LOS ANGELES — Lots of weird things happen in La-La Land but none are perhaps more curious than the T-shirt guy who’s watching the manufacturing behemoth he built and was fired from crumble to a sale as he moves pallets in another part of town to erect a carbon copy of what he started some 27 years ago — only better, he hopes.
It has been Charney’s contention since his official firing in December 2014 from American Apparel — the irreverent T-shirt brand with a valuation that swelled to $1 billion under his watch — that the company was stolen from him by way of a former chief financial officer, along with a hedge fund he was once aligned with.
As that company now folds in on itself, he’s starting over, less than five miles from where American Apparel sits, this time weighing his options with alternatives to institutional capital — some might say because he has no other choice, although he would counter he is fearful of traditional finance. He’s carefully considering an option called Regulation A+, a new type of crowdfunding platform under Title IV of the JOBS Act.
The business is so far financed with a $10 million asset-backed loan. The reality is that Charney needs funding — but he doesn’t kid himself about the prevailing perception of him in the market.
“The upside of investing in me is that I’m a creative thinker,” he said. “I sometimes take the difficult road but I’ve shown results in the past and I know how to capture the attention of the consumer. The disadvantage is I’m an unconventional entrepreneur and there’s a clash that could take place because, in practical terms, what many of these institutional investors are looking for is something that’s predictable and safe and that’s not the product I have to offer.”
His new venture, which is toying with the name The Los Angeles Apparel Co., has already raised money from some workers and ex-American Apparel employees.
The business counts about a dozen customers, with a focus on imprintables. He views that industry segment as a way to test the market before going direct and getting into his own retail, online and off.
“I want to make sure if someone comes into my bar, they enjoy the drinks and if I open it up to the crowd [now], they’re going to say this doesn’t work because it’s very artisanal,” Charney said.
The current business’ sweet spot for orders is anywhere from 500 to 20,000 pieces. It’s rapid reaction manufacturing. Case in point: The company on a recent Friday received a 10,000-piece order. The textiles — of which only 2,000 yards were available — were purchased the same day, sewn on Saturday and then shipped Sunday.
Charney has already mapped out the business’ trajectory by the numbers — and they are, in his typical fashion, ambitious. He’s estimating the company will turn cash positive within 18 months and believes it can get to $600 million in sales in 10 years with a market capitalization of more than $1 billion.
Pricing will range from $12 to $120 with an eventual expansion into swim, sportswear, headwear and bags.
He’s brought a cadre of former American Apparel colleagues with him, who make up the bulk of the business’ roughly 50 workers. They include former American Apparel director of retail standards, Jan Willem Hubner; the company’s former vice president of product development and design, John Chung; former director of manufacturing, accounting analysis and audit, David Nisenbaum, and former president of wholesale, Pat Honda.
Charney would be happy if the new business surpassed the old one in terms of size, although he’d be just as satisfied simply building a beloved brand.
“It’s not about size because if it was about size, well, Forever 21 is a large company but it wouldn’t be something I would want to create or build — not that I don’t have respect for what they’ve done. It’s not my vision,” Charney said. “I do think that if I really concentrate and really focus, I could build a business that brings a lot of pride to myself, to my family, to my workers [and] to my vendors.”
Very few entrepreneurs are like Charney.
“He’s determined. Oh my God, he’s determined,” said California Fashion Association president Ilse Metchek, who’s known Charney for some 16 years.
“Money’s not the driver. The driver is not to have Rolls Royces,” Metchek continued. “It is who he is. Who he is, is a reflection of his business.”
Still, the competition’s not what it was when American Apparel started. There are not only the heritage brands to contend with but the whole crop of digital brands in the vein of Reformation, Nasty Gal, Everlane, Cuyana and on that have scaled at rapid rates — and in some cases, slowed as the entire retail world struggles with a consumer who isn’t spending money or shopping the way they used to.
One major advantage is the potential sale of American Apparel leaves a raft of possible customers for the taking.
“So I have to hurry up and get my schtick together,” Charney said.
An Extraordinary Tale
What happened at American Apparel is a real doozy of a story. It’s one Charney has called “extraordinary” and it’s also far from done as it holds implications for his future. So, seeing as how he’s no longer there nor interested in buying it, why can’t he let it go and just be happy building anew?
