SEC Investigating Charney’s Departure

Charney Suspended Last June

Dov CharneyThe U.S. Securities and Exchange Commission (SEC) is investigating Top 40 supplier American Apparel’s (asi/35297) dismissal of the clothing firm’s founder and former CEO Dov Charney, according to a filing released this week. The probe, officially launched in February, is a “non-public, fact-finding inquiry” into “matters arising from [American Apparel’s] review relating to Mr. Charney.” American Apparel has pledged to cooperate fully with the investigation, which will essentially determine whether any laws were broken.

A whirlwind of accusation and recrimination at American Apparel began last June when the company suspended Charney, alleging he misused company funds and repeatedly disregarded sexual harassment policies. After an independent firm reviewed Charney’s actions, he was fired in December. Charney, who has fought against the allegations, has sought for months to be reinstated at American Apparel. He even brokered a deal last summer with hedge fund Standard General that increased his stake in the clothing maker to 43% of outstanding shares. Yet, the agreement didn’t provide Charney the leverage he hoped for and Standard General did not stop his eventual removal.

Since Charney was ousted, American Apparel has named several new board members and has hired Paula Schneider as CEO. In addition to trying to turn around the firm’s troubled finances, Schneider has promised to revamp its image by cutting out risqué ads. American Apparel has also announced plans to improve its digital efforts and streamline the clothing styles it offers in 2015. “We remain focused on putting the right processes and systems in place, such as a rigorous forecasting process and disciplined bottom-up budgeting – so that we can better leverage American Apparel’s strong brand,” Schneider said in a statement yesterday.  

Schneider’s work will no doubt be challenging as American Apparel hasn’t turned a profit since 2009. Slumping sales, a poor distribution center rollout and more than $10 million in expenses related to Charney’s review and departure have combined to saddle the manufacturer with financial distress. In its latest reporting, American Apparel said its total Q4 2014 sales decreased $15.6 million, or 9% year-over-year, falling to $153.5 million. The company suffered a fourth-quarter net loss of $28 million.

For 2014 overall, one of the lone bright spots appears to be American Apparel’s ad specialty revenues. The company recently reported to Counselor that its 2014 North American ad specialty sales were $105 million, a year-over-year increase of about 6%. On its Top 40 list, Counselor currently ranks American Apparel as the 14th-largest supplier in the industry.