The Stunning Rise and Fall of American Apparel

Includes: APPCQ, GPS
by: RetailSails

Two years ago, Los Angeles-based clothing chain American Apparel (APP) was riding high. The company had grown from just three stores, 1,300 employees and just over $82 million in revenues in 2003, to 260 stores in 19 countries, nearly 10,000 employees and $545 million in revenues by the end of 2008, for a 5-YR compound annual growth rate of 46%.

Built on a foundation of affordable, American-manufactured stylish and well-made basic cotton apparel, such as sub-$10 t-shirts, founder and CEO Dov Charney turned a small wholesale business started in his college dorm room into one of the fastest-growing retailers in the U.S.

Using controversial marketing techniques like scantily clad barely-legal models posing provocatively on billboards, the company built a unique brand that was successfully competing on price and fashion with the likes of Gap (NYSE:GPS) and H&M. It boasted the largest garment-manufacturing operating in the entire country, employing nearly 4,000 factory workers in downtown Los Angeles who made between $12-$13 an hour and got medical benefits.

However, by the beginning of 2009 there were hints that cracks were starting to appear in the foundation. While reporting record results for the fourth quarter and full year 2008, American Apparel said it had to cut production due to liquidity issues and raised $80 million from British private equity firm Lion Capital.

Same-store sales, which had risen by double-digits every month since the company had gone public, turned negative in February 2009, as consumers severely cut their discretionary spending, and cannibalization began to eat into growth at existing stores. The major turning point was September 2009, when 1,600 of its factory workers were terminated over questions about their legal status during an investigation by U.S. Immigration and Customs Enforcement (ICE). From there, things only got worse.

By the end of fiscal year 2010, revenues fell to under $533 million, and the company reported a net loss of $86.3 million, nearly double the total profits the company had earned since its formation. The company’s stock price languished at around $1 per share, and the annual report contained “going concern” warnings as it became apparent bankruptcy was imminent unless the company could find new investors. Several weeks ago, the company secured $14.9 million in additional financing, providing the lifeline it needed to stay afloat for now.

Just days after being rescued from the brink of bankruptcy, Charney was once again confidently boasting he would not only turn around the chain but re-make it into one of the great American companies, telling the New York Post:

"People didn’t believe in Amazon for many years, but it ended up changing the way Americans shop,” Charney told The Post in an interview yesterday, likening his company to the e-commerce giant that was savaged by media and investors a decade earlier as it battled debts and accounting questions.

"People didn’t believe in Apple — they thought it was a fringe computer company,” Charney added. “But it ended up changing the way people listen to music, and changing what daily life feels like worldwide.”

Nobody has ever accused Charney of being shy. When interviewed for a profile for Fast Company back in 2008, the reporter started off the article with “Dov Charney was naked from the waist down,” noting that the CEO was shamelessly trying on just-manufactured underwear in front of the reporter and two designers.

Charney is currently facing multiple sexual harassment lawsuits accusing him of keeping a worker as a teenage sex slave and posting nude pictures of models online. Though nothing new for the often-criticized executive, the negative headlines and increasing legal costs aren’t helping a company aspiring to be the next great American brand.

While Charney would like everyone to believe its staffing problems at the manufacturing facility, the headline-grabbing legal issues and recession-conscious consumers are largely to blame for American Apparel’s woes, the truth is, the company has strayed far from its core strengths and the brand simply lost its “cool.”

The other day, I visited a couple of American Apparel stores in Manhattan, hoping to stock up on some basic cotton t-shirts and hoodies. I was shocked to learn they were peddling v-neck t-shirts for $24, zip front hoodies for $45 and long sleeve denim shirts for $64, all nearly triple the price they were selling the same items for 2-3 years ago. The chain known for offering inexpensive seems to by trying for fashionably upscale - now it looks more like they are trying to be a hipster Club Monaco, but the quality is not even close to what one would get for the price point.

On a tip from a friend, I decided instead to head over to the 36,000 square foot Uniqlo store in Soho. I picked up several well-made, soft cotton v-neck t-shirts for $4.99 a piece and a zip front hoodie for $19.99. The quality and value of just about everything in the store is better than in American Apparel, and I expect the Japan-based chain will be making its presence felt in other major U.S. cities over the next few years.

As for American Apparel, you won’t find me browsing their racks anytime soon, and unless there is a major strategy shift back to basics in the near future, I fear the chain that turned “Made in America” into a cool slogan again will be just another sad story of what could have been.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.