At American Apparel's peak, it was synonymous with made-in-L.A. hipster cool and provocative
advertising. It was also synonymous with its founder, Dov Charney, and that proved to be its
downfall. Dov Charney was American Apparel.
He founded the company after he dropped out of college and built it into a fast-growing
retail brand, all while manufacturing in the U.S. and paying workers a proper wage in an
industry known for poor working conditions.
In many ways, Charney was a visionary in retail.
Dov Charney was way ahead of his time. From the point of view of what he was doing right. He
was manufacturing in the U.S. He was taking on all the social issues. He was all about
protecting immigration, LGBT rights, not using models who were made up or airbrushed or
anything.
But he was also doing a lot of things wrong. Allegations of sexual harassment surfaced around
Charney in 2005, and people started to wonder if American Apparel's overtly sexualized image
went too far.
In 2014, the board of American Apparel ousted Charney, saying he had misused company funds.
Charney tried to get his company back, but failed. American Apparel went bankrupt in 2015,
and then again in 2016. The second time it closed all of its retail stores and laid off
employees. But you can still order American Apparel online. That's because it came back in
2017 as an online only retailer after being acquired by a Canadian company. Some things look
the same, like the natural models and knit basics, but other parts of the company, like its
commitment to manufacturing everything in the US, are gone.
As a teenager from Montreal, Dov Charney was obsessed with American T-shirts, which were
higher quality and cost less than Canadian shirts.
Charney dropped out of college and in 1991 started manufacturing T-shirts. Soon he would
begin making shirts with a tighter cut and better fit than the standard oversized tee.
In 1997, 28-year-old Charney moved to Los Angeles and started a wholesale T-shirt business.
Initially, American Apparel T-shirts were produced in Mexico, but Charney moved the
manufacturing to L.A.
By 2001, sales in American Apparel hit $20 million. Soon, the company started selling
directly to consumers. American Apparel's first store opened in 2003 in Los Angeles. And in
2004, the company started selling online. The brand stocks basics like zip-up hoodies and
knit tees
The company's principal competitors were Fruit of the Loom, Hanes Brands and VF Corp., which
owns Van's, the North Face and other brands.
By the end of 2005, the company had about 60 stores; half in the U.S. and half international.
That same year, the company pulled in revenue of more than $275 million.
But that wasn't enough for Charney.
He wanted the company to be even bigger. One way to get there was through expansion into even
more locations overseas. Charney wanted to be in all the global capital cities: Paris,
Berlin, Beijing, Mexico City and more. He wanted to go to big cities around the world and
they wantrf to expand out from there. I told you, Dov wanted to take over the world, but you
have to do that one city at a time. So you go to London, you go to Paris, you go to the major
cities and get your name out, and then you can build out more around that. Soon, canvas tote
bags listing international cities became a symbol of the brand. But despite its rapid
expansion abroad, 2005 was a rough year at home for American Apparel. Sales growth at stores
open for more than a year slowed. To try to shore up the company's growth, American Apparel
was sold to an investment firm called Endeavor Acquisition in 2006. The company was purchased
for over $800 million in stock, cash and assumption of debt. Endeavor acquisition was already
a public company when it bought the retail business and it started operating under the name
American Apparel Inc. in 2007.
As a public company, American Apparel sales grew seven out of the nine years it was a public
company. It went private again in 2016, but the company wasn't always profitable. The last
time it turned a profit was in 2009. That's also the year the company started closing more
stores than it opened, shrinking its footprint.
So what went so wrong for American Apparel?
It grew fast in the early 2000s, but after 2008, the company faced huge problems it couldn't
overcome. Charney wanted everything American Apparel sold
to be made in the U.S.
That stance set the company apart from competitors, and the phrase "made-in-USA" appeared on
many ads. American Apparel was seen as an anomaly in an industry known for dangerous working
conditions at extremely low pay. American Apparel paid its workers high wages by industry
standards and provided benefits, including health-care and education resources to workers.