“Be happy?” he said. “I am, but if they’re putting a cloud over the new endeavor, they’re rewriting the history of what happened and it’s going to put negative pressure upon me in order for me to get the financing. They want to neuter me. They’re trying to assassinate my character. I was a very good performer.”
That’s where the story shifts, depending on who’s telling it.
The new regime — after Charney was first suspended in June 2014 and then officially fired that December — said he breached his fiduciary duties, misused corporate assets and violated company policy. The picture painted to the press was that of a micromanager who lacked a basic organizational chart and was, at times, rough around the edges (which is putting it kindly given the number of allegations of sexual harassment against him over the years, the last of which he said was made in 2011). He’s owned up to what he said is an aggressive personality: “You have to be willing to take body checks and give body checks in this business, OK?” said Charney.
He’s not being literal, but he also doesn’t tiptoe around others’ feelings to get things done for the business.
He pointed to earnings before interest, taxes, depreciation and amortization as a measure of his performance, which peaked at $70.1 million in 2008 at American Apparel. There was only one year the company saw negative EBITDA under his leadership, which was 2010 when its workforce took a hit following the I-9 audit that found 1,800 undocumented aliens working at the factory. American Apparel in the end had to fire them all. He claims the company’s own projections for the following three years estimated the company would have eventually swung back to the black around the 2015-2016 fiscal year. Although, given American Apparel’s subsequent travails after his firing, it would be difficult to predict whether those projections would have panned out.
Despite his boasts, the business was swimming in red ink in Charney’s final years as chief executive officer. The last time it saw a profit was 2009 and in 2013, Charney’s final full year at the helm, net losses had ballooned to $106.3 million, attributable to one-time charges associated with move of the company’s distribution center among other items. There was also a lot of debt that weighed heavily on the business. It didn’t help that the industry landscape was forever altered with fast-fashion and American Apparel’s ramp up in new stores just before the recession left it with expensive leases when the economy took a tumble.
“There were a number of things that worked against him. He was in the teeth of a really difficult market. I wouldn’t say that he was running [the business] poorly,” said one banker, requesting anonymity.
The board felt otherwise and brought in Paula Schneider, whose previous stints included Warnaco Swimwear Group president and Laundry by Shelli Segal president, as the antidote. She described to multiple reporters her first few months on the job as being akin to drinking from a firehose, but appeared confident the job could get done under her watch. The characterization was that American Apparel’s corporate culture needed to be taken from Wild West to large corporate entity. What came was a bankruptcy. Upon emergence from Chapter 11 the narrative remained that the business would continue to focus on a turnaround. But in a surprising twist, Schneider left in early October with the job unfinished and now there are murmurs of a second bankruptcy as part of a potential deal to sell off all or part of the business. Amid the upheaval, the company’s general counsel was sent to run a manufacturing operation whose deceptively simple T-shirts tell little about the complexity of the skilled dance involved in their production.
It’s been the opinion of Charney and his supporters — and even some watching from the sidelines — that he was the heart of American Apparel and to rip him from it proved the nail in the coffin on any turnaround attempt.
“I don’t ever meet ceos that are irreplaceable like Dov,” said Chad Hagan, managing partner and group president of Hagan Capital Group, who reached out to Charney and aligned with him in January on a $300 million bid to buy American Apparel. “With so many ceos, it’s just come and go. No big deal.”
Schneider herself would have preferred to have had Charney at least aligned with the business instead of railing against it prior to her departure (she later became head of Delta Galil’s DG Premium Brands division).
“I think it would have been helpful to have friendly terms [with him] as opposed to someone outside the building, yelling,” she said in an interview last month, referencing the regular protests outside headquarters of loyal workers and other supporters calling for Charney’s reinstatement.
The very public saga of American Apparel and Charney’s personal affairs that became public — the sexting and relationships with employees — have made some institutional investors somewhat nervous about backing his new venture, according to the banker. Sure, there are equity investors out there but institutional debt won’t be as easy to come by with the human resources issues, American Apparel’s performance in the past few years and the lawsuits Charney lobbed throughout last year.
“The upside of having a good return from their investment is really overshadowed by the controversial issues,” said the banker, who is still of the opinion Charney will pull through and succeed with the new venture.
