The Rise And Fall Of American Apparel

The Rise And Fall Of American Apparel

January 17, 2020 100 By Kailee Schamberger


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?