In a 2012 interview with CNBC, Charney said it was more efficient to manufacture in the U.S.
closer to a company's headquarters, and that it was the right thing to do.
I think it's more consistent with avant garde morality. Avant garde morality is that no one
touched by principles of sustainability.
That no one touched by the business process, whether be the environment or a worker, should
be damaged by the commerce of the business.
In 2008, American Apparel employed about 9,700 people. But in 2009, the company faced a huge
blow to its productivity, when a federal investigation found irregularities in some employees
identification paperwork.
Over 1,500 of American Apparel's experienced manufacturing employees were fired following an
I-9 inspection by U.S. Immigration and Customs Enforcement. The investigation into the
company was part of then President Barack Obama's policy of reducing illegal immigration by
requiring companies to fire unauthorized workers.
Losing those employees led to lower manufacturing efficiency, which the company estimated
reduced its operating income by $4.4 million in the first quarter of 2010.
And there were more risks to the business that year, including its financial health. In
American Apparel's first four years as a public company, its CFO changed several times. Those
moves lost trust with investors and made accurate financial reporting difficult, according to
a 2011 class action lawsuit filed by shareholders.
iBut trouble began in 2008. In an interview with the Wall Street Journal, Charney called his
company's then CFO, Ken Cieply, a complete loser with no credibility, despite giving him a 20
percent raise the previous year.
Charney later backpedaled, saying that Cieply had enormous credibility. Cieply quit not long
after. The company named 31-year-old Adrian Kowalewski as CFO in 2008.8,.
Filings from the 2011 lawsuit allege this move gave Charney more power over managing the
company's finances and other operations with little oversight or accountability.
You're beholden to multiple stakeholders. You have an obligation to your customers, to your
employees, to your vendors and to your suppliers. You have an obligation, as American Apparel
filed out about 2009, you have an obligation to federal regulators. There's a whole set of
rules you have to play by, and often charismatic entrepreneurs just don't get it.
It hired Deloitte and Touche as its independent auditor in the spring of 2009. The 2011
lawsuit alleges the move was to assure investors about American Apparel's commitment to best
practices in financial reporting.
In 2009, American Apparel's performance seemed strong amid a recession that hit retailers
particularly hard. On a March 17th, 2009, conference call with investors, Charney said "We
feel our brand and the market segment we serve will allow us to weather the economic storm
well."
But that came crashing down in July 2010 when Deloitte resigned suddenly.denly,. The auditor
claimed American Apparel management withheld from Deloitte the February 2010 monthly
financial statements after the filing of the 2009 10-K.
Deloitte warned investors that the 2009 financial statements from American Apparel should no
longer be relied upon. After Deloitte resigned, shares of American Apparel fell 14 percent
and the FBI and S.E.C. launched investigations.
Within weeks of Deloitte's departure, the company disclosed it received a subpoena from the
U.S. Attorney's Office for the Central District of California.
In the following days, American Apparel stock price fell over 46 percent. In American
Apparel's 2010 annual report, the company cited bankruptcy as a risk factor. But in a 2012
interview with CNBC's Jane Wells, Charney said bankruptcy was not a possibility. If you had
asked me any day, or last thousand days, whether we were going to go bankrupt, I would tell
you never. It's not going to happen. Our business is too strong. It's too hot. We know what
we're doing. We have too much promise here. We're not going bankrupt.
American Apparel's poor financial situation was compounded by the rising price of cotton. As
American Apparel sales were falling, cotton prices more than doubled from 2010 to 2011,
weighing down its business and forcing American Apparel to raise prices on some products.
The company said what it paid for a pound of cotton doubled from the first quarter of 2010 to
March 2011. By 2012, cotton prices returned to more normal levels, but the damage was already
done.
Well, it was real bad before you know, the price of cotton went, we were paying $1.50 for
yarn and it suddenly went to $3.30.
