Dov Charney wants back in at American Apparel Inc. — and he might have found a friend who can help in Jay Schottenstein.

Sources said that Charney has held some preliminary discussions with Schottenstein about trying to regain control of the company he founded. Michael Broidy, senior vice president of corporate affairs at Schottenstein Stores Corp., declined to comment on the matter. But the retail veteran could be a powerful ally for Charney. Schottenstein is head of SB Capital Group and Schottenstein Stores Corp. and chairman of American Eagle Outfitters Inc.

Charney is also believed to have spoken to other would-be investors in his effort to regain control of the firm.

The key question going forward might be how aggressively any takeover offers would be pursued by American Apparel’s board, which was reconstituted last year with the help of Standard General — the hedge fund that Charney once saw as his white knight.

It’s a timely issue, since the company’s not wanting for suitors.

John Howard’s Irving Place Capital reached out to American Apparel last year and said it would consider paying as much as $245 million for the firm, pending due diligence. But two sources close to the situation said while the board hired investment bank Moelis & Co. last year to explore strategic options, the company has been slow to engage with Irving Place.

Some minority shareholders attribute the apparent lack of movement to a confusion of priorities at the board level. Standard General, which has an equity interest in the company and is also a lender, had a hand in picking five of the nine directors on the company’s board.

Michael Bigger, who says his Bigger Capital Fund owns about 1 million shares of American Apparel, needled the board last week about “serious conflicts of interests” in a letter.

“It is clear to us that the timing is right to capitalize on the acquisition interest in American Apparel and pursue a value-maximizing transaction to unlock value for shareholders,” Bigger said. “Not only are the interests of Standard General in conflict with those of the other shareholders in terms of the upside to a prompt sale of the company, but also Standard General does not face the same downside from missing value-maximizing opportunities as other shareholders do.”

A spokeswoman for Standard General said at the time that Bigger’s claims were baseless.

“Both sides are playing for advantage,” said Jonathan Low, founding partner of Predictiv Consulting. “This sort of maneuvering is all about obtaining the best deal possible when the ultimate compromise is struck. The Bigger family has its own agenda, as does Standard General. No one in this situation is on the side of the angels.”

But it could be an uncomfortable situation for the board members chosen by Standard General.

“It puts them in a very difficult position, said Charles M. Elson, a corporate governance expert and professor at the University of Delaware. “As a director, your obligations are to all shareholders, not to the person who put you there. Your obligation is to get the best possible value for the company.”

And Standard General itself has varying interests as a lender and shareholder. (The fund agreed to give American Apparel $25 million in financial backing, and also loaned Charney nearly $20 million and shares voting rights for his 43 percent stake in the business).

“Lenders want to be paid back, shareholders want growth,” Elson noted.

While the cross currents might make for a difficult situation, it’s not an unusual one.

“These sorts of conflict happen all the time,” Elson said. “This is not an isolated thing.”

If they don’t like how things play out, other shareholders can pressure the board with letters, as Bigger has done, raise a fuss at the company’s annual meeting or turn to the courts.

But it’s easier to sue over a deal that went bad than a deal that never happened.

“It is more challenging to bring a claim against a board for continuing business in the ordinary course, even when that means, as it does here, that a potential transaction is passed on,” said Douglas Hand, an attorney at Hand Baldachin & Amburgey.

Whether the company presses on under the leadership of the new chief executive officer Paula Schneider or finds a new home away from the glare of Wall Street, the business of American Apparel needs something — and badly.

In the third quarter, the heavily indebted company forked over $9.9 million in interest payments, driving it to losses of $19.2 million. Sales fell 5.3 percent to $155.9 million.

This is at a time when the business of American Apparel might be thriving.

It’s an established brand with 245 stores in 20 countries. It’s basic at a time when logos are on the outs. And the Made in USA movement is enjoying a revival.

“I do like the stores and the concept and the product and even that it’s just called American Apparel,” said Gary Wassner, chairman of fashion investment firm InterLuxe and co-ceo of the fashion factor Hilldun. “I think there’s a place for it in the market in a significant way.”

American Apparel just hasn’t found that place.

“They’re focused too much on internal issues,” Wassner said. “They haven’t had a clear vision for a while, and I don’t think internally that they’ve been organized enough to execute on any clear vision.”

What should the company’s vision be? What does American Apparel need now?

Charney’s answer, or at least part of it, is typically iconoclastic: brick-and-mortar stores.

“For four years now, American Apparel has been unable to bring about a store expansion program due to the company’s constrained capital structure,” Charney said to WWD last month. That capital structure includes long-term debt of $216 million.

New stores might sound strange at a time when so many chains, including those focused on younger shoppers, are cutting back on their retail fleets, but American Apparel is a different animal with its own factory in Los Angeles and a wholesale division that accounts for about a third of sales.

All things being equal, the firm should grow more profitable as its sales rise, since it’s already laid out the money to set up the factory.

That assumes, though, that the world wants more American Apparel stores.

“The fact that their factory capabilities can accommodate more runs is nice, but I’m not sure that would justify someone paying big bucks for the company so that they would get scale,” said Craig Johnson, president of Customer Growth Partners. “You’ve got to have a product that people want to buy and make it profitable and then you size your production capability to fit the demand.”

Howard Feller, partner at the investment bank MMG Advisors, said the company has “no gas in the tank” to invest in new stores, but that the business could support some more points of sale.

“If you look at the concentration of their store base, it’s very East Coast/West Coast-driven, but there probably is room for some door growth,” he said. “They’re probably underpenetrated in some key markets in the U.S.”

Right now, it’s the U.S. wholesale division and the e-commerce business that make the money. For the nine months ended Sept. 30, the two businesses, which are accounted for together in regulatory filings, saw operating profits of $26 million on sales of $157 million.

That’s operating profits of 26 cents for each dollar of sales, while the rest of the company, including the U.S. retail operation and the international businesses, drew operating profits of 1 cent out of every dollar.

load comments
blog comments powered by Disqus