Does the recent departure of two top executives from troubled L.A. clothing maker American Apparel indicate a successful turnaround? Or a turn back?
Chief Executive Dov Charney told the Business Journal last week that the executives made solid contributions, and now the company is poised to move forward. But others see the departures as a misstep in an organization that has long suffered from financial mismanagement.
American Apparel on Nov. 18 announced the resignation of Tom Casey as acting president. Casey, a former executive at Blockbuster, joined the company in October 2010 to “validate the company’s strategy, improve operating disciplines and optimize the capital structure,” according to the company statement announcing his departure.
Three weeks before Casey’s exit, Marty Staff left. He had been chief business development officer since March. During his short tenure, he expanded American Apparel’s accessory line and boosted sales through online channels.
Both men were brought in to stabilize the downtown L.A. clothing manufacturer and retailer, which lost $86 million last year. In recent years, the company lost nearly 2,000 workers in an immigration crackdown and has been hurt by the recession, which hit the whole fashion sector. Earlier this year, the company told regulators it might have to file for bankruptcy court protection because of inability to service its huge debt.
Charney, who founded American Apparel in 1998, pointed to the company’s third quarter results, released Nov. 7, as evidence of a turnaround. The net loss for the quarter was $7.2 million, compared with a loss of $9.5 million for the same quarter last year.
Also, the company reported a 2 percent increase in retail store sales and an 11 percent rise in online sales.
“The third quarter numbers show we have sales momentum,” he said. “We are seeing a continuation of that improvement in the fourth quarter.”
As for the executives who resigned, he said they left on good terms.
“They made contributions to the company, but it’s about finding the right chemistry,” he explained. “We got a lot out of them and now we are going to move on.”
Casey and Staff couldn’t be reached for comment.
Charney doesn’t plan to hire replacements, saying the company has plenty of in-house talent and any new managers would be “incremental strategic hires.”
But Robin Lewis, publisher of the retailing newsletter Robin Report in New York, believes the departed executives brought much needed business discipline and letting them go was a huge mistake.
“These guys both have good track records,” Lewis said. “Charney’s got a terrific creative mind and he’s a great merchant of apparel, but he can’t run the business. I think Marty (Staff) felt he could manage around Dov but it turned out he could not.”
Paul Altman, managing director of investment bank Sage Group in Los Angeles, said that for shareholders, the turnaround may be a long time coming despite improvements in third quarter financials.
“They have a high level of debt that will continue to weigh the company down,” Altman said. “For shareholders, it’s just going to take time. Even if the company turns around sales, it will still face inventory management and debt issues.”
He pointed out that the company’s inventory management has long been unsatisfactory. The time from when the company buys raw materials to when it sells a finished product to the consumer takes about 250 days, compared with 55 days for companies in its peer group. Both the debt issue and inventory management are long-term problems that take months or years to solve, Altman said.
Charney responded that as sales improve, so do efficiencies in manufacturing and distribution. To further fuel sales gains, the company plans to open stores in Singapore, Taiwan, Hong Kong and London. The company currently operates 247 stores, according to its most recent filing.
“With improved profitability, we can really work on the cost structure in the next months,” he said. “We think there will be a gain for shareholders in terms of positive profitability.”
Future viability
Lewis, the newsletter publisher who also works as a retail consultant, emphasized the American Apparel brand still carries tremendous cachet among consumers. However, he believes that if the company continues under Charney’s autocratic and eccentric management style, it will either go out of business or get acquired.
“It’s possible for a private-equity firm to buy it and get rid of him or at least make it clear someone else is in charge,” he said. “Some people believe the brand would die without Dov Charney, but I’m not one of those.”
Sage Group’s Altman sees Charney as a survivor who has succeeded for years by not giving up.
“He’s in the best position to drive the brand with his heart,” he said. “As long as he’s in the picture, he will exert as much influence as possible. Anyone coming into the company should have his eyes open that he will be sharing the podium.”
Scott Avila, managing partner at CRG Partners in Los Angeles, which specializes in consulting distressed companies, said that many retailers are now telling shareholders that times are tough but are certain to get better. His advice for American Apparel is to not expect the economic winds to blow in its favor anytime soon.
“No one will have clarity until we get through this holiday season,” Avila said. “But they need to understand their market and plan how they can be viable assuming this market doesn’t improve. They have to manage their business around the current state of the economy, not what they hope it will be in the future.”
