American Apparel shares surge 19% amid takeover speculation

A major operational rethink at American Apparel could lift it out of doldrums, or a buyer may make an offer

A day after the firing of Dov Charney, American Apparel Inc.'s stock jumped amid fresh speculation that the apparel company is ripe for a takeover.

Shares of the Los Angeles retailer shot up nearly 19% to 69 cents Wednesday following Charney's ouster and the appointment of Paula Schneider as the new chief executive starting Jan 5.

Charney had been working as a consultant to the company during his suspension from the CEO job. American Apparel said Tuesday that an investigation into misconduct allegations, including inappropriate behavior with employees, led the company to the determination that Charney shouldn't be reinstated as CEO or continue as an employee.

The next few months under Schneider, an experienced clothing executive, could determine the future of American Apparel, industry experts said. A major operational rethink could lift the retailer out of the doldrums, or a buyer may come in and make an offer.

"There's always going to be someone that is going to look at an asset like this as a challenge and see if they can turn it profitable," said Ronnie Moas, founder of Standpoint Research, a market research firm. "Stranger things have happened."

Throughout the months of turmoil surrounding Charney's role with the company, American Apparel executives have strongly denied interest in selling the company.

Allan Mayer, co-chairman of American Apparel, declined to comment on takeover rumors. In an interview, Schneider said she planned to quickly get up to speed on American Apparel and then decide on a strategy to turn around the company's fortunes.

"You go in and find out what's going on and what's working and what's not working," Schneider said Wednesday. "Then you create a strategy. Up until then it would be irresponsible to say there is one."

Schneider said American Apparel was committed to continuing to make its clothing in the U.S. and would not be swayed even if Los Angeles followed through with a proposal to hike the minimum wage to $13.25 by 2017.

The company "is made in America. It's sweatshop free," she said. "I doubt there would be a strategy change in regard to that. It's really important."

Schneider, 56, has spent her entire career in the Southland fashion industry.

Schneider graduated from California State Chico with a bachelor's degree in theater costume design. It was a major that she designed herself to pursue her creative interests, she said.

"I actually have the technical skills and understand how to design and the construction of a garment," she said.

Over the years, Schneider climbed the ranks of the retail industry in Southern California. She said she has gained turnaround experience from stints at BCBG Max Azria, where she helped steer the company to profitability, and Warnaco, where she aided in corporate restructuring.

Her approach at the helm of American Apparel, Schneider said, would be "extremely collaborative."

"There are people who have been working there 10, 15 … years and know a lot more about the business than I do," she said. "It's really about listening for the first 60 days."

A lot of eyes will be on Schneider as she takes the reins.

For now, the board appears committed to keeping the company public, analysts said. But the retailer will have to show signs of improved performance soon or shareholders may start getting antsy.

The company has lost $310 million in nearly five years and carries more than $200 million in debt. In its latest quarter, American Apparel posted a net loss of $19.2 million, or 11 cents a share.

Schneider will also face a tough cultural challenge. Under Charney, considered innovative but unpredictable, the company lacked many of the formal controls common at traditional retailers. Stores, for example, did not get regular budgets, sales targets or schematics for how to lay out the shops, according to former executives.

A number of managers and executives sent a letter to the board Tuesday expressing disappointment in Charney's ouster and hope in his eventual return.

"You have a lady coming in to help right the ship, and it's a brilliant move," said Lloyd Greif, chief executive of Los Angeles investment banking firm Greif & Co. But "her executive team is still longingly looking at the empty seat that Dov Charney sat in. That's a huge problem."

If the company continues its downward slide, observers say a private equity firm may come in and make a compelling offer. Charney controls 44% of the stock in combination with New York hedge fund Standard General.

"The question is are they going to run out of money before someone comes in and makes an offer?" Moas said.

Twitter: @byshanli

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