Given American Apparel's strong niche brand that resonates with consumers, it could be one option for a company that has been mired in problems, primarily stemming from Charney himself and his inability to manage the growing company as well as multiple lawsuits against him alleging sexual harassment in the office.
"If a buyer can somehow restructure the debt -- and the debt is very substantial -- it is a very saleable company because the product is known, it's got a great reputation and the consumer has always liked the product," says Jerry Reisman, a business and retail expert and a partner at corporate law firm Reisman Peirez Reisman and Capobianco of Garden City, N.Y. "It needs new management. It needs new direction. [But] it has a place in the market."
The Los Angeles-based manufacturer and retailer, known for its "Made in USA" mission, surprised Wall Street on Wednesday evening when its board of directors put out a press release saying they had voted to replace Charney, 45, and notified him of their intent to terminate his employment with co-chairman Allan Mayer citing "an ongoing investigation into alleged misconduct" as the reason. American Apparel shares rose 6.7% to 68 cents on Thursday as investors cheered the news.
As part of Wednesday's announcement, the board named current CFO John Luttrell as interim CEO. Prior to joining American Apparel in February 2011, Luttrell served in executive positions at Gap's (GPS) Old Navy, The Wet Seal (WTSL) and Cost Plus. The board also appointed Mayer, its lead independent director, and David Danziger, as co-chairmen. Charney's termination is expected to be effective following a 30-day "cure period" as part of his employment agreement.
"We take no joy in this, but the board felt it was the right thing to do," Mayer said in the press release. "Dov Charney created American Apparel, but the company has grown much larger than any one individual and we are confident that its greatest days are still ahead." American Apparel has hired a search firm to identify candidates for a permanent chief executive position.
More importantly though, the company warned that the removal of Charney could trigger "an event of default" under its credit agreements with Lion/Hollywood LLC and Capital One Business Credit Corp. American Apparel said it would be in discussions with the lenders for a waiver of the default, it said.
"Unless we are able to secure a waiver, the lenders under the Lion Facility and the Capital One Facility are entitled to, among other things, accelerate the outstanding amounts under the facility. Any such acceleration under our credit facilities would have a material adverse effect on our liquidity, financial condition and results of operations, and could cause us to become bankrupt or insolvent," the company said in a Securities and Exchange Commission filing.
As the company grew, it found itself becoming more and more in a cash-flow crunch. Charney has been attempting to stem American Apparel's cash-flow bleed with a series of fund raises in the last few years with the most recent fundraising stock offering in April. American Apparel raised $30.5 million by selling 61 million shares at 50 cents a share, according to The Deal, a sister site to TheStreet. As part of that stock offering, activist investor FiveT Capital snatched up 12.6% stake in the company, becoming the second largest shareholder behind Charney himself, who owns 27% of the retailer. FiveT Capital is also an investor in TheStreet through its FiveMore Fund.
"I think the bondholders would welcome an acquisition. The more liquidity and the more safety the bondholders can get the better," says Eric Beder of Brean Capital, who has a "buy" rating on the stock. Brean Capital and Roth Capital Partners acted as book-running managers for the April stock sale.
Beder notes that American Apparel could be attractive to another manufacturer or a strategic retail buyer.
"The niche they operate -- the urban consumer is very hip," Beder says. Lots of retailers are operating within the space, but "no one is really dominant within that niche," he says. Competitors to American Apparel include Urban Outfitters (URBN) and H&M.
In May, the company reported first-quarter net sales that declined 1% to $137.1 million. Comparable store sales declined 7% compared to 5% growth in the first quarter of 2013. Online sales rose just 3% in the quarter compared to a 24% in the year-earlier quarter.
American Apparel had a net loss of $5.47 million for the quarter compared to a loss of $46.5 million in the first quarter of 2013. Adjusted EBITDA improved to $1.4 million for the first quarter compared to a loss of $700,000 in the year-earlier period. The company had reaffirmed its prior estimate range of adjusted EBITDA for the year of $40 million to $50 million.
"We are encouraged by our first quarter performance with our achieved results ahead of our 2014 business plan. The results of our cost control efforts are being seen in all areas of the business and we are now fully focused on measures to improve top line performance," Charney said in the earnings statement.
According to its latest 10-Q, American Apparel has debt of nearly $245 million as of March 31.
It's possible that American Apparel may already have an interested buyer.
Johannes Minho Roth, the founding partner of FiveT Capital AG, told Bloomberg that the surprise announcement may mean the company already has a buyer or wants to sell the company.
However, American Apparel's Mayer told Bloomberg in a separate story that the company "is not pursuing any transaction" and that "We have no intention to sell the company."
TheStreet reached out to Terry Fahn, an external spokesman for American Apparel, who declined to comment on Thursday when asked if the company would consider a sale.
Retail turnaround expert Michael Appel says the company doesn't need to sell so long as capable management is brought in and the debt is restructured.
"This is the issue you have very often with entrepreneurial founders," Appel says. "They're highly creative and build something up, but they have a hard time once the business has gotten to a different level."
"I think that's really the nub of it all. The street doesn't have any confidence in him as long as he is there. If you replace him, bring in more professional management and start running the company" better, the company should perform better, he adds.
--Written by Laurie Kulikowski in New York.