The media at large has publicly exposed enough of the “dirty” part of this “jokester” that I don’t need to pile on more. Although it might be a more titillating read to add more dirt to the pile, I’ll just sign off on his disgusting behavior during his tenure as CEO of American Apparel by saying it’s equally disgusting to me that the board didn’t kick his butt out of there a long time ago. It never ceases to amaze me that too many boards are still weak on proper governance in protecting the shareholders from the egregious, deleterious behavior of miscreant CEO’s. And American Apparel’s board seems to be one of those.

But for the moment, let’s forget about Charney’s sexual proclivities, including allegations of abuse. Many top executives have been caught with their pants down, so to speak, albeit not all as flagrantly as Charney. Many were fired, yet many others have just had their dalliances swept under the rug.

Charney’s real dirty joke is that he is a business joke of the tallest order.

A Business Joke

Reluctantly, I feel it’s necessary to acknowledge Charney’s entrepreneurial accomplishment in creating a brand that hooked up with (no pun intended) young urban consumers in a sensuously charged way. It took off and spread like wildfire. It was at that moment in time when Charney should have removed himself from running the business and hired a CEO with management, operating and leadership credentials. Entrepreneurs, by definition, are creators and most often are not capable of managing and profitably growing a business. Charney is no exception.

Not only has he proven to be an inept CEO, given the continuing decline of the business (propped up by one loan after another), his maniacal micromanagement of every aspect of the operations has decimated whatever semblance of an organization there might once have been. Worse, his “everyone reports to Dov” insanity has driven off all of the skilled executives he briefly had. One example of his warped behavior was reported in a New York Times op-ed column by Joe Nocera: “In 2007, after the company went public and he had to bring in a chief financial officer, he told The Wall Street Journal that the man he hired was a ‘complete loser,’ which of course caused the man to quit.”

Anecdotally, anonymous observers provide a disturbing picture of his dysfunctional, really whacky, abusive management style and hodge-podge approach to a retail business. Here’s one observation: “There is no retail management for the 250 or so stores. Everyone reports to Dov, from the assistant store manager in Cincinnati, to the visual display assistant. Dov conducts a meeting generally from his bedroom every week. He has every store call in. Seoul Korea calls in. Santa Barbara calls in. Berlin calls in. Lots of time differences … and languages … but the one constant is that Dov does all the talking. If business is bad in a store, it becomes a weather report by Dov: ‘Toronto, your business was terrible! it rained (or snowed, or was hot).’ …Any reason for slow business was due to the weather. And the solution was always the same: ‘Toronto, if your business doesn’t improve next week I’m coming up there and cutting off your (expletive).’

“There is no allocation department. That area is the lifeblood of specialty retail. So, instead of an algorithm for allocating, it is all Dov: ‘Send 5000 to the stores! Its gonna get cold soon so we need to send a lot of jackets to the stores!’ Product development is all done by Dov, as well. Nail polish is made in downtown LA. It is not FDA approved, and several bottles have exploded.”

Another anonymous comment: “Dov’s favorite lines to his employees: ‘I’m gonna make you bleed. I’m gonna break you in half. You’re a fraud.’\”  It is all Dov, all the time. There is no one else running the store.

Another blatant example of abusive behavior towards his employees, and one for which Charney is being sued, was reported in a recent Bloomberg Businessweek article: “In November 2012, Michael Bumblis, a store manager in Malibu, had accused Charney of rubbing dirt in his face because Charney was displeased with the store’s condition and performance. Bumblis’s lawyer, Ilan Heimanson, says he informed the company of evidence of the confrontation beyond the accounts of witnesses. The stores had security cameras, and Bumblis had access to the video. Among the details in the complaint was a phone call Charney had supposedly made to Bumblis about his store’s poor sales. ‘Get your f-?-?-ing s-?-?- together, fag. Where is your f-?-?-ing creativity? Get some f-?-?-ing girls in bikinis to stand on PCH [Pacific Coast Highway] and have them wave a f-?-?-ing American flag. Are you a fag? Do you not want to see girls in bikinis? Are you banging that girl you were with in Vegas? What’s her name?’ American Apparel’s lawyer said in a filing that Bumblis was a poor-performing employee who was dismissed and that his story is ‘entirely contrived or wildly exaggerated.’

