Clothing Maker Seeking Better Fit

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American Apparel Inc.’s first six months as a public company have been, to put it mildly, less than auspicious.

A wave of negative publicity centering on public name-calling among top executives, a lingering sexual harassment lawsuit and the company’s inability to get a grip on its finances has spooked the markets and drawn unflattering attention to the clothing maker’s flamboyant founder, Dov Charney.

Most recently, the company’s chief financial officer quit and the company’s stock price hit an all-time low of $6.65, slicing its one-time $1 billion market cap by half.

That kind of carnage is starting to force changes at the downtown Los Angeles company, which recently authorized a $25 million stock buyback in an effort to calm the public markets.

It’s also forced Charney, who has drawn frequent comparisons to freewheeling adult magazine publishers Larry Flynt and Hugh Hefner, to play a new role: buttoned down corporate executive.

In a recent interview, Charney, 39, declined to speak on the record about many issues, but he was willing to be quoted on one: the company’s financial performance and stock price.

“We think we’re going to deliver results to the shareholders,” said Charney, who holds the chief executive title. “We have a fantastic business. We’re connecting with the customer and we’re trying to provide a fantastic and exciting place for people to work.”

Indeed, since founding the company 10 years ago, Charney has displayed a remarkable feel for the direction of fashion, scoring a huge hit with tight-fitting and logo-free clothing at a time when hip hop-inspired baggy apparel dominated.

But Charney has long been a provocateur, admittedly having sexual relations with younger employees and personally photographing them in suggestive positions wearing the company’s trademark skimpy underwear.

In short, he’s displayed little of the orthodoxy common to public company executives.

And in the past half year since going public in a maneuver that dispensed with the need for a public offering, the company has become mired in the nitty-gritty issues that every public company faces: carefully accounting for its finances.

The company admitted as much in a recent filing with the Securities and Exchange Commission that stated, as of March 31, it “lacks adequately trained accounting personnel with appropriate United States generally accepted accounting principles expertise.”

He’s also shown a certain naivet & #233; with the media, providing access that has come back to haunt him, starting with a well publicized incident four years ago when he masturbated in front of a Jane magazine reporter.

More recently, the company provided the Wall Street Journal with financial documents that indicated American Apparel’s financial state was far less rosy than its Securities and Exchange Commission filings indicated.

In the same April 12 article, he was quoted lashing out at his chief financial officer, Ken Cieply, calling him a “complete loser” only to retract the statement and call his own words “juvenile.”

Cieply quit May 22.


Financial strength

The negative publicity generated by Charney’s statements and actions has generated speculation on Web sites about whether the company will be able to overcome its accounting and PR troubles.

Indeed, the publicity has been so bad that American Apparel decided recently to fight back against the negative press, sending an e-mail to DealBreaker, a Wall Street gossip Web site. The e-mail detailed what it called the incorrect facts in one of the site’s articles about the company’s finances. It also said the company was disputing certain facts in the Wall Street Journal’s article with the newspaper’s owner, News Corp.

But American Apparel can take solace in the fact that three Wall Street analysts who follow the company have maintained “buy” ratings despite its ongoing struggles and they generally remain bullish on the company’s future. Shares of American Apparel closed up 5 percent on June 5 at $7.60.

As founder of the company, Charney has not only displayed an acute fashion sense but put together a vertical operation that surprised the fashion world.

In an era when clothing manufacturers routinely ship off manufacturing to the cheapest foreign factories, American Apparel’s downtown operations not only involved sewing the clothes, but also dying the yarn giving the company a one-week turnaround time between a notion in Charney’s head and a finished garment.

That unusual business model has paid off.

In the first quarter, the company recorded sales of $111 million, up 51 percent from the same period last year. Though the company missed Wall Street estimates, retail sales for the quarter increased 56 percent in the United States, 70 percent in Canada and 84 percent in other international stores.

Net income was down 54 percent to $1.1 million, reflecting a variety of charges related to store openings and other issues.

The company has expanded its retail stores from just a handful a few years ago to almost 200 today. Just last month, American Apparel opened four retail stores in three countries and it has 35 leases signed for additional stores to be opened this year. And the stores are generally performing well: Last week the company reported that same-store sales in May increased 24 percent over the same time last year.

Mickey Schleien, an analyst with Landenburg Thalmann Financial Services Inc., issued a report last week that reiterated a “buy” rating on the depressed stock.

Schleien lauded the company’s growth rate, and that it hired an interim chief financial officer and has started a search for a new one but noted the delay in cleaning up its finances has likely caused the stock to be undervalued. The company doesn’t expect to name a permanent chief financial officer for three to six months.

“We have been frustrated with the amount of time it is taking the company to address its accounting issues and the expansion of its financial team and have little doubt that this uncertainty is depressing the share’s valuation,” wrote Schleien.

William Gochnauer, a certified public accountant and former chief financial officer of several publicly traded companies, was appointed May 22 as the interim replacement while an outside search firm seeks a permanent replacement. In the meantime, Gochnauer is expected to help bring the company in compliance with Sarbanes-Oxley requirements.

American Apparel has built an almost cult following as much for its celebration of an open, sexualized lifestyle as for its T-shirts, dresses and leggings a lifestyle that directly emanates from Charney.

But the chief executive’s free-spiritedness has also led to trouble as four former employees have filed sexual harassment lawsuits against him, one of which is still not settled.

As a result, executives have begun having employees sign a statement acknowledging that the company “is in the business of designing and manufacturing sexually charged T-shirts and intimate apparel, and uses sexually charged visual and oral communications in its marketing and sales activity.”

Charney declined to speak publicly about these matters.

Ilse Metchek, executive director of the California Fashion Association, said personality is paramount in the fashion industry and Charney has been extraordinarily successful at building the American Apparel brand around him.

“The reputation of (American Apparel) is based on the personality of the owner and, for good or bad, it has worked for them,” she said. “Outrageousness sells.”

But as the company grows, investors are left in a sort-of Catch 22, said Eli Portnoy, the Los Angeles-based chief executive of brand strategy consulting firm Portnoy Group Inc.

Though investors may be put off by Charney’s outspokenness, he is essential to the company’s success.

“He has a very extreme personality. I don’t think he could pass on what he is about,” Portnoy said, and if Charney ever left the company, “it would kill the brand.”

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