American Apparel, Inc.

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American Apparel, Inc.

747 Warehouse Street
Los Angeles, California 90021
U.S.A.
Telephone: (213) 488-0226
Fax: (213) 488-0334
Web site: http://www.americanapparel.net

Private Company
Incorporated: 1997
Employees: 1,000
Sales: $300 million (2006 est.)
NAIC: 315223 Men's and Boys' Cut and Sew Shirt (Except Work Shirt) Manufacturing; 315232 Women's and Girls' Cut and Sew Blouse and Shirt Manufacturing

Based in Los Angeles, California, American Apparel, Inc., is one of the few apparel companies that in recent years has succeeded by maintaining domestic manufacturing operations. The company gained recognition for running a non-sweatshop operation, paying wages well above the garment industry norm. It also developed a reputation for sexual exploitation, as reflected by the nature of its print ads and vintage pornography that once adorned the walls of its shops. Moreover, founder and chief executive officer Dov Charney has admitted to having sex with employees (drawing the line at garment workers because he maintains such behavior would be exploitive), and has settled several sexual harassment lawsuits. American Apparel made its mark by producing stylish T-shirts for the wholesale imprinted T-shirt market. It expanded to include a wide variety of women's, men's, and children's apparel, and became involved in retail through the launch of a chain of boutiques, which in short order spread to dozens of locations in the United States, Canada, and more than a dozen other countries. In 2007 Charney said he planned to open about 800 shops in the next few years. Products are also available for purchase through the company's web site.

Apparel for men includes underwear, socks, sleepwear, shirts, jackets, sweatshirts, and accessories such as neckties, wallets, sunglasses, and gym bags. Apparel for women includes T-shirts, tops, sleepwear, shorts, dresses, skirts, swimwear, and workout and dance wear. American Apparel also offers shirts, pants, skirts, and dresses for children as well as items for babies. American Apparel is a private company, acquired by Endeavor Acquisition Corporation in a maneuver to take the company public, gain a stock market listing, and raise funds to support continued growth.

FOUNDER, MONTREAL-BORN: 1969

According to Dov Charney, via the New York Times, he was "born in the brisket" of Montreal's Jewish community in 1969. He attended prep school in Connecticut and became aware that items such as T-shirts were priced much higher in Canada than in the United States because of the Canadian distribution system. In addition, American-made T-shirts, in particular Hanes, were higher-quality and better made. He began buying them in the United States for his friends in Canada, which led to bus or train trips to the United States to stock up for sale on the streets of Montreal. He continued this sideline after enrolling at Tufts University in Boston. According to Inc., "he quit school and fell in with a guy who proposed they make T-shirts for wholesale." Thus Charney left Tufts in his senior year to move to Columbia, South Carolina, to learn the apparel trade and start his own T-shirt company under the American Apparel name. In 1991 Charney moved beyond importing to become involved in manufacturing by way of subcontracting, mostly wholesaling his shirts to screen printers. The business was successful for a while, but his timing did not prove fortuitous. Inexpensive imported goods began flooding the market, crippling the U.S. textile industry. According to Apparel News, "Small companies merged with larger ones or went out of business. Large companies began looking offshore for joint venture opportunities. Charney saw his East Coast contracting base shrinking as his West Coast sales grew." He held on as long as he could, but finally one of his contractors went out of business in the middle of an order, leaving him with a shipment of fabric, which he decided to have shipped to Los Angeles where he planned to reestablish himself; first he placed his South Carolina business in bankruptcy.

By this time Charney was fashioning T-shirts with a tighter cut and better fit. "We used to make 18 heavyweight T-shirts at $23 a dozen, then the price went to $20 a dozen," he told Wearables Business about his business in 1995. He continued, "I was broke but had a beautiful girlfriend in Miami who was from Argentina. And the T-shirt she was wearing was doing something for me." Charney began experimenting with a new line of form-fitting T-shirts to counter the standard oversized American version. It proved successful enough to serve as the focus of his next venture.

MOVE TO LOS ANGELES: 1997

In 1997 Charney moved to Los Angeles and, while looking for a contractor, met Sang Ho Lim, who operated a sewing shop. The two men became partners along with a man named Sam Kim. Charney also received funding from his family in Montreal. They launched a contracting business under the fanciful name "Two Koreans and a Jew." Kim would soon sell out to Charney and Lim and the business assumed Charney's old American Apparel name. It was a shoestring operation but Charney was convinced that he could make a go of it with a higher-priced niche product like fitted T-shirts using higher quality materials—lightweight combed cotton in fine-gauge jersey and baby rib. He was also a tireless promoter, willing to travel to trade shows to pitch his T-shirts to his target market: screen printers, promotional T-shirt makers, embroiderers, and distributors.