The article went on to say: “That case could bring other complications. Heimanson asked a Los Angeles court to try the case rather than send it to confidential arbitration, as American Apparel requires in all such matters. The judge ruled that the documents all American Apparel employees have to sign are ‘unconscionable,’ according to legal filings. The agreements forbid workers from filing claims against the company, talking about the company, or sharing any information about the personal life of the CEO. If they do, they risk being sued for $1 million. The company is appealing the ruling. If it stands, ‘we’ll be able to shine sunlight on the backroom dealings of American Apparel and Dov Charney,’ says Heimanson.”

The Unravelling

Following its IPO in 2007, Charney put his ambitions on steroids along with his chaotic, micro-managing behavior. This combination of a publicly traded company being run by an overzealous entrepreneur with zero management skills with a looming recession was bound to become a train wreck. A tipping point likely came in 2009 when an immigration audit forced him to lay off over half of his illegal factory workers. The subsequent disruptions to the business while replacement workers were hired and trained just exacerbated the declining business.

Between 2009 and 2013, the business consistently hemorrhaged money in addition to taking on costly debt, ballooning from under $100 million to around $250 million. In the last three fiscal years, American Apparel lost $270 million and its stock traded for under 50 cents earlier this year, down from $15 at the end of 2007.

In 2011, Lion Capital, one of American Apparel’s major lenders and a Charney supporter at the time, urged Charney to hire an experienced C-level apparel executive to stabilize the business, reorganize the infrastructure and operating functions, and to strategically put the business on a profitable growth trajectory.

Obviously in an attempt to protect their interests and ward off a potential disaster, Lion Capital reached out to Marty Staff, former successful CEO of JA Apparel (owner of the Joseph Abboud brand) and previously, CEO of Hugo Boss. In my opinion, Staff was precisely what Charney needed to turn the business around.

It was a doomed relationship from the start. First of all, Charney gave Staff the title of President of Business Development. And as I wrote in an article for The Robin Report upon Staff’s departure after only six months on the job, (American Apparel: A Last Chance Lost) that title didn’t even imply operating authority. Charney just continued to micromanage every part of the business, and Staff got frustrated and left. This is not unlike the turnover of many other capable operating executives who wouldn’t put up with the tumultuous and chaotic working environment where it was impossible for them to develop and implement sound strategies for achieving growth.

I also wrote in that October, 2011 article: “Quite frankly, it amazes me that as CEO of a publicly owned company, given American Apparel’s financial condition and his questionable and storied behavior, Charney still has a job.”

Indeed, Staff was a “last chance lost” as American Apparel continues its downward spiral.

Enter The Money Guys

Now the money guys are circling. Lion Capital is demanding payment of its $10 million loan at 20% interest. Following his ouster by the Board, Charney requested New York investment firm Standard General to do a financial deal, which he hopes will be a mechanism to reinsert himself back into the business. And I guess Standard General believes there’s still a viable business that if turned around, could end up being a smart investment.
Standard General’s deal with Charney provides an immediate infusion of $25 million to shore up American Apparel’s financial mess, including repayment of the Lion Capital loan. Charney gets to keep a 43% share in the company but relinquishes his ownership control to Standard General. His fate for returning in any capacity to American Apparel, including reinstatement to the Board, is pending an investigation into his conduct and alleged wrongdoings. The deal also includes a commitment to continue manufacturing the apparel in the US, which has been a strong marketing position for the brand from its inception. The Board will be recast and, amazingly, Charney will be a paid consultant during the investigation period.

My Advice: Dump Charney

My final perspective amidst the cacophony of the media storm around this dirty business and dirty joke is one of disgust. Lion Capital and Standard General as well as all other funding sources that have thrown money down this cesspool ought to have their heads examined. I’ve been around long enough to know that most investors, no matter how deeply they analyze companies, don’t have a clue as to how businesses are run. The “numbers, the numbers, the “numbers” is their war cry. At the end of the day, it’s not about making a better America, about creating real value, or about improving the economy. It’s about making money.

Okay so be it. We live in a capitalistic economy. But from day one when Dov Charney luckily hit on a hot idea, all anybody with any common sense had to conclude was that it was not ever a question of whether American Apparel would collapse under his ineptness. It was only a question of when.
And now that the end is near, it’s equally incredible to me that Charney is being kept on on as a consultant, or even as janitor, as he so flippantly suggested to the press. Whatever his capacity, he has demonstrated from American Apparel’s opening day that he is not only an abusive micromanager, but also incapable of sustaining profitable growth.

Regardless of the outcome of the current investigation, if the American Apparel brand has any chance of being turned around, I advise the Board: Open your eyes and dump Dov Charney. Now.