Time to try on American Apparel? Perhaps, but watch out for the CEO

15 12 2007

Time to try on American Apparel? Perhaps, but watch out for the CEO

Posted by: in Marketing and Advertising

Filed under: Management, Marketing and advertising, Entrepreneurs

Several friends have asked me for my thought of American Apparel (AMEX: APP), a clothier that recently became public through its acquisition by Endeavor Acquisition.

First a little bit of background: American Apparel was founded in 1997 by Dov Charney, and is known for its easy, high-quality clothing, and its unique practice of not plastering its logo on everything it sells. Browse through their merchandise on the company’s website. The company also avoids outsourcing, manufacturing its clothing in Los Angeles where it is headquartered.

In 2006, the company had revenue of just over $264 million, an increase of 37.7%. The increase was driven by the opening of 41 new stores, but the company still reported a loss just about $1.6 million as SG&A expenses climbed.

Sales are growing quickly and the company turned a profit in its most recent quarter. American Apparel certainly has the potential to turn into a very hot retail growth stock — it’s already up big over the past few months. But there are a couple things to worry about. First, saying that founder and CEO Dov Charney is uninhibited is like saying that Alan Greenspan can ramble a bit. In 2005, the New York Times did a story on Charney’s — er … very special management style. Here’s a quick sampling:

“Mr. Charney decorates stores with covers of Penthouse and Oui magazines from the ’70s, admits in interviews to engaging in sexual relationships with women who work for him, and once exposed himself for an ad in a gay magazine, all in the name of personal freedom.

“In two separate sexual harassment lawsuits, three plaintiffs who worked on American Apparel’s administrative and sales staffs charge that they endured sexual misconduct and innuendo and an environment in which women didn’t feel safe … Among the allegations: using crude language and gestures, conducting job interviews in his underwear, ordering the hiring of women in whom he had a sexual interest and giving one of the plaintiffs a vibrator.”

Wow. In an article in Jane a couple years ago, Mr. Charney was described as having masturbated in front of the writer, and also having engaged in oral sex with an employee in the writer’s presence.

How Mr. Charney, who seems to personify the phrase “brilliantly eccentric entrepreneur” will adapt to a world of quarterly conference calls with Wall Street analysts remains to be seen: He could actually give Patrick Byrne a run for his money in the eccentric department. Whether he’ll be able to deliver growth and earnings superior than Byrne has remains to be seen.

Another concern that I’ve, as someone who has shopped in American Apparel stores, is that the clothing is really not particularly unique, and could be very vulnerable to lower cost competitors as it expands its footprint. This is definitely a stock to keep an eye on, if only for entertainment value. I don’t really have an view on whether it’s a buy or a sell, but I’m certainly looking forward to watching Mr. Charney Goes to Wall Street.