“I think [the events at American Apparel are] too fresh in people’s minds right now for them to line up and say, ‘Where can I send the check?’” said Lloyd Greif, president and ceo of investment bank Greif & Co. It’s not a question of whether Charney is brilliant creatively, of which Greif said he is, but he can be mercurial and not always easy to control. “When you have an institutional investor, that presents a certain degree of risk,” he said. “They’re in the risk business. At the same token, they like to take calculated risks.”
Charney is adamant he’s not stepping away and will fight until the record is clear about not only his abilities as a leader but the nature in which he was removed from the company.
The reasons for his firing, he said, don’t draw on any contemporary allegations. The board would have been aware of any other issues in his personnel file — including any sexual harassment claims — prior to it spending more than $10 million on an internal investigation to determine whether Charney was fit to continue on at the company.
Several hours before a press release went out on Charney’s suspension in June 2014, shareholders attended the company’s annual meeting in New York. It was standard business: elect three new board members, appoint an independent auditor and approve executive compensation. In the proxy statement, a brief description of Charney read he “provides our board with an informed perspective on the company and the apparel industry and the perspectives and judgment necessary to guide the company’s strategy and monitor its execution.”
Why, Charney has argued in and out of court, if he was seen as vital to the company’s continued operations in that proxy, was he somehow fit for termination hours later?
Between mid-June of 2014 and on through to the end of the year, the former ceo plotted for a way back in. That included getting a loan from New York hedge fund Standard General to buy back shares of the company in exchange for independent voting rights. Charney said the hedge fund promised to insert him back into the company. That’s not the way things panned out.
“Of course I kick myself,” he said of linking with Standard General. “I’m going to kick them. They stole my company. But it doesn’t matter. I had no choice. I was put into those circumstances by way of a securities crime.”
American Apparel disclosed in its 2014 annual report that the Securities and Exchange Commission initiated an investigation to look into the circumstances surrounding Charney’s firing and determine if laws were broken. Charney, who sources say was interviewed by SEC officials roughly two months ago on the series of events around his ouster, declined to discuss the investigation. A spokesman for the SEC declined comment on the case’s status.
The allegations Charney has made against Standard General in court — the same as what he’s said outside of the legal system — have been called “frivolous, meritless” lawsuits by the hedge fund via a spokesman. American Apparel, through a spokeswoman, also referred to the allegations in multiple legal complaints in a similar manner throughout last year.
“The truth is, [former American Apparel board member] Allan Mayer’s publicity plan for me is exactly what I need to get [public],” said Charney referencing a screenshot he sent to WWD of what appears to be an e-mail sent to him by Mayer, dated April 11, 2012, in which the sender outlined talking points for Charney’s future interviews with reporters. It was suggested in that note he talk up the company’s rising sales, strong gross margins, new financing and being on track to hit EBITDA targets. On the subject of any lawsuits against him, he was coached to say, “People like to take shots at me because I’m an unconventional guy” and to also say the company’s edgy advertising isn’t for everyone, but the business’ sales clearly indicate a liking of it by many.
It’s all the opposite picture of what the management team after his firing chatted up about him publicly, with a narrative that revolved around the losses he’d racked up and advertising that needed to be toned down.
“Exactly what he said in 2012 is the truth,” Charney continued on the subject of the e-mail. “Did you ever see the movie ‘The Aviator’?…when he’s [surrounded] himself in toilet paper? That’s my life.”
It’s a reference to a scene in the 2004 film featuring Leonardo DiCaprio as Howard Hughes, who suffered from obsessive compulsive disorder. At one point, Hughes holed up in a screening room for months, victimized by his disorder. Charney was joking, although his fixation on repeating the e-mail’s bullets — in much the same way DiCaprio as Hughes repeated certain rituals in the scene — and making sure his history at American Apparel is written to his liking is very real.
In early October, Charney pulled up to American Apparel’s former Hawthorne dye house in a black Hyundai Accent hatchback, slumped in the driver’s seat wearing a white T-shirt, brown slacks and earbuds. He was there for an auction of the facility’s equipment. The company said in February that Hawthorne’s closure was part of a move to consolidate operations.
