Peter Schey counters that Deloitte pointed to areas of "weakness" in internal controls but never to wrongdoing on the part of AA employees. Schey says the auditors were also unhappy with the lack of consistency of financial reporting from the company's outlets abroad, where rules are different than those in the United States, and needed further hard information regarding revenue predictions. "I believe the unanswered questions will soon be resolved favourably," Schey said in mid-September, and he expects a similarly pleasing outcome in the matter of the SEC and Department of Justice inquiries into American Apparel's change of auditors.
But Davidowitz has other issues. "Who builds all these locations all over the world? Who does that?" Schey says that the company may "relocate" or close a small number, perhaps 10, of American Apparel's 280-plus shops. Improved production and transportation techniques will add efficiency, he says. By the end of September, Charney and Co. reworked their debt agreement with Lion Capital, eliminating the minimum consolidated EBITDA covenant until the end of this year, and providing for the same covenant to be tested monthly during 2011. "Lion Capital has enormous admiration for both American Apparel and its founder, Dov Charney," says Lyndon Lea, the brash young rainmaker who is Lion's founder. He noted that his firm is working with Charney on hiring executives to bolster AA's senior ranks. (The first straight-up business suit to arrive was former Blockbuster Inc. CFO Tom Casey, appointed AA's acting president in early October.) There are no plans for significantly altering labour practices, all parties involved say-and the AA board is behind Charney, who says he is "touched" by Lion's understanding and flexibility.
But even if all these fixes work out satisfactorily, someone like Davidowitz is not going to be satisfied that Charney is a good fit as CEO. "I believe Charney is a genius," he says. "He does have tremendous skills. But he should be running a private company with only 75 stores-and he'd make a fortune. And he'd be happy." For his part, Charney has said he regretted going public via a shell entity instead of an initial public offering.
Davidowitz maintains that the best scenario is for a new, white-knight investor to swoop in and take 30% or so of the company. "Like a Burkle type." (Ron Burkle, an investor lately engaged with the founding family of bookseller Barnes & Noble, currently owns 6% of American Apparel shares.) The investor might insist on his own senior management personnel. He or she could advocate for shifting Charney out of the CEO's chair and into a strictly creative role. So could Lion, for that matter, which issued its $80-million loan in March, 2009, and, in turn, received warrants for 16 million shares or about 18% ownership in the company. It's well poised to take the whole thing over.
"At the end of the day, Charney's 53% is going to be meaningless if he goes broke. The 53% he could use for toilet paper," says Davidowitz. "The only thing that could save Charney is an investor who believes in his skills-someone that buys into him." But how many might look at it that way? "They might say this guy's a maniac, with all the locations he's opened and coming to work in his underwear."
All the recent turmoil has left Charney in a contemplative position. As he told Bloomberg Businessweek in August, "A lot of assumptions that I grew up with are no longer reality. 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."
A month later, Peter Schey tells me that American Apparel's primary goal is to stay committed to "a sustainable, ethical model of business" and that the company is in the process of "a reassertion of its values," meaning that Charney and his team have crafted a vision statement. In it, American Apparel promises to make "cutting-edge, high-quality" apparel; improve the vertically integrated business model; provide industrial workers with fair wages and a healthy environment; ensure employees have "opportunities for advancement without regard to race, age, ethnic origin, gender, or sexual preference"; advocate for vulnerable people; engage in humanitarian relief efforts; shrink AA's carbon footprint; and build consumer and investor confidence, among other noble efforts. Schey does not detail a plan to fund these initiatives.Report Typo/Error