This bombshell story was in the front page of the wall street journal this weekend....
American Apparel Bares All
Dov Charney's newly public company makes a wild debut; dissing the CFO
By NICHOLAS CASEY
The chief executive of American Apparel Inc. has long been known as something of an exhibitionist. Dov Charney is beyond frank when discussing his sex life and sometimes wanders around his factory in his underpants.
But the business operations of Mr. Charney's rapidly expanding clothing empire have not been nearly so transparent. Even as American Apparel rose to prominence over the past decade with basic T-shirts, clingy dresses and sexualized marketing campaigns, its status as a private company has shielded from view its chronic financial problems.
Now, American Apparel is opening the kimono -- and it's not necessarily a pretty sight. Since going public last December in an unorthodox maneuver, the company has conceded it suffers a number of "material weaknesses." According to a filing with the Securities and Exchange Commission, these include "inadequate expertise in the application of U.S. generally accepted accounting principles." The company is grappling with its fourth sexual-harassment lawsuit, and its former insurer says it won't pay any damages.
The company says it's blameless in the suit and that it's working to correct its other problems. But it also details an unusually long list of risk factors, including a recent query from Immigration and Customs Enforcement requesting citizen documents of factory employees; a current government tax audit and high levels of debt.
Mr. Charney's penchant for outspokenness could also prove risky. In an interview March 20, Mr. Charney said his current chief financial officer, Ken Cieply, "has no credibility" in the retail apparel industry and is a "complete loser." Mr. Cieply says: "The only thing I can say is I'm surprised … There are times when Dov is frustrated."
In a followup telephone interview, Mr. Charney Friday called his own words "juvenile." In a subsequent letter sent via the company's general counsel, Mr. Charney added: "I do not think Ken Cieply is a 'loser,' and if I said anything that led you to believe otherwise, you must have misunderstood me." Mr. Charney also said in the letter that Mr. Cieply has "enormous credibility" in the manufacturing world, but lacks extensive retail experience.
American Apparel had healthy sales of $387 million last year, up 36% over 2006, and reported a big 37.5% gain in same-store sales in the recently ended first quarter. But its shares are off more than 40% since December. Friday, they closed at $8.30, up 30 cents.
Sheer Loopiness
Certainly, many entrepreneurs struggle at the helm when their companies go public, and many fashion houses find their fortunes wane due to the eccentricities of a flamboyant founder. But few such stories contain the drama or sheer loopiness of Mr. Charney's recent adventures.
Mr. Charney insists his leadership style provides a model of authenticity for young people looking for alternatives to a "Baby Boomer economy which is collapsing."
He is also adamant that his behavior is appropriate for a trendsetting fashion company. Sporting vintage glasses and tight shirts, the 39-year-old Mr. Charney seems almost a living resurrection of the free-spirited 1970s. He sees himself as crusading against today's puritanical conventionality and likens himself to Larry Flynt, the Hustler magazine publisher who fought many First Amendment battles.
Mr. Charney stages provocative photo shoots in the basement of his Los Angeles mansion -- a hilltop perch filled with stacks of his vintage p*rn magazines. On a recent evening there, a young female employee served Mr. Charney tomatoes over rice while another, dressed in underwear and a T-shirt, was quizzed by her boss on competing brands.
"If you're offended by sexual innuendo or masturbation or sexual coloring books -- if you're offended by any of these, then don't work here," Mr. Charney says.
A Montreal native, Mr. Charney founded American Apparel as a wholesale T-shirt business in 1998 after filing for bankruptcy for a similar venture he launched in South Carolina. He relocated to Los Angeles and set up a new factory under a strip of Interstate 10. Long obsessed with the styles of the 1970s, Mr. Charney eschewed logos and created shirts with flashy colors, sequined pants and striped leg-warmers. Company ads, featuring spread-eagled women and skimpily clad behinds, blurred the lines between fashion photography and soft p*rn.
Made in the U.S.A.
At a time when many large clothing makers were moving their manufacturing overseas, Mr. Charney attracted attention to the brand by electing to make all of the company's clothes in a Los Angeles factory and by championing social causes like immigration reform and universal health care. Tailors at American Apparel's factory receive subsidized health-care benefits and generally make twice the minimum wage. The factory's proximity also allows Mr. Charney to create new designs, and get them to stores, the week after he's conceived them, a speed unheard of in the industry.
With its decidedly anti-corporate image, American Apparel soon gained currency with a young, metropolitan crowd that was growing disenchanted with mainstream mall standards like Abercrombie & Fitch Inc. and the Gap. A recent nationwide poll by Look-Look, a Los Angeles-based trendspotting firm, found that more than 60% of 14-to-35-year-olds said they liked or loved the brand.
