The confirmation last week of American Apparel Inc.’s plan of reorganization in Delaware Bankruptcy Court, handing over control of the company to a consortium of bondholders, was an outcome that I, as the company’s founder and largest shareholder, had been working for nearly two years to avoid. Much of the media attention has focused on the corporate drama surrounding who would end up controlling the company, but there are important elements of this story as well as implications of the bankruptcy court decision that have been overlooked.
Since relocating American Apparel to Los Angeles in the late 1990s from South Carolina, I have been a leading advocate of Made in USA apparel manufacturing. Many people challenged and ridiculed the logic of my business model, since widespread offshoring to take advantage of cheaper overseas labor was the dominant trend. American Apparel was one of the only companies that shattered the sweatshop paradigm by manufacturing in the United States, paying fair wages and doing so at scale. By the time American Apparel went public in 2007, it was running the largest apparel manufacturing plant in operation in the United States. Today, domestic manufacturing has become a fashionable topic, but for many years I was a solitary voice promoting its merits.
Many observers claim that the historical financial performance of American Apparel is a poor one. The truth is that until I was removed as CEO in 2014, American Apparel had posted positive earnings before interest, taxes, depreciation and amortization in nine of the previous 10 years. That is to say that American Apparel, as a business, generated positive cash flow from operations.
I believe American Apparel had been successful for so long, and as a brand captured the imagination of so many people, because our organization respected and celebrated creativity and unorthodox thinking. Having defended the company’s unique business model for so many years, I knew that if it abandoned the contrarian logic that had made it successful, the company would no longer be profitable. A vertically integrated domestic manufacturer had to approach business in a fundamentally different manner than that of other retail and apparel companies.
When I was first terminated in June 2014 (with false allegations of misconduct as the pretense), I was midway through a successful turnaround of American Apparel’s business, after a disastrous move of the company’s distribution operations from downtown Los Angeles to La Mirada. This project had been spearheaded by the company’s chief financial officer, with support of the company’s board of directors, despite my strenuous objections. After bringing the company back on track to achieve its EBITDA earnings guidance of $40 million for 2014, I was asked to relinquish my positions as CEO and chairman, as well as the voting rights of my stock. The bondholders were pressuring the directors to sell the company and could not do so while I was involved.
I first entered into partnership with the hedge fund Standard General in June 2014 because of their stated desire to reinstall me as CEO of the company. I was attempting to regain control of the company because of my concerns that American Apparel was still in a very vulnerable position with its turnaround not yet complete. I feared that new management, not understanding what made American Apparel successful in the first place, would try to run the company in a more “conventional” but ultimately unsuccessful and unprofitable manner. When Standard General did not deliver on its promises to reinstall me as CEO by late summer 2014, I made numerous offers to buy out Standard General as well as the company. All of those transactions would have resulted in superior recoveries to the company’s stakeholders.
In December 2014, the board rebuffed a buyout offer of $1.30-$1.40 a share from a private equity firm, claiming that it significantly undervalued the company. Instead, the board pursued a path where only a year later the shareholders are receiving zero. The recent offer made in conjunction with Hagan Capital to purchase the company at a valuation of $300 million was just one in a long list of similar offers. There was no reason to believe that the Hagan offer would end any differently, given the powerful forces steering the company toward a reorganization where the bondholders would end up owning the company. While many parties close to me feared that this would be the outcome of my partnership with Standard General, and even the hedge fund’s ultimate goal, even they could not fathom its deception.
Leaving Los Angeles?
I firmly believe the path being followed by the company’s management is a road to ruin. The financial results of plummeting sales and EBITDA thus far support this. Management’s attempts to explain away their abysmal financial performance as the result of inadequate liquidity, but the truth is that they misunderstand the unique business model that American Apparel must pursue as a vertically integrated domestic manufacturer. Management is surely evaluating moving its operations out of Los Angeles and into nearby areas such as Vernon and Commerce to avoid recently passed minimum-wage ordinances. This is what a company does when it is run by purely financial actors like hedge funds, and cannot count on innovation and creativity to generate a compelling brand story and grow its sales.
I plan to vigorously pursue my legal cases over the fraudulent manner in which ownership of American Apparel was taken from me, but I worry for the manufacturing workers and the L.A. apparel industry who are collateral damage in this bankruptcy. Many of the company’s loyal vendors will recover only cents on the dollar of what they are owed. The company’s workers, faced with current management’s inability to generate sales, face a highly uncertain future. American Apparel has ranked as one of the largest private-sector employers in Los Angeles now for many years. As a long-term resident of downtown, the company brought over 4,000 jobs into the area, sparking a renaissance of industrial activity and a revitalization of the area. While I will certainly be back, Los Angeles is a clear loser as this chapter of the story closes.
Dov Charney is the founder of American Apparel and was the company’s chief executive until mid-2014.
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