Photo: dovcharney via Flickr
American Apparel’s problems are well-chronicled, but less well understood is how far the chain has gone to gets its house in order.Stores have been closed. Adspend was cut back. And CEO Dov Charney brought in a whole new management team, particularly on the corporate finance side.
It appears to be working. Same store sales are up, overall revenues are up, and the company’s net loss is declining.
We spoke to Charney recently about the turnaround, who he blames for the company’s troubles, and what he expects from the rest of 2012.
Business Insider: There are a lot of moving parts to your business—advertising, product, stores—what factor is most responsible for the turnaround?
Dov Charney: We had fluidity problems, we had late deliveries and cost overruns in 2010 as a result of an immigration intervention that threw off our sales and profitability, and instigated limited liquidity to us, to perform store renovations and make technical improvements or invest in advertising. [The government raided AA’s factory, triggering the layoff of 1,800 staff.] The immigration thing caused a reduction in sales and profitability as a result of late deliveries. This had a domino effect. We lost our balance.
In 2011, we saw some recovery. We did positive $15.8 million in EBITDA. This year we’re going to do $30 – 40 million of EBITDA on our guidance.
In 2010, we were trying to bring about the presentation of a widened assortment [of clothes] but this was difficult. You have this creative guy, me, trying to expand the line when half the sailors were ejected off the boat by Homeland Security! We’ve got to make button-downs! We’ve got to make jackets! But all the sewers are new. it was a real comedy.
2011 was a little less sloppy, and this year we are starting to get our act together.
BI: What do you expect from revenues in 2012?
DC: I don’t think we gave guidance on that. We did $550 million last year, we’ll do better than that. It might get to $600 million.
BI: You’ll still have to reduce operating expenses by about $10m per quarter to become profitable.
DC: I don’t think it’s about reducing expenses but it often is. We’re revamping our distribution centre and we’re becoming more automated. This could save $4 or $5 million without making any changes to the sales. We’re working on a plan right now, we’re optimising store payroll. There may be $3 – 5 million there, by calibrating the payroll better, doing the scheduling better. There’s some money but it’s never that much. Most fluctuations in our margin relate to efficiency in the factory, or if there’s a cotton price spike, like last year.
BI: You’ve got to pay some attention to operating costs, surely?
DC: We have three areas where we can leverage costs. Stores: more sales per store to leverage the rent. The factory: the more units the factory produces, the cheaper the goods get. And we can leverage corporate expenses. To rent a board the fee is $1 million. If you’re doing greater revenues, it’s no greater.
The largest of all expenses is interest. We can pay that down itself. with a lot of EBITDA, you can do that.
We can refinance debt. We think we can refinance debt when we’re earning more money. the leverage will be better from the point of view of the banks.
BI: The LA Times said recently you’d consider moving your factory out of the U.S. to a foreign country.
DC: There’s no truth to that. To never say never is silly. But I think it’s more likely we’ll be struck by lightning.
BI: How many of the lawsuits filed against you—many to do with sexual harassment—are still outstanding?
DC: None outstanding in a public court right now. They’re all in [employment] arbitration, I think they’re all frivolous.
- THE AMERICAN APPAREL TURNAROUND: From Sex Slaves, To Slump, To Sales Success
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