California Apparel News

In a stunning move, the board of directors of Los Angeles–based American Apparel Inc. voted June 18 to suspend founder, President and Chief Executive Officer Dov Charney, naming John Luttrell as interim CEO.

The board, whose decision was made on a 5–0 vote, also notified Charney of its intent to terminate his employment for cause. The announcement was made after the stock market’s close, when the company’s shares were last selling for 64 cents.

At the end of the market on June 19, the stock, which trades on the New York Stock Exchange, had risen nearly 7 percent to 68 cents. The 52-week high for the stock was $2.09 on July 29, 2013.

According to a press release issued by the company, “It is expected that the termination will be effective following a 30-day cure period required under the terms of Mr. Charney’s employment agreement.”

The board also intends to request Charney resign from the board, the release said. He is no longer the chairman of the board. That position is now jointly held by board directors Allan Mayer and David Danzinger.

Mayer has been a member of the board since the company went public in 2007 and has served as its lead independent director for the past three years. Danziger has chaired the board’s Audit Committee since 2011.

According to the company, American Apparel may have “been deemed to have triggered an event of default under its credit agreements” as a result of its decision. The release said the company “will be in discussions with its lenders for a waiver of the default.”

The company’s directors said they decided to fire Charney after conducting an investigation into his alleged misconduct, although the directors did not go into any details about the investigation.

Over the years, Charney has been embroiled in a number of sexual-harassment lawsuits, some settled out of court, some dropped and some still active. He has also garnered his share of criticism for his provocative advertisements showing scantily clad models wearing the company’s apparel or posing in suggestive manners.

In recent years, American Apparel has been losing money and flirting with bankruptcy. It has had only one profitable quarter over the past 17 quarters.

For 2013, the company reported a net loss of $106.3 million on $633.4 million in revenues, compared with a loss of

$37.3 million on $617.3 million in revenues in 2012. Facing a cash shortfall, the retailer in March announced plans to sell 61 million shares of stock at 50 cents each to meet debt payments.

With the stock issuance, Charney went from owning 42 percent of the company to 27 percent. As of March 31, he owned 47.2 million shares. Lion Capital, which has loaned American Apparel money in the past, has warrants that can be converted into 24.5 million shares.

Head hunt

The company is working with an executive search firm to find a new chief executive.

Sources close to the company doubted that Luttrell, the acting CEO, would take over the top job permanently. He has been with American Apparel since February 2011 and currently serves as the company’s executive vice president and chief financial officer. Previously, he held the same titles at Old Navy, The Wet Seal and Cost Plus. His strength is running the finance side of a business.

However, in his new temporary position, Luttrell’s yearly compensation will increase from $441,000 to $750,000, with a guarantee he will earn that sum for at least six months.

In addition, he was awarded a vested stock grant of 350,000 shares, which means he now owns 967,186 shares.

The board said in its statement that “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.”

In financial papers filed with the Securities & Exchange Commission, American Apparel noted that a new distribution center opened last year in La Mirada, Calif., had cost the company $10 million instead of saving it $3 million as planned But it failed to note that Charney insisted that he run the new distribution center, which turned out to be disastrous until he departed around Thanksgiving, sources close to the distribution center said. Charney even moved in a bed to be closer to the operations, one source said.

American Apparel is probably one of the largest apparel factories in the United States. It employs 10,000 people around the world—in stores and in production facilities.

“We have one of the best known and most relevant brands in the world, with employees who are second to none; I believe we have a very exciting future,” Luttrell said in the release. “Our core business—designing, manufacturing and selling American-made branded apparel—is strong and continues to demonstrate great potential for growth, both in the U.S. and abroad. This new chapter in the American Apparel story will be the most exciting one yet.”

The release said the company will continue to “remain committed to its sweatshop-free, Made in USA manufacturing philosophy.”

Charney founded American Apparel in 1997. The company operates nearly 250 retail stores in 20 countries, including the United States, Canada, Mexico, Brazil, the United Kingdom, Ireland, Australia, Belgium, France, Germany, Italy, the Netherlands, Spain, Sweden, Switzerland, Austria, Japan, South Korea and China. The company also operates a wholesale business that supplies T-shirts and other apparel to distributors and screen printers. It has a vibrant e-commerce site, too.