Features August 5, 2010, 5:00PM EST

American Apparel's Unhip Finances

(page 3 of 3)

Moving too quickly isn't the only knock against Charney. He has been sued by three former employees for sexual harassment (one suit was dismissed, one was settled, and a third remains in arbitration), and in 2004, Jane magazine reported that he masturbated in front of a reporter while being interviewed. More recently, Gawker.com reported that American Apparel makes managers photograph its female store employees so Charney can ensure they fit his aesthetic tastes, which include full eyebrows and long, natural hair. Charney says there is no official doctrine, and that they look for people who understand the brand, know how to present themselves, and can communicate the brand's style to its customers. Still, Charney's record makes some wonder whether he has the judgment and credibility to oversee a large company. "The travails of their senior management, all well-known, will make fixing the brand very difficult until a management change occurs," says Johnson of Customer Growth Partners.

Charney insists he is willing to make major changes to how the company is managed, including the possibility of hiring three chief operating officers to run manufacturing, distribution, and retail separately. The company has recently added new senior staff and will continue to make key appointments, including a director of quality control, Charney says. He also says he is open to relinquishing his CEO role when he has built a management team he feels confident can take over. Charney does have his supporters, including Yruma, who praises his "hands-on" management style. Allan Mayer, who has served on American Apparel's board since 2007, calls Charney a brilliant marketer with an incredible work ethic. "This is a guy who works seven days a week, 52 weeks a year," says Mayer, a partner at Los Angeles public-relations firm 42West. "You don't build a $600 million-a-year vertically integrated manufacturing and retailing business on an edgy image and sexy ads alone."

Charney admits there are things he could have done differently: not opening quite as many stores; taking the company public through a normal initial public offering instead of through a shell company; moving manufacturing offshore while he resolved his worker problems.

"A lot of assumptions that I grew up with are no longer reality," he says. "Those were things that we could rely on: that lenders will always be there, that they'll behave ethically and they'll always have money, that you can trust that as the sun comes up the consumer will be healthy, that we'll always be close to full employment in developed nations. Now there are no certainties."

George Whalin, president of Retail Management Consultants in Carlsbad, Calif., says the brand is strong but the company needs a management overhaul. "Volatile people running retail businesses are scary people," Whalin says in an interview. "But I think [American Apparel's] concept is still viable."

That concept, however, is in flux. As Charney reorients the company to more grown-up styles, he goes up against the likes of J.Crew, Gap, and even Brooks Brothers, retailers who have been cultivating the preppy look for years. Charney says he isn't worried because his clothes are basics without the frills, and that nobody else can serve that market as well as he can.

As for his other troubles, Charney says he is used to people underestimating him, recalling a loan officer at the Bank of Nova Scotia (BNS) who waffled about extending a line of credit back when American Apparel was making $1 million a year. The hipster may be dead, but Charney lives on. "Over time, I will improve my ability to perform," he says. "Keep watching the movie and I'll prove you wrong."

Abell Schwartz is a reporter for Bloomberg News.

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