American Apparel's First Profits In Years Put The CEO's Sex Scandals In The Rearview Mirror

Dov CharneyAmerican Apparel CEO Dov Charney

Photo: Mogulite

American Apparel recently reported its first net income profit after 12 straight quarters of losses.That’s an amazing turnaround for a brand which a few years ago was close to bankruptcy; its CEO surrounded by lawsuits alleging sexual harassment.

Now, comparable same-store sales are showing increases of 7 – 13 per cent.

Q4 revenues rose to $173 million. And CEO Dov Charney made good on his promise — made to Business Insider back in June — of booking more than $600 million in revenue for the year.

Even the stock is up.

Things are different now at the U.S.’s most-watched fashion advertiser (a company known to have girls in bikinis wash its roof). In the past two years, AA has undergone a wrenching series of changes to get the all-American clothing house back on the right track.

Here’s how Charney did it.

In the beginning ...

American Apparel was started by Dov Charney while he attended Tufts in the late 1980s.

By 1997, the company moved from Charleston, South Carolina, to Los Angeles. In 2000, American Apparel moved into its current Los Angeles factory.

In 2006, the company was sold for more than $380 million to endeavour Acquisition Corporation.

Charney stayed on and still runs the company today.

In 2004, concerns about the sexual nature of AA's corporate culture emerged.

Charney gave an infamous interview with Claudine Ko, which became a relatively unedited article looking into the company, Charney and the women around him.

Ko claimed Charney masturbated in front of her -- multiple times.

What followed were a series of lawsuits from former employees, now totaling nine, regarding sexual harassment, naked pictures, etc. In one of them, filed in 2011, a woman alleged Charney trapped her in his home as a sex slave.

But in the mid-2000s, sales were booming.

2008 was a very good year, until ...

... Charney called his CFO a 'complete loser.'

Ken Cieply resigned a few weeks later and the stock had one of its worst months in history. It would get temporary reprieve, but then suffer with the rest of the markets in the fall of that year.

By December there were still reasons to celebrate a bit: rapid expansion, success in the U.K., domestic praise, and a great online strategy.

And 2009 was not much better.

In March, American Apparel avoided bankruptcy thanks to an $80 million loan from Lion Capital.

Two months later, it paid Woody Allen $5 million for using an image of Annie Hall without Allen's permission.

The stock continued to struggle and then it got a lot worse.

1,800 employees were laid off because of their immigration status.

In September, American Apparel let go 1,800 employees after an Immigration & Customs Enforcement raid revealed many employees did not have proper legal status.

The layoffs were well over a third of American Apparel's factory staff and would lead to even more publicized campaign for immigration reform, something that had long been a staple of the company's public image.

Charney would actually blame American Apparel's economic woes on the immigration raid, although that was just the beginning of what would be a dismal 2010. '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 were new. It was a real comedy.'

In August of 2010, APP was threatened with delisting.

Only a week after announcing it might go bankrupt, American Apparel received a letter threatening delisting from the New York Stock Exchange/AMEX because of delayed second quarter filings.

This came after Deloitte & Touche resigned as auditor because of concerns over internal controls regarding financial disclosure. The month before, the U.S. Attorney in New York began investigating American Apparel.

The turnaround began with a restocking of its management suite.

After facing delisting and struggling financial numbers, Dov Charney seemed to accept the idea that American Apparel had become too large for him to run alone. As such, American Apparel began an aggressive overhaul of its executives in late 2010.

In October of 2010, Tom Casey, formerly of Blockbuster, was made acting president. John Luttrell was named executive vice president and CFO in February of 2011. That July, David Danziger was put on the board while Marvin Igelman was given a seat-in-waiting. In February of this year, Jordan Schiff was hired as GMM and Stacy Shulman was promoted to CTO.

In addition, fashion industry veteran Marty Staff was hired as chief business development officer in early 2011, but left before the end of the year.

The move was welcomed as a step in American Apparel's growth, although quick departures of Casey and Staff confirmed Dov is still not an easy person to work alongside.

The crazy store expansion came to an end.

At the end of the first quarter of 2010, American Apparel had 280 retail stores. Two years later it had shrunk to 249. (Currently it has 251.)

The insane growth through of the 2000s had come to an end. American Apparel began shutting down under-performing stores.

Charney promised to make his remaining stores more efficient. 'Retail is detail,' he's fond of saying.

And 2012 started with sales going up.

The focus on efficiency and streamlining paid off.

Total January sales were up 14%.

In some categories, American Apparel was beating record highs from 2008.

Cotton prices started stabilizing.

In 2011, the price of cotton hit record highs thanks to demand, floods in China and Pakistan and other abnormal factors.

'Most fluctuations in our margins relate to efficiency in the factory or if there's a cotton-price spike. like last year,' Charney told us.

But bankruptcy was still a concern.

In the spring of 2011, American Apparel announced it might pursue bankruptcy. Among the concerns listed: financial losses, lawsuits, cotton prices, labour concerns, and more.

Behind all that lay American Apparel's fundamental, long-term problem: its persistent unprofitability and its debt and liquidity issues.

'The largest of all expenses is interest. We can pay that down itself in cash. With a lot of EBITDA you can do that,' Charney says. 'We can refinance debt. We think we can refinance our debt when we're earning more money. The leverage will be better from the point of view of the banks.'

And then George Soros loaned the company $80 million.

This was big,

All throughout late 2011, the concern regarding American Apparel was how it was going to be able to pay its two creditors, Bank of American and Lion Capital.

The answer was George Soros and Crystal Financial.

In March of this year, Crystal Financial loaned $80 million to American Apparel, replacing Bank of America, and by most accounts allowed American Apparel to avoid bankruptcy.

Charney even started winning in court.

Made in America might work out in the long-run.

American Apparel is proud of its massive Los Angeles factory, which might just be the biggest clothing factory in the U.S. For the longest time, there's been one glaring problem -- it's in the U.S.

With an average salary of $12.00 an hour, making clothes in the U.S. is expensive compared to China, the Dominican Republic, Honduras or Mexico.

He loves American Apparel's vertical integration, which allows for designs to go from concept to retail in a week's time. In addition, he cites rising costs in China as one more reason to not even think about leaving.

And as The Atlantic pointed out, 'made in America' is a gigantic selling point.

Even the stock has performed: It's well above $1 for the first time in two years.

Charney need fear delisting no longer. Investors think this company might actually grow and add value -- something it hasn't done in years.

One caveat: Charney has has a habit of diluting his stock in return for financing. The company recently said it still needs financing.

Charney is a crazy genius.

Dov Charney is hard to work with. Dov Charney gets in trouble. Dov Charney is actually brilliant.

Charney has made American Apparel a brand obsessed with quality and in large part, it's paid off. While profits might not look great, American Apparel has a loyal customer base who have no problem paying $20 for a plain T-shirt.

The fact he seems to be avoiding lawsuits of late has to only be good news for investors.

American Apparel's factory is also quite cool...

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