He walked hastily into the facility asking out loud to no one in particular for registration and then dashed off, snapping pictures, stopped regularly by other bidders curious to know what he’s doing next.
“Make T-shirts. What else?” Charney said to one.
The auction’s start at 10 a.m. came and went. And then in an anticlimactic end, it was canceled. Someone bought all the lots. People lingered as they speculated about the buyer.
“Dov, did you buy it?” one man standing in a group asked Charney as he sped by, still taking pictures.
“I bought everything. I put it on my credit card,” he said as the men chuckled.
As people filtered out, Charney wanted to take in the facility for just a while longer. That factory was just one symbol of the vertical manufacturing theme Charney put forth with American Apparel.
This time around, he’s calling Los Angeles Apparel “fair-wage, urban manufacturing” and evolving the concept of mixed-use’s live-work-play mantra to include industrial uses in that equation in which artists, factory workers, fabric suppliers, accountants and others all converge at a single hub in downtown L.A.’s core.
“This [represents] the end,” he said at the entrance to the dye house. He then ran over to mention one last thought he was overcome by: “This reminds me of when I buried my dog.” It was closure, he said. He found out after the fact that a friend of his acquired everything and Charney will be using some of the equipment, so all was not entirely lost.
To some, the factories, the equipment and the T-shirts themselves are all inanimate things. To Charney, they’re symbolic of the thesis upon which American Apparel was built: to create an industrial revolution. It says so atop its headquarters.
“I put [that wording] on the bloody building,” Charney said. “I typed those up and sent them to a printer. I authored those. They’ve faded but they’re still there, you know? They probably can’t afford to take it down. What I’m trying to do is bring that back. We’re going to cut from a new cloth and we’re going to do it our way.”
He’s been doing it his way for a while now, indifferent to judgments passed by those who don’t understand him or his plans. He made the decision to carry the magazine for gay men, Butt, in his stores as means of driving a conversation around sexual freedom and art and has rallied for immigration reform and open borders since before American Apparel’s start. One could look at the sprouts of Los Angeles Apparel as a continuation of those themes.
“I don’t believe in American nationalism,” he said. “I don’t believe in building walls. I think a true America is the America that I understand. The America that I signed up for is no borders. No walls. ‘Mr. Gorbachev, tear down that wall.’ They’re not building walls. They’re taking down walls. Ronald Reagan was a free trader. He was not anti-Mexico. In the inaugural address of Ronald Reagan, which I personally watched myself live, he said, ‘Yukon to Yucatan. One free-trade area.’ That’s the vision. As a Canadian boy I said, ‘You know what? I don’t like the border between Canada and the United States. I don’t like that we’re not together. I think that we should have one market for us all.’ I fought for free trade since I was a kid.”
There’s an exhaustion that sets in on him at times.
He recognized this one Saturday afternoon after spending the day moving rolls of fabric to shelving in his temporary South Central warehouse.
Back at his home, weeks earlier, the question was posed to him of just how much time he is spending on the aggregate of righting what he sees as the wrongs in his ouster from American Apparel.
“Probably a lot,” he said facing his computer screen, flipping through documents and eating Toblerone chocolate.
The question is whether he’s willing to continue fighting for the years litigation often takes.
“I can get this done. So other people go for dinner; I don’t leave my house or my factory, you know what I mean? I don’t have a social life, but there’s no way they’re going to get away with this…. You know what my gross profits were? Three billion dollars in 10 years. Three billion dollars. My sales were $5 billion. Dov Charney’s sold $5 billion of apparel in a decade. How many have accomplished that? Then they just pick their nose and flick me.”
Anger aside, there’s also a part that may be just as much about redemption as it is about proving his point. Living up to what American Apparel was at its peak and then surpassing it is a very big burden to bear for someone who is essentially running a start-up.
“I have to bring something profound back,” he said. “I have to do it again.”
It’s now Saturday night and music filters in from neighbors’ homes and the lights from downtown dance in the distance. The house is still as Charney moves from one room to the next methodically flicking off lights in his mansion still talking about American Apparel.
He warned a visitor to walk carefully down the steep steps many have tripped on and mused in perhaps the greatest understatement of a now two-year saga and counting, “Nutty story, eh?”