American Apparel’s shares plummet 21% as doubts rise about its future
A day after American Apparel Inc. admitted that its future hangs by a thread, the hipster Los Angeles clothing maker and retailer was scrambling to overhaul operations, bolster sales and repair its faltering image.
After warning this week that there was “substantial doubt that the company will be able to continue as a going concern,” the company saw its stock fall 21.3% on Wednesday, ending at an all-time low of 81 cents. That was on the heels of a 26% plunge the day before.
In recent months, the troubled company has been beset by sales declines, losses, a crackdown on undocumented workers, problems with its debt, delayed quarterly filings and, most recently, an investigation by the U.S. attorney’s office in New York related to the company’s abrupt change in accounting firms.
Industry experts say the company’s problems are so severe that nothing short of a major overhaul in its business practices and management, which could include a possible bankruptcy filing, can pull it out of its free fall.
And there were doubts about the future for founder Dov Charney, the company’s colorful chief executive from Canada who built American Apparel into a retail powerhouse with 10,000 employees. He also has a reputation as an outlandish personality, going so far as to appear at work in his underwear.
As the company has floundered, analysts and investors have grown increasingly concerned about Charney’s business savvy and his ability to deal with the company’s numerous challenges.
American Apparel is operating like “a madhouse,” said Howard Davidowitz, chairman of national retail consulting and investment banking firm Davidowitz & Associates Inc.
“No one’s going to leave him in control — that’s over with,” he said. “I think it’s impossible to get anybody who’s going to bet on him again.”
When reached by phone Wednesday, Charney declined to comment, referring calls to his lawyer, Peter Schey, who said there were no plans for Charney to vacate his position or leave the company.
“Neither the board nor management believes that there would be any benefit to Dov stepping aside as the CEO,” Schey said. “Dov knows this business top to bottom. He understands its intricacies, its complexities and what needs to be done to get over the bumps in the road and move forward into long-term profitability.”
Still, Schey acknowledged that Charney “understands and appreciates the need to recruit additional experienced managers” and was looking into other ways to turn the company’s fortunes around.
Some options include closing a few underperforming stores, although Schey said there were no plans to shut large numbers of locations because doing so would not significantly help the company’s cash flow. American Apparel operates more than 280 retail stores in 20 countries.
Instead, the company is looking into reducing manufacturing costs, increasing the speed and efficiency with which its products are brought to market and improving the appearance of stores. It’s also working on diversifying its longtime lineup of colorful basics by expanding to preppier, more sophisticated styles, Schey said.
One American Apparel executive, who was not authorized to speak publicly, said management believes the company can recover.
“The company’s having some financial troubles and all that, but the demand for the brand is still there,” the executive said. “It doesn’t affect the day-to-day operations.”
One investor who appears to be betting on the company is Los Angeles billionaire Ron Burkle, who recently took a 6% stake in American Apparel. Burkle did not return calls for comment.
But with its business in jeopardy, the company may need to take more drastic measures — including letting go of its longtime Made-in-USA stance, said Nikoleta Panteva, apparel analyst with IBISWorld in Santa Monica.
She said American Apparel should consider outsourcing some of its manufacturing to countries such as China and Vietnam, which would be less costly and could help the company pay off some of its loans.
“If they can’t let go of these ideals or shift them somehow, then they’re in a lot of trouble for a while,” she said. “It seems like their business model isn’t really fitting in overall with the industry trends. They really need to evaluate their entire strategy.”
Still, Schey insisted that the company’s problems have been overblown, repeatedly saying the abrupt resignation of its independent auditing firm, Deloitte & Touche, last month “created a lot of smoke when there’s no fire.”
He said American Apparel was cooperating with the U.S. attorney’s office, which declined to comment on the investigation.
In the event of a bankruptcy, analysts said the retailer’s popularity among teens and young adults would be an asset. But they also said Charney would probably need to take on a different role.
“I don’t think everything Charney did was wrong,” Davidowitz said. “I just think he was over his head doing everything.”
The best solution, he said, would be for a new investor to gain control, replace Charney as head of the company and move him to a position as head of creative design.
“The question is, can Charney handle working under anyone? He might be running around the factory in his underwear.”