Charney has not totally given
up. He insists that the company
failed because he was forced
out. He is suing American
Apparel and Standard General.
At the same time, he has started
a second act with a new factory
in South Central LA. He hired 40
workers, who still get minimum
wage or more, and once again
he’s shipping wholesale T-shirts
His vertical approach — American Apparel
controlled everything from the fabric dyes to the stores
themselves — proved profitable. His team production
process enabled the company to manufacture more
shirts in less time. In 2007, the Economist reported the
company had an 80% gross margin, compared to the
industry standard of 60%.
That year the company went public, just in time for
the Great Recession.
American Apparel suffered from the recession like
everyone else, but the biggest blow came in 2009 when
an immigration services raid scooped up about 1,800
employees, making it impossible to fill orders and keep
Charney’s quirky personality also took a toll on the
company’s bottom line. In 2004, the now-defunct magazine, Jane, ran an article alleging that he had engaged in
inappropriate sexual behavior with the reporter during
their interview. At first, the bad behavior only enhanced
the brand’s image.
However, later charges from employees about
sexual harassment and a hostile workplace environment proved costly (the charges were either dismissed
or settled out of court). The situation inside the business office also deteriorated. The company’s accounting
firm, Deloitte and Touche, resigned in July 2011, citing
a lack of internal control over financial reporting. The
Department of Justice and the Securities and Exchange
Commission initiated investigations into the company,
and its stock plummeted from its IPO high of $15 a share
to 78 cents.
Charney Ousted as CEO
Although the company was delisted in 2014, it managed
to receive funding from FiveTCapital, a Swiss asset
management company. In June 2014, the board ousted
Charney as chair and formed a new board without him.
Charney teamed up with hedge fund Standard General
to purchase 43% of the company stock and plot a return.
But the relationship soured, and Standard General shut
Charney out while retaining its share in the company (at
the same time, it had become owner of another bankrupt legacy retailor, RadioShack).
Meanwhile, in a competitive market with internet
sales on the rise and in-store sales sagging, the
company failed to make a profit under new CEO Paula
Schneider and filed Chapter 11 for the first time in
October 2015. For Charney, the January 2015 bankruptcy court proceedings offered another opportunity to
wrest control from the board. Hagen Capital Group and
Silver Creek Capital offered $300 million to purchase
the company and restore Charney as CEO.
Instead, Judge Brendan L. Shannon approved an
alternate plan presented by the bond holders that eliminated $200 million in debt and handed control of the
company to a group of creditors, including Monarch
Alternative Capital, Coliseum Capital, Standard
General, Pentwater Capital Management and Goldman
Sachs Asset Management.
to produce simple T-shirts. Unlike the boxy Hanes shirts
of his youth, Charney designed a fitted shirt of a softer,
more pliable material. For the first five years, American
Apparel was a wholesaler providing shirts to companies
that added artwork and distributed them.
According to a 2004 New York Times Sunday
Magazine article, the business changed in the summer
of 2003, when Charney rented a storefront gallery
in LA’s Echo Park neighborhood for a friend’s photo
exhibit. As an afterthought, he put some T-shirts out for
sale. When he discovered that the shirts had rung up
$1,500 in sales, he began signing leases in the hip neighborhoods of other cities. American Apparel opened its
first retail store that year. At its peak, the company had
273 stores around the world.
Ironically, American Apparel entered the world of
brick and mortar just as internet shopping was beginning, but no one imagined how it would completely
change the way people shopped.
From the outset, Charney cultivated a sexy image,
offering body-hugging but comfortable garments. He
created erotic ads featuring real women, including
employees, instead of professional models. Critics said
the ads were almost pornographic, but they seemed to
resonate with the consumers the company targeted.
Vertical Approach Succeeds
In addition to creating provocative ads, Charney honed
the brand by continuing to manufacture in Central LA
while most clothing makers were moving to Asia for
cheap labor. He insisted he could be more nimble and
fill orders quicker from LA than overseas. The company
also promoted its anti-sweatshop ethos. Charney paid
his workers on a performance-related basis, with some
earning twice the minimum wage. He offered English
classes, low-cost healthcare packages and subsidized
meals to employees at his factory.