American Apparel is in turmoil, but the business has deeper problems than just a sleazy founder.
Yesterday, the besieged fashion manufacturer and retailer secured a $25 million lifeline from investment fund Standard General, which is backing its recently fired CEO and founder Dov Charney. The fund will now get three representatives on the company’s seven person board of directors.
Last month, Charney was unceremoniously ousted by the previous board amid fresh allegations of impropriety (paywall). A highly controversial figure, Charney has been accused of all sorts of vulgar behavior before. But the current impasse apparently has more to do with the company’s shaky finances and poor performance than anything else.
And that makes sense. Put bluntly, American Apparel doesn’t look like a great business, and it has undeniably been a terrible investment over the past few years.
It has never really made money, despite reasonable sales growth
It’s burning through cash
And its stock price has performed dismally
Just about every teen retailer in the US is struggling at the moment. But the fact that American Apparel’s losses have deepened even as its revenue has grown raises questions about the scalability of its business model.
The company makes a point of manufacturing its clothing in “sweatshop free” factory outlets in downtown LA. Charney has previously said that the model typically employed by rival clothing manufacturers (i.e. getting stuff made offshore in cheaper countries) won’t be financially viable in the long term, as global labor and transportation costs rise. At the moment, the numbers are proving him wrong on that count.
And there might be an even bigger problem: the company’s stores and clothes are just not fashionable anymore. The Washington Post recently argued that the company’s troubles are a sign of consumer fatigue with “porn chic.” And a quick browse through the company’s history of suggestive, hyper-sexual advertising on the American Apparel website shows how its aesthetic has devolved over the years.
Despite being fired and being subject to a misconduct investigation by an outside firm, Charney appears to be finding it difficult to walk away. He was this week spotted in a downtown New York store, possibly in violation of his termination agreement. The battle for control of the struggling retailer is proving every bit as tawdry as his alleged behavior.