Sunday, January 17, 2016

Up and Down with American Apparel

Above is a picture of an American Apparel store in my neighborhood.

Ten years ago, American Apparel was a hot clothing brand much favored by young people.  No longer.

When I walked by this store last week, I looked inside to see what was happening.  Nothing was happening.  The only people inside were employees.

The company's rise and fall make for a good story, a more interesting version of the now-common tale of retailers trying to attract and keep the loyalty of young buyers.

American Apparel

American Apparel opened its first retail store in 2003 on Sunset Boulevard in the Echo Park neighborhood of Los Angeles.

Its idea -- selling non-logo clothing basics to teenagers and young twenty-somethings -- originated with company founder Dov Charney, a serial entrepreneur who started his business while in college and had already been through at least one company bankruptcy.

Basics in bright colors was not a new idea -- Gap had made it work years earlier -- but Charney added several fillips.  One was vertical integration, selling only American-made products from his Los Angeles factory.  Another was company commitment to political causes, including sustainability, gay rights, universal healthcare and immigration reform.

A third was out-there advertising, associating simple products with overt sexuality, a reflection of the man himself.  In the early days he masturbated in front of a journalist who was interviewing him ; there were reports of public blow jobs and Charney walking through headquarters clad only in a pair of American Apparel briefs.

This interesting combination of new stores and a libertine for an owner worked for a while.

The Early Years

At first, American Apparel store numbers grew very fast.

From three opened in 2003, American Apparel set up shops in Europe and other American cities -- 65 in 2005 alone.  (At its peak the company operated more than 260 stores from Brazil to Israel to China to Australia.)

But growing a retail franchise is expensive.  It requires up-front investment in locations, managers, employees, distribution and product that pay off only afterward in sales revenue.

Charney may have been a visionary about his brand, but he was not smart with money.  When he got around to hiring an actual financial officer, the executive soon found a "lack of accounting knowledge" in the company's central office.  Its banker was hounding American Apparel for unpaid interest.  Trade creditors also were demanding payment and delaying shipments of raw materials.

By late 2006, financial reports had undergone two significant downward revisions, and two negotiated refinancings had been canceled by the money people.

At that point, another CFO arranged a deal with an investor group.  It transferred American Apparel's equity into a shell corporation in what is called a "reverse merger" and got the company listed on the American Exchange, raising much-needed cash.  The investors who organized the deal wanted Charney to leave, but he dug in his heels and stayed.

(Reverse merger listings do not require as much financial scrutiny as traditional IPOs; most likely the American Apparel stock buyers were wowed by the company's brand name and didn't pay attention to its financial prospects.)

Even at that point, dark clouds had begun to gather.  While same-store sales had risen 74 percent in 2004 and 45 percent in 2005, the revenue gains in 2006 were 7 percent.

The Decline

In 2008, the first of a number of sexual harassment lawsuits were filed against Charney by female American Apparel employees.  All were resolved short of the courthouse door, but people still share stories of his irregular behavior inside and outside company offices.

In 2009, immigration officials raided company facilities in Los Angeles and found that 1,800 employees were illegal immigrants.

In 2010, American Apparel's auditor, Deloitte & Touche, resigned, refusing to affirm the reliability of 2009 financial statements.  Investigations were initiated by the SEC and the lawyers/publicity hounds of the US Attorney’s Office for the Southern District of New York.

Also in 2010, the Guardian newspaper in the UK, which had covered American Apparel avidly for years, published a profile/eulogy of the company's decline.  (It' s a fun read; find it on  The nut graf:

        It is a chaotic final chapter in the story of a bombastic figure whose out-of-control carnality
        has, at times, overshadowed the fact that Charney is also an old-fashioned captain of
        industry – an eccentric, erratic, brilliant figure – with a disconcertingly simple concept:
        to make humble T-shirts, jogging pants and sweatshirts seem exciting.

Things just kept getting worse, and Charney didn't seem to develop any self control as he moved into his mid 40s.  He was fired at the end of 2014.  (He of course filed a nine-figure civil suit that will go nowhere.)

Charney was replaced by an executive with a strong resume and relevant experience, but by that point the company was a mess.  Less than a year later, American Apparel filed Chapter 11 (reorganization) bankruptcy.

I can't find full financial statements online, but it appears that American Apparel hasn't made a profit since the fourth quarter of 2009, and that followed three full years of losses.  Since then, it has lost $384 million.

In its bankruptcy filing, management projected profits of $6 million in 2018 and and $23.7 million in 2020.

Yeah, right, I think.


     -- American Apparel is downsizing.  In December, it closed its first store in Echo Park, Los Angeles.

     -- Charney, still swinging, found an apparently credulous investor group to back him in a bid to buy the company out of bankruptcy.  Last week the judge said no.
     Now American Apparel will be owned by its bondholders.  Wish them luck -- they certainly will need it.

     --Youth fashion is a tough game.  Other once-popular stores that have run into hard times include Aeropostale, Abercrombie & Fitch, Wet Seal and American Eagle.
     The only youth-fashion store that seems to have gone the distance is the first one, Gap, which itself has been in financial trouble for years.  Its customer base also has shifted; the last time I visited a Gap store, the youngest customers in the place were in their 40s.

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