Why American Apparel's CEO Had To Go

Dov Charney owns 27% of the company he founded in 1991, but right now it looks like he'll no longer work there. American Apparel's  board of directors last week gave the CEO the ax based on what a company press release called an "ongoing investigation into alleged misconduct" by Charney. It's not a clear-cut ousting, though, as Charney filed paperwork with the SEC claiming that his termination "is without merit."

If the board's action sticks, it will be a fitting end to Charney's odd run as head of American Apparel. The Los Angeles Times reported that the investigation cited in the board's filing focused on Charney's misuse of company funds, abuse of an American Apparel-owned apartment, and role in the leaking of nude photographs of a former employee. He's an interesting guy, if nothing else.

Dov Charney's history at American Apparel
Charney has long been a specific type of character, as The New York Times summed up when in 2004 it called the entrepreneur "part garmento, part 1970's pornographer." His personality has pervaded every part of the American Apparel brand, reflected largely in the hypersexualized hipster advertising material over which the company is regularly admonished.


On the other hand, Charney also is committed to a specific social agenda. American Apparel clothing is all proudly marketed as "Made in Downtown L.A.," where Charney pays his factory employees a real living wage . When a clothing factory in Bangladesh collapsed last year, Charney took to the airwaves, calling out other manufacturers for failing to support their employees.

American Apparel's commitment to "made in the USA" is really a commitment to things made by workers who are treated right. Unfortunately, Charney's persona has gotten in the way of his vision. While many of the allegations against him have ended up being dismissed, the pervasiveness of Charney's self-described hustler attitude has put off potential customers.

The rise and fall of an American brand
In 2007, American Apparel was briefly a $15 stock -- today it's at $0.66. When the company went public in 2006, analysts wondered if it would keep its sharp edge as a traded business. The answer is a mixed bag. Charney did a wonderful job at refusing to change, but in doing so he's cost American Apparel and its investors huge sums of money.

The question for the company now is whether it can come back from the damage inflicted by Charney. Revenue has been on the decline, and in its most recent quarter, comparable-store sales fell 7%. On the plus side, much of what Charney has done at the company has helped set it up for success. The vertical integration, the focus on employees, and the overall hipster vibe has given American Apparel a distinct feel that many consumers identify with.

The problem is twofold. First, Charney let his personality cross the line. What started out as a hint of brand identity ended up feeling like unabashed misogyny. Second, the board turned a blind eye to his negative impact on the brand for too long. While it's good that the board has stepped up to move him out, it should have made the move long ago. The size of his ego and its gravity pulled the business down, but that was overlooked for a variety of reasons.

I like American Apparel's core business. It makes clothing that people can identify with, and does so in a socially responsible way with a well-known brand. If it can get through Charney's removal without losing too much focus, I think this time next year we will see a much clearer path ahead for the company. On the other hand, Charney's 27% stake is going to be an issue at some point, and that simple fact might be enough to keep the company depressed for a long time.

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The article Why American Apparel's CEO Had To Go originally appeared on Fool.com.

Andrew Marder has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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