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American Apparel Eyes Growth Initiatives

Wholesaling to other retailers and new lines could be part of the plan.

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American Apparel is anxious to get back on the growth path — and wholesaling to other retailers could be part of the plan.

This story first appeared in the March 23, 2011 issue of WWD.  Subscribe Today.

To spearhead the strategy, the company, which has been afflicted with debt issues, declining sales and controversies, has brought in Marty Staff as chief sales development officer. Staff, a former chief executive officer of both JA Apparel Corp. and Hugo Boss USA, starts in his new role today.

“His first mission will be, how do we get more dollars through the existing assets and systems that we have,” said Dov Charney, chairman and ceo of American Apparel. “In the words of that old Yiddish proverb: ‘Get me an order. Everything else will take care of itself.’ ”

The new hire brings to American Apparel one of the more colorful and voluble executives in the fashion world. Known as much for his tattoos, blunt talk and hard-partying personality as his business acumen, Staff has a career that spans more than three decades in the industry, including high-level tenures at Polo Ralph Lauren and Calvin Klein.

“I’ve never been the adult supervision before,” said Staff, who just turned 60, of the 42-year-old Charney — who has generated reams of press with his own outsize personality and alleged antics, including those related to a number of highly publicized sexual harassment, discrimination and wage-and-hour lawsuits, which the company is currently defending. Charney declined to comment on the cases.

Staff approached American Apparel several months ago, following his departure in September from JA Apparel, owner of the Joseph Abboud business. He was introduced to Charney by Keith Miller, a board member of American Apparel and a partner at the New York-based private equity firm Goode Partners.

“I think the American Apparel name is better than the business. This is a hot brand with a lot of legs, and it can move in every direction,” said Staff, explaining his initial interest that led to a series of meetings in L.A. with Charney.

One of the first sales initiatives Staff will now oversee is exploring the possibility of wholesaling American Apparel product to other retailers. Currently, the company only wholesales to the imprintable T-shirt industry. However, two leased shop-in-shops, in Galeries Lafayette in Paris and Selfridges in London, have been performing well for American Apparel.

“I think it’s a careful discussion, but I believe there’s an opportunity. I think on a very careful, selective basis we could sell a store chain or more,” said Staff, who currently lives in Pennsylvania but will move to L.A.

Growing revenue is the linchpin of American Apparel’s strategy to turn around its struggling financial performance. “Our overriding goal is to increase sales. We can leverage our existing infrastructure and overhead and make this company a much more meaningful profit proposition,” said Charney.

For the nine months ended Sept. 30, the company reported a net loss of $67 million compared to a net loss of $1.9 million in the 2009 period, while net sales declined 2.9 percent to $389 million. Gross margin decreased to 51.4 percent, down from 58.1 percent in the year ago period.

Charney attributed the weak results primarily to the loss of several thousand improperly documented workers at American Apparel’s L.A. manufacturing facility in late 2009, stemming from an investigation by the U.S. Immigration and Customs Enforcement Agency. The company originally said it lost 1,600 of its almost 5,600 production line workers, but Charney said the actual number was closer to 3,000.

“Many of them self-deported. They knew there was an audit and they didn’t want to wait for the gringos to show up with handcuffs,” he said.

The company had difficulty hiring new workers due to financial restraints. Retraining workers and ramping up the factory took longer than expected, as well. “We didn’t start hiring until April of 2010. I was out of line with my loan covenants at the time and couldn’t spend money like a mad drunk,” said Charney of the delay. “That led to cost overruns and late deliveries to our stores. We couldn’t get bathing suits to the stores in time, for example, and missed out on replenishing hot sellers.”

American Apparel will need at least another nine months to get its L.A. production facility up to optimal operational efficiency, said Charney.

The company’s same-store sales have taken a hit from those production problems. For the nine months ended Sept. 30, comps contracted 14 percent. The company currently operates 273 stores, down from 281 at the end of 2009, and Charney said a few more stores could close this year.

“If we can increase top-line sales by 10 percent at our own stores, that will translate to over $20 million in EBITDA,” noted Charney. “Staff’s job is to get some gelt into those stores.”

Increasing EBITDA is crucial to American Apparel’s ability to refinance its $76 million loan with Lion Capital at more favorable terms — either with Lion or another lender—when that loan comes due.

Next month, the company will introduce a key push into women’s indigo denim, with jeans retailing for $80. “I’m also doing leather pouches. The nail polish is working and has become a multimillion-dollar business. My bag business is working. Men’s and women’s pants are starting to turn. We’ve brought a lot of new product into the product line,” said Charney.

American Apparel has hired three top executives since October, including former Old Navy and Wet Seal executive John Luttrell as executive vice president and chief financial officer, and Tom Casey, formerly cfo of Blockbuster, as acting president. Casey is being groomed by Charney to assume a big-picture corporate strategy role in the company, leaving Charney to focus on creative aspects of the business — although Charney has no plans to relinquish his ceo title.

Lyndon Lea, a founding partner at London-based Lion Capital and a board member of American Apparel, said the hires were “a significant step to professionalizing American Apparel.”

Casey said he has focused on improving the people, processes and systems at American Apparel during his five months at the company. “This is a classic entrepreneurial business that has grown rapidly and become a large and complex company. There were certain internal communication inefficiencies that needed to be addressed, and we’re working to enhance profitability and working capital efficiencies,” he noted.

American Apparel has delayed filing its fourth quarter and full-year results for 2010 but expects to release those numbers on March 31. Additionally, it will file revised numbers for 2009 by April 10.

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