As the brand took off, Mr. Charney decided to try his hand at selling directly to consumers. He plunged the company into an aggressive retail expansion. In 2003 he had three stores; in 2005 he opened 65 more; today there are 187 in 15 countries.
But Mr. Charney wasn't as focused on the company's finances. In early 2005, chief financial officer Mark Schlein died unexpectedly of heart failure, and Mr. Charney and others say a replacement wasn't found for a year. An interim CFO was later hired, though Mr. Charney only remembers that "he had gray hair and quit after a week." Mr. Charney delegated bookkeeping to a few younger staff members and continued to open stores.
Problems developed. According to a chronology of the company's financial history provided by American Apparel executives to The Wall Street Journal, U.S. Bank, a Minneapolis-based bank that was backing American Apparel's growth, urged Mr. Charney to secure additional financing amid the company's rapid store openings.
By year's end, American Apparel was unable to convince additional large lenders to provide capital, and U.S. Bank found the company in default of its credit agreements. Although the bank continued its loan agreement, it strongly urged the company to find more financing. A U.S. Bank spokeswoman declined to comment on the transaction.
So, American Apparel began shopping for another source of cash. In spring 2006, Plainfield Asset Management, a private firm that was considering an investment, requested an outside audit, prompting the company to begin its own internal audit. The internal auditors found American Apparel had inflated its 2005 earnings by nearly 30%, according to the company's chronology. American Apparel adjusted the numbers, reducing 2005 earnings before interest, taxes, depreciation and amortization to $18 million from $26 million.
Mr. Charney says the auditors "were exaggerating" and he still believes the revised earnings, not the originals, are wrong. Regardless, Plainfield backed away from the deal, the chronology states. American Apparel began to run out of money. Plainfield said through the company that it has no comment on the deal.
Of course, American Apparel's books weren't the only issue. Mr. Charney grew increasingly public about his lifestyle, making himself the brand's mascot and provocateur. He entered into relationships with employees and on occasions walked through the factory in his underwear to model new designs, he says. Billboards springing up across the country quickly gained attention for their racy layouts. In one ad, a woman spreads her legs for the camera in company stockings and underwear on a white bed -- Mr. Charney's bed.
American Apparel Bares All
Dov Charney's newly public company makes a wild debut; dissing the CFO
By NICHOLAS CASEY
Los Angeles
The chief executive of American Apparel Inc. has long been known as something of an exhibitionist. Dov Charney is beyond frank when discussing his sex life and sometimes wanders around his factory in his underpants.
But the business operations of Mr. Charney's rapidly expanding clothing empire have not been nearly so transparent. Even as American Apparel rose to prominence over the past decade with basic T-shirts, clingy dresses and sexualized marketing campaigns, its status as a private company has shielded from view its chronic financial problems.
Now, American Apparel is opening the kimono -- and it's not necessarily a pretty sight. Since going public last December in an unorthodox maneuver, the company has conceded it suffers a number of "material weaknesses." According to a filing with the Securities and Exchange Commission, these include "inadequate expertise in the application of U.S. generally accepted accounting principles." The company is grappling with its fourth sexual-harassment lawsuit, and its former insurer says it won't pay any damages.
The company says it's blameless in the suit and that it's working to correct its other problems. But it also details an unusually long list of risk factors, including a recent query from Immigration and Customs Enforcement requesting citizen documents of factory employees; a current government tax audit and high levels of debt.
Mr. Charney's penchant for outspokenness could also prove risky. In an interview March 20, Mr. Charney said his current chief financial officer, Ken Cieply, "has no credibility" in the retail apparel industry and is a "complete loser." Mr. Cieply says: "The only thing I can say is I'm surprised … There are times when Dov is frustrated."
In a followup telephone interview, Mr. Charney Friday called his own words "juvenile." In a subsequent letter sent via the company's general counsel, Mr. Charney added: "I do not think Ken Cieply is a 'loser,' and if I said anything that led you to believe otherwise, you must have misunderstood me." Mr. Charney also said in the letter that Mr. Cieply has "enormous credibility" in the manufacturing world, but lacks extensive retail experience.
American Apparel had healthy sales of $387 million last year, up 36% over 2006, and reported a big 37.5% gain in same-store sales in the recently ended first quarter. But its shares are off more than 40% since December. Friday, they closed at $8.30, up 30 cents.
