyond Charney’s proclivity for attracting lawsuits, the other big challenge for the company is to deal with its debt—$175 million as of the end of last year. The company is paying a hefty 18% interest rate on some of that debt. In March, American Apparel announced it was attempting to refinance a portion of its debt.
Still, with Charney at the helm, it’s hard to know what’s in store for American Apparel. DeFrancesco is confident Charney won’t steer the company back to the point of oblivion. “Dov’s had an awakening.”