American Apparel Dismisses CEO Dov Charney for Misconduct

Jun 19, 2014 9:31 am ET

(Updates with analyst’s comment in seventh paragraph.)

June 19 (Bloomberg) -- American Apparel Inc. replaced Chief Executive Officer Dov Charney, who has faced accusations of sexual harassment, after an investigation into unspecified misconduct at the casual clothing maker he founded.

The board named Chief Financial Officer John Luttrell, a former executive with retailers Old Navy Inc., Wet Seal Inc. and Cost Plus Inc., as its interim CEO, according to a statement yesterday. Charney was suspended and will be terminated for cause after a contractual 30-day waiting period, Los Angeles- based American Apparel said.

Charney, 45, tested limits with the use of young, scantily clad models in advertisements for the company’s American-made underwear. That approach spilled over into his management, spawning lawsuits alleging sexual harassment. The company has lost money recently under Charney, and its shares have fallen under $1 apiece. His dismissal may trigger a notice of default, American Apparel said.

“We take no joy in this, but the board felt it was the right thing to do,” Allan Mayer, who has been lead director for the past three years, said in the statement. “Dov Charney created American Apparel, but the company has grown much larger than any one individual and we are confident that its greatest days are still ahead.”

Stock Gains

Investors applauded the move, sending the shares up as much as 22 percent to 78 cents in New York. The stock, which traded at $15 at the end of 2007, had lost almost half of its value this year through yesterday.

Mayer and director David Danziger were appointed as co- chairmen, replacing Charney in that role. The company will start discussions with its lenders to seek a waiver, and is working with a search firm to find a successor, it said.

“We are highly surprised,” Eric Beder, an analyst at Brean Capital in New York, said in a report. “We expect the sordid details to become apparent in the near term.”

An outside spokesman for the company declined to comment on the alleged misconduct or talks with lenders. Charney didn’t respond to a request for comment sent to his American Apparel e- mail.

As part of Luttrell’s elevation to the interim CEO job, his annual salary was increased to $750,000 from $441,000. He also received a stock grant of 350,000 shares, valued at about $224,000 as of yesterday’s close.

Charney had a salary $832,000, plus other incentives and compensation that brought his total to $1.07 million last year, according to data compiled by Bloomberg. He also is the company’s largest shareholder, with about a 27 percent stake.

Debt Crunch

Charney had been working to create some breathing room for the troubled company. Facing a debt payment that exceeded American Apparel’s cash on hand, he attracted an investment in March from the Swiss firm FiveT Capital AG. Johannes Minho Roth, the Zurich-based company’s founding partner, didn’t return calls seeking a comment on the CEO dismissal.

While the chain has racked up about $270 million in net losses since the beginning of 2010, it had been one of the hottest retail brands in the past decade. With its irreverent advertising, U.S.-made goods and tight-fitting clothes, the company almost doubled sales between 2006 and 2008.

In recent years, sales have slowed and losses have piled up, in part because of a costly new distribution center that didn’t perform as expected. That left the retailer facing a cash crunch, with an interest payment of $13.4 million coming in April.

Sexual Harassment

Fearing that the company may be headed for default, American Apparel’s bondholders hired advisers to help them strategize, people familiar with the matter said in February.

That same month, the NYSE Amex threatened to delist American Apparel’s stock, citing the chain’s financial state and its inability to meet obligations.

Despite the turmoil, the company has been making a comeback, said Brean’s Beder, whose firm has also served as an adviser to American Apparel.

“We believe operationally the company remains on track,” he said, reiterating his buy rating on American Apparel. “We believe the company has been on the mend for 2014.”

Its fashions and inventories are improving, and the company is working toward projected earnings before interest, taxes, depreciation and amortization of $40 to $50 million, Beder said.

“We expect it to be ‘business as usual’ for the vast majority of workers and employees of the company,” he said.

The company is notifying creditors Lion/Hollywood LLC and Capital One about the CEO’s ouster and seeking a waiver in case of default, according to a filing today.

Negotiating Terms

“There can be no assurance that the requested relief will be granted on terms acceptable to us or at all,” the company said in the filing. Without a waiver, the lenders are entitled to accelerate payment of the money due. That could lead the company to become bankrupt or insolvent, according to the filing.

Charney’s exit removes an executive who has drawn lawsuits and criticism. In February 2006, a former employee alleged she was subjected to sexual harassment that led to a finding from the Equal Employment Opportunity Commission that reasonable cause existed that women were subjected to harassment at the company, according to regulatory filings. The company reached a three-year agreement with the employee and the EEOC in August 2013 that governs its administrative measures.

Two shareholder lawsuits alleged the company failed to prevent a sexually hostile work environment. The suit was dismissed in federal court, and the plaintiffs have appealed.

Woody Allen

Charney, the company’s biggest shareholder, has drawn other sorts of controversy over the years.

He and the company were sued by Woody Allen in 2008 after American Apparel used his image in billboards in New York and Los Angeles. Charney, who referred to Allen in court papers as his hero, personally captured the disputed image while watching the film on television.

The designer’s lawyers claim it was a protected “fair use” of the image because the ads were an artistic expression of Charney’s emotional connection to Allen and his character in the movie, a neurotic comedian named Alvy Singer. The following year, Allen settled the suit for $5 million.

More recently, one of the company’s New York stores gained attention by featuring mannequins with pubic hair.

--With assistance from Corinne Gretler in Zurich.