AMERICAN APPAREL: From Sex Slaves, To Slump, To Sales Success

Dov CharneyAmerican Apparel CEO Dov Charney

Photo: Mogulite

Last month American Apparel announced a quarterly net loss of $7.9 million. For most companies, posting a ninth straight quarter of losses wouldn’t be cause for celebration. But things are different at American Apparel, the company known to have girls in bikinis wash its roof.In the past 12 months, American Apparel, led by founder Dov Charney, has undergone a wrenching series of changes to get the all-American clothing house, one of fashion’s most prominent advertisers, back on the right track.

American Apparel is known for sexy clothes, sexy ads and lawsuits alleging sexual harassment. But sales are on the increase, its retail footprint is being rationalized, and its wholesale and internet businesses are booming.

If Charney can pull this off—the company is still in the red, so it’s not guaranteed—it will be one the most epic turnarounds in fashion retail history.

Here’s how American Apparel has gone from rambunctious teenager to mature adult, accompanied by a history of the ads that made the store infamous.

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.

The business originally focused on T-shirts, allegedly inspired by one of Dov's ex-girlfriends.

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.

In August, investors joined the long list of people suing.

The illegal hirings came back to haunt American Apparel again, this time when a shareholder filed a lawsuit citing fraud.

Anthony Andrade was the named plaintiff who alleged American Apparel knowingly hired illegal workers, putting the finances of the company and investors at risk.

In addition, the suit claimed American Apparel lied about its financial health to investors, who lost a lot of money on paper.

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.

In December of 2011, it used Groupon to shift inventory.

American Apparel boosted its holiday sales thanks to an aggressive Groupon campaign. While it didn't help profits, the Groupon effort brought shoppers into the store.

Selling clothes at half-price on Groupon isn't generally a great strategy, but the company claims it was happy with the campaign.

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.

Fortunately for American, supply is expected to outpace demand in 2012, bringing prices down a bit, although Chinese demand is expected to keep cotton from dropping further.

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

But bankruptcy was still a concern.

In the spring of last year, 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.

Last month, it got in trouble for something besides sexy ads.

American Apparel's ads are notorious. We once called the advertising 'pornography.' There were nude sketches, nude watercolors, and then straight-up nudity like the kind Britain banned earlier this year.

Last month, comedian Fahim Anwar tweeted a link to an ad showing an American Apparel model holding onto a Hispanic farmer, which was picked up by Gawker. The image, which has since been pulled, inspired the Undocumented Apparel series from California artist Julio Salgado.

It seemed odd given how much the company had done for the Latino community.

'Raul is a family friend and the photos turned out great, so we developed them into an ad and put it on our website. The whole controversy seems a bit contrived,' a company spokesperson told The Bay Citizen.

Charney even started winning in court.

Last month, American Apparel posted decent Q1 2012 numbers.

The number American Apparel would like you to focus on is the net sales number, which was up 14 per cent. However, it's the reduction in net loss for the quarter that shows the real growth. In Q1 2012, APP reported a $7.9 million loss. The year before, it was $20.7 million.

The closing of stores, a new executive team, and stabilised cotton prices are quietly bringing American Apparel a lot closer to being profitable. Those trends continued into spring. May was the 12th consecutive month of positive comparable sales and the company is getting close to its 2008 records.

However, questions over liquidity still remain. It did not help that missed financial targets resulted in Lion Capital receiving even further reduced share prices.

But there is hope ...

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.

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. Recently, the Los Angeles Times reported Charney was considering moving his manufacturing elsewhere.

Charney denies it. 'There's no truth to that,' he told us. 'To never say never is silly. But I think it's more likely we'll be struck by lightning.'

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.

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

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.