Can American Apparel Get Back to Business Now, Please?

If it can put troubles behind it, retailer may be able to get a leg up on growth once more. Photo: Flickr user William Murphy.

Maybe now American Apparel can get back to making ultra-fashionable clothes.

The quirky retailer just appointed as interim CEO a turnaround expert and a new money guy who, when combined with a reconstituted board of directors, may just show that there are adults running the place again. It ought to allow consumers and the markets to focus on what the hip retailer has on the selling floor instead of the antics taking place in the executive offices.

Ushering in an era of confusion
The travails of American Apparel and its founder and (now) ex-CEO Dov Charney nearly brought the hip retailer to financial ruin.

It was the culmination of a long-running drama earlier this summer that saw the old board of directors finally become exasperated enough by allegations of misconduct by Charney to give him an ultimatum: go quietly or be fired. He chose the latter, an action that sent out a series of ripples that threatened to swamp American Apparel.

American Apparel's board sent its CEO packing, only to unleash a maelstrom of trouble. Photo: Flickr user Anna Fayet.

Because of certain clauses in his employment contract, Charney's ouster led lender Lion Capital to call in a $10 million loan that could have led to it defaulting on a separate $50 million loan from Capital One Financial. It spawned a mad scramble to come up with financing, which ultimately saw private equity firm Standard General take control of the company in conjunction with Charney, front $25 million to pay off Lion, keep the retailer in business, and start afresh with a new board.

Still, Charney has been largely marginalized in the aftermath, accepting a role as a creative voice with the company until his fate is determined, and the board that started the imbroglio was largely replaced at the P/E firm's insistence (only two of the board's original members remain). At the same time American Apparel's first two women directors have taken seats at the table and now executives with experience at righting a listing ship are in command.

A firm grip on the wheel
Taking the CEO spot is Scott Brubaker, managing director of Alvarez & Marsal, an advisory firm that specializes in turnaround management, having previously been hired by HealthSouth in 2002 following accusations of fraud at the hospital operator, and overseeing the unwinding of Lehman Brothers following the start of the financial markets meltdown.

The new face of American Apparel. Photo: Alvarez & Marsal.

TheNew York Post had previously reported Standard General had been talking to the firm in July to support American Apparel's finance department, and now it will be leading the turnaround effort.

Stepping into the role of executive vice president and CFO is Hassan Natha, a former Nike executive who also served as CFO of Jones Soda and most recently Fisher Communications.

The appointments should just about be the last of the housecleaning needed to get American Apparel on track again, other than Charney himself who, despite his creative title, is still under investigation by the P/E firm.

Threadbare results
The retailer reported flat sales for the second quarter ending June 30, but same store sales were down 6% and online comps fell 3%, though net losses narrowed by half to $16.2 million. However, American Apparel hasn't had a profitable quarter since 2010 and much of its loss last year was associated with expenses due to refinancing existing loans with Lion Capital and others, and its fumbling introduction of a new distribution center.

Over the past 12 months American Apparel has lost $44 million and some $267 million over the last five years. It remains around $216 million in debt.

Although revenue from wholesale operations jumped 9% last quarter, giving some hope there's a chance of a recovery, the retailer remains in difficult financial straits. With a new CEO and CFO on board, it ought to be the clothes that once again define American Apparel as a fashion house and not its executive causing it to be viewed as a house of horrors.

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Rich Duprey owns shares of Nike. Follow him on Facebook where he covers all the most important developments in retail and consumer brand name goods. The Motley Fool recommends Nike. The Motley Fool owns shares of Capital One Financial. and Nike. 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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