American Apparel Inc. (NYSEMKT: APP) is about to be torn to shreds by the battle against ousted CEO Dov Charney. The company’s financial situation is precarious, and its board and management cannot stand the distraction of a long legal battle with Charney as American Apparel tilts toward disaster. And Charney’s fight against the board’s decision to dismiss him could go on for months and cost American Apparel millions of dollars the company does not have for legal fees.
The primary reason American Apparel is in trouble shows up in its most recent profit and loss statement. In the first quarter, revenue was flat at $138 million and the company had an operating loss of $7.5 million. This followed a year in which American Apparel lost $29 million on $624 million in revenue. American Apparel has lost large sums in three of the past four years. Cumulatively, those losses total more than $100 million. The “risk factors” in the company’s filings with the SEC are filled with references to defaults and restrictive debt obligations. Revenue only has to slip a bit, or expenses only need to rise a bit, to drive American Apparel toward Chapter 11.
Ironically, Charney has started a battle that may destroy his own net worth. As of the most recent proxy, he owned 27% of American Apparel’s shares. By not taking what is rumored to be a multiyear consulting job worth $1 million a year, and instead threatening to take the matter of his firing to court, he could end up with nothing. The fact that American Apparel shares traded below $0.50 a share earlier this year is not an accident. American Apparel was in deep trouble before this dispute.
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Another rumor about Charney’s departure is that some large suppliers and retailers have expressed an interest in doing business with American Apparel. Apparently, his reputation and volatility kept these potential partners away. However, it will take more than a few modest partnerships to pull the company out of the conflagration that the battle between Charney and the American Apparel board has started.
It is hard to find a precedent for a legal dispute between a public company CEO and his board that could last as long and be as destructive as the one that has started at American Apparel. It is equally hard to make a case that it can turn out well for Charney and the company.
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