Charney was determined to make American Apparel a global brand. But after his board fired him
in 2014, Charney's priorities changed.He
He just wanted to get his business back.
In June 2014, the board of American Apparel ousted Charney, saying he had misused company
funds and failed to prevent an employee from publishing nude photos of another employee
online.
Charney had been mired in controversy for years. In 2005, he was at the center of sexual
harassment lawsuits and later was accused of sexual misconduct and inappropriate workplace
behavior.
Including using ethnic slurs against workers and keeping videos on a company server of
himself in sex acts with employees. Charney has
denied claims of sexual harassment.
In a 2015 statement to Reuters, Charney’s lawyer said “He was fired because he wouldn’t
relinquish control of his company.” In a Jan 2020 emailed statement to CNBC, Dov Charney
said: "The board asked me to voluntarily step down as CEO and relinquish control over my 27%
ownership stake in the company, or be forcibly removed. Using old, discredited allegations
they knew were false as cover to terminate me, they embarked on a well-financed media
campaign to discredit me and my track record as a successful executive and entrepreneur.”
Retail experts say sometimes a founder isn't the best person to lead a public company. Think
Uber's Travis Kalanick, Facebook's Mark Zuckerberg and, of course, Dov Charney.
In June 2015, American Apparel was granted a restraining order against Charney, temporarily
preventing him from making negative statements in the press against the company and its
employees.
Charney teamed up with an investor group in 2016 to acquire American Apparel, but ultimately
failed. After Charney's firing, the then board of directors hired a new CEO, Paula Schneider,
to lead a turnaround plan. She was going to increase sales by introducing seasonal apparel,
developing more online business, and improving quality. But soon it was apparent that
American Apparel didn't have the cash to implement the changes. American Apparel filed for
Chapter 11 bankruptcy protection in October 2015, carrying almost $300 million worth of debt.
American Apparel received a bit of $300 million from a group of investors backing Charney's
return, but it wasn't accepted. The company emerged from bankruptcy in February 2016 after
being purchased by a hedge fund.
Eight months later, Snyder resigned, after two years on the job. In November 2016, the
company filed for bankruptcy protection a second time with about $177 million in debt.
Increased competition from online and other teen retailers, mixed with slumping sales, hurt
the brand.
A slew of other retailers like Wet Seal and Pacific Sunwear of California, also filed for
bankruptcy between 2014 and 2016, as mall traffic dipped.
But American Apparel didn't die in bankruptcy court. The brand is still available online, but
with a different owner now. Canadian company Gildan Activewear acquired the brand in 2017 for
$88 million. They basically bought the rights to anything that was intellectual property,
which means the name and the design and that kind of stuff. They didn't take any stores. They
did take any leases. They didn't take any manufacturing facilities. They just took what could
be used to market the product.
With the acquisition, American Apparel retail stores and U.S.
manufacturing plants closed.
The company laid off thousands of employees and moved some manufacturing abroad.
When you visit American Apparel online today, it may not look much different from the company
Dov Charney founded.
The models are fresh-faced wearing body suits and basic tees and solid colors.
The web site says that the brand is ethically made-sweatshop free.
That's one of the most obvious differences to the original brand.
Gildan, the company that acquired American Apparel, produces its products around the world.
Gildan CEO told analysts on an earnings call in February 2017, "There's an opportunity to
offer product that's more price centric." Still, Gildan describes American Apparel as a
premium brand in fashion basics at a higher price point than its other brands.
Gildan sells a Made in the USA collection, as well as more affordable styles made outside the
U.S. Gildan told CNBC many American Apparel
sales are produced in company-owned facilities, which are primarily located in Central
America and are operated under some of the industry's leading corporate social responsibility
programs. Gildan doesn't break out American Apparel's financial results in its earnings, so
it's unclear if the strategy is working.
But on a call with analysts in October 2019, Gildan CEO said American Apparel is a strong
brand. The question is, will consumers get behind American Apparel under a different
ownership?