Sheer Loopiness
Certainly, many entrepreneurs struggle at the helm when their companies go public, and many fashion houses find their fortunes wane due to the eccentricities of a flamboyant founder. But few such stories contain the drama or sheer loopiness of Mr. Charney's recent adventures.
Mr. Charney insists his leadership style provides a model of authenticity for young people looking for alternatives to a "Baby Boomer economy which is collapsing."
He is also adamant that his behavior is appropriate for a trendsetting fashion company. Sporting vintage glasses and tight shirts, the 39-year-old Mr. Charney seems almost a living resurrection of the free-spirited 1970s. He sees himself as crusading against today's puritanical conventionality and likens himself to Larry Flynt, the Hustler magazine publisher who fought many First Amendment battles.
Mr. Charney stages provocative photo shoots in the basement of his Los Angeles mansion -- a hilltop perch filled with stacks of his vintage p*rn magazines. On a recent evening there, a young female employee served Mr. Charney tomatoes over rice while another, dressed in underwear and a T-shirt, was quizzed by her boss on competing brands.
"If you're offended by sexual innuendo or masturbation or sexual coloring books -- if you're offended by any of these, then don't work here," Mr. Charney says.
A Montreal native, Mr. Charney founded American Apparel as a wholesale T-shirt business in 1998 after filing for bankruptcy for a similar venture he launched in South Carolina. He relocated to Los Angeles and set up a new factory under a strip of Interstate 10. Long obsessed with the styles of the 1970s, Mr. Charney eschewed logos and created shirts with flashy colors, sequined pants and striped leg-warmers. Company ads, featuring spread-eagled women and skimpily clad behinds, blurred the lines between fashion photography and soft p*rn.
Made in the U.S.A.
At a time when many large clothing makers were moving their manufacturing overseas, Mr. Charney attracted attention to the brand by electing to make all of the company's clothes in a Los Angeles factory and by championing social causes like immigration reform and universal health care. Tailors at American Apparel's factory receive subsidized health-care benefits and generally make twice the minimum wage. The factory's proximity also allows Mr. Charney to create new designs, and get them to stores, the week after he's conceived them, a speed unheard of in the industry.
With its decidedly anti-corporate image, American Apparel soon gained currency with a young, metropolitan crowd that was growing disenchanted with mainstream mall standards like Abercrombie & Fitch Inc. and the Gap. A recent nationwide poll by Look-Look, a Los Angeles-based trendspotting firm, found that more than 60% of 14-to-35-year-olds said they liked or loved the brand.
As the brand took off, Mr. Charney decided to try his hand at selling directly to consumers. He plunged the company into an aggressive retail expansion. In 2003 he had three stores; in 2005 he opened 65 more; today there are 187 in 15 countries.
But Mr. Charney wasn't as focused on the company's finances. In early 2005, chief financial officer Mark Schlein died unexpectedly of heart failure, and Mr. Charney and others say a replacement wasn't found for a year. An interim CFO was later hired, though Mr. Charney only remembers that "he had gray hair and quit after a week." Mr. Charney delegated bookkeeping to a few younger staff members and continued to open stores.
Problems developed. According to a chronology of the company's financial history provided by American Apparel executives to The Wall Street Journal, U.S. Bank, a Minneapolis-based bank that was backing American Apparel's growth, urged Mr. Charney to secure additional financing amid the company's rapid store openings.
By year's end, American Apparel was unable to convince additional large lenders to provide capital, and U.S. Bank found the company in default of its credit agreements. Although the bank continued its loan agreement, it strongly urged the company to find more financing. A U.S. Bank spokeswoman declined to comment on the transaction.
So, American Apparel began shopping for another source of cash. In spring 2006, Plainfield Asset Management, a private firm that was considering an investment, requested an outside audit, prompting the company to begin its own internal audit. The internal auditors found American Apparel had inflated its 2005 earnings by nearly 30%, according to the company's chronology. American Apparel adjusted the numbers, reducing 2005 earnings before interest, taxes, depreciation and amortization to $18 million from $26 million.
Mr. Charney says the auditors "were exaggerating" and he still believes the revised earnings, not the originals, are wrong. Regardless, Plainfield backed away from the deal, the chronology states. American Apparel began to run out of money. Plainfield said through the company that it has no comment on the deal.
Of course, American Apparel's books weren't the only issue. Mr. Charney grew increasingly public about his lifestyle, making himself the brand's mascot and provocateur. He entered into relationships with employees and on occasions walked through the factory in his underwear to model new designs, he says. Billboards springing up across the country quickly gained attention for their racy layouts. In one ad, a woman spreads her legs for the camera in company stockings and underwear on a white bed -- Mr. Charney's bed.
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