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Last Stand at American Apparel Add to ...

According to Angelica Salas, the executive director of the Coalition for Humane Immigrant Rights of Los Angeles, and herself the daughter of a former garment worker, "Dov was really pained by the situation. Many of the people were his best employees and had been with him since the beginning of his factory." Charney tells me he was absorbed in their circumstances for at least "six months solid" and barely had time to attend to anything else in the business.

The effect that distraction had on the company is now well known. And so what happened to those employees?

The backdrop to the answer, according to Salas, who has visited AA's factory at least 50 times for "know your rights" workshops and various community initiatives, goes like this. Teams work at a brisk pace, starting and completing a garment as it gets passed on to various stations along one table. In addition to a base wage, employees earn extra money for product output, tallying anywhere from $12 to $18 an hour in total. (California's minimum wage is $8 an hour.) "Then there are the roving masseuses to ensure that people are able to do their work. There's a recognition that if you have tired workers, you have shoddy products," says Salas. American Apparel also offers a benefits plan, an on-site medical clinic, free international phone calls for staff and a bicycle-borrowing program.

After leaving American Apparel, Salas imagines, many of these workers were welcomed into the arms of the scruple-free underground economy, where they are lucky to earn $5 an hour. (Some are jobless; no one was deported.) Salas believes it's easier for ICE to target one visible company and deal with 1,500 illegal workers in one blow than to go after the "100 smaller shops who are the true labour offenders-the subcontractors and real sweatshops that surround American Apparel."

There are an estimated one million undocumented workers in the Los Angeles area alone. Dov Charney is unusual for an apparel maker in being vocal about their human rights. But does that excuse other, dubious behaviour, such as using sexist language, even if it's "private"? Is he some sort of clueless discriminator who fancies himself the saviour of the Hispanic working class and yet thinks nothing of hitting on the cute office girl?

Charney's higher principles do come at a price. Analysts say that by industry standards, American Apparel's cost structure-a result of resisting the lure of cheaper offshore production-is entirely impractical. The company posted a $43-million net loss for the first quarter of this year. At the end of fiscal 2009, net income after tax was just 0.2% of revenue, and it has declined ever since, which says to outsiders that AA must consider major cost-shearing, especially in labour. "As it is, the company makes everything in the United States," says fashion and apparel analyst Nikoleta Panteva of IBISWorld in Santa Monica. "They could outsource their textile manufacturing, for example, but keep the apparel making."

Add to Charney's worries these other issues: declining year-over-year sales, financing problems that stalled AA's overseas expansion (though in early September, it opened a shop in Paris), and some stumbles in meeting production targets.

Ever the salesman, Charney's refrain is that bankruptcy would be premature. "We haven't worked out all the kinks," he said in April. "Right now we are in a period of rationalization, in a period of working with less and deploying our assets more productively. That means reducing inventory, paying down debt and getting more sales out of the stores we have. We're upgrading software, improving distribution methodology and updating our point-of-sale systems. If there weren't any problems-then I'd be worried."

But the problems at American Apparel are not small ones. In mid-August, the company issued its dire "going concern" concerns and, as if to get all of its bad news out at once, said the Securities and Exchange Commission was looking into why Deloitte & Touche ended its tenure as the company's auditor. (The accountants cited a lack of reliability in team Charney's financial reporting.) Enter a new-actually former-auditor, Marcum. AA reported more millions in losses for the second quarter of 2010, as well as an increase in its debt of $28.9 million, vaulting it over the $120-million mark. Deep into some very textured muck, American Apparel saw its share price nosedive to 77 cents, from a 52-week high of $3.88. As of early October, it had rallied to around $1.20.

"The company has been an ongoing circus," says Howard Davidowitz of Davidowitz & Associates, a Manhattan-based retail consulting and investment banking firm. He gets increasingly worked up the longer we talk about American Apparel. The immigration issue, he adds, "was just one of the circus acts. Their own accountants quit! They resigned! When is the last time you've seen that?"

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