American Apparel took over a factory in Ensenada, Mexico, owned by Lim, but Charney preferred to produce his wares domestically in Los Angeles, part of a strategy to promote a "Los Angeleno" image. In 2000 he told Apparel News, "Our T-shirts are designed in California, the fabric is made in California, all the colorization decisions, our advertising, our photography, our print work, all of our graphic designs as far as our image is concern is designed here in Los Angeles. The company's image is a Los Angeleno image, which we are taking to drive this image internationally and be creative in an industry that has been stagnant for a decade." Charney did bring the production work to Los Angeles, but soon stopped pitching the Los Angeleno theme in favor of positioning American Apparel as the nonsweatshop company because the company paid its sewers high wages by industry standards, between $10 and $15 an hour, and provided such benefits as healthcare, immigration assistance, English lessons, and free massages. Charney became something of a champion for the cause of human rights in apparel manufacturing, which was notorious for being especially abusive around the world. How sincerely held were these beliefs could not be easily determined. Paying higher wages to keep production within the company provided tangible financial benefits due to the shortening of the supply line, as well as increasing turnaround times, and no dollar amount could be ascribed to the positive press Charney and American Apparel received from this policy. Charney did, however, resist attempts to unionize the Los Angeles factory, maintaining that the union would simply prevent a direct relationship with his workers. In time the company de-emphasized the anti-sweatshop stance, which Charney called tiresome. Instead he pursued a more timeless strategy: sex sells.

COMPANY PERSPECTIVES

At American Apparel our true inspirations for the "perfect fit" are ordinary people and their landscapes.

CONSUMER SALES ADDED: 2002

American Apparel's wholesale T-shirt business enjoyed strong growth. In 2001 sales reached $20 million. Early in 2002 the company expanded into consumer sales. Yet while sales were booming, the factory was inefficient and having a difficult time keeping up with orders. The future of the business was in jeopardy, prompting Charney to turn to an industry friend and ask for the name of the best person available to organize a factory. Marty Bailey, a 15-year veteran at Fruit of the Loom, was the recommendation. Charney called Bailey on a Saturday and reportedly said, "Dude, my name's Dov and I need help." Two days later Bailey took over as vice-president of operations and in short order created a finely tuned, vertically integrated operation, one that could produce a high volume of garments with the flexibility to turn a shirt design into a product ready to ship within a matter of days.

With a strong manufacturing operation in place, American Apparel could move into consumer sales and expand beyond T-shirts to other items of women's, men's, and children's apparel. Sales doubled to $40 million in 2002 and continued to grow in 2003, spurred further by the opening of the first American Apparel stores. The first two units were laboratories of sorts, opening in October 2003 far from the usual locales for boutiques: Echo Park in Los Angeles and near New York University in Manhattan. However, they served the important purpose of allowing the company to learn how to best sell to the public. American Apparel revenues reached $75 million for the year.

More store openings followed in 2004 and 2005 as American Apparel developed its own edgy decor, relying a great deal on pornographic pictures from magazines of the 1970s and 1980s as well as promotional pictures of employees in provocative poses, many of them taken by Charney himself, an amateur photographer since childhood. The accompanying print ad copy often read like personal ads, such as "Meet Glen. He's a 25-year-old New Jersey native living in New York. Glen's a bright guy and works as a tutor, but he has shown off some other features in Sweet Action magazine, a porn mag created by ladies for ladies." The use of pornography, actual and implied, was clearly meant to draw a reaction from some people, generally older, while playing to sensibilities of a younger generation that took a more casual approach to sexuality. For his part, Charney adopted the mutton-chop mustache look of a 1970s porn star, and his personal conduct received some attention, although it was not clear if he considered the unsolicited publicity a blemish or a mere bonus. It was one thing to boast in an interview with Jane magazine that he had sex with employees, but it was another to be the subject of a pair of sexual harassment suits filed in 2005. According to the New York Times, the allegations of the four former employees involved in the suits included "using crude language and gestures, conducting job interviews in his underwear, ordering the hiring of women in whom he had a sexual interest and giving one of the plaintiffs a vibrator." Charney denied the charges and eventually three of the claims were either settled or dismissed, while the fourth lingered on in the courts.

Regardless of the controversy surrounding Charney, American Apparel continued to grow sales and add stores. By the end of 2005 the company had about 60 stores, half located in the United States, and posted revenues of more than $275 million. Less than a year later there were nearly 150 stores. The units that had been in business for at least a year, however, experienced declining growth. In 2004 American Apparel stores enjoyed a robust 74 percent increase in sales over the previous year. The number fell to 45 percent in 2005, and in 2006 American Apparel stores improved sales by just 7 percent. Nevertheless, Charney continued to roll out new stores and look for additional sources of capital to support a strategy of opening 800 stores within the next few years.

Rather than go through the expensive and lengthy process of making an initial public offering of stock, and deal with the close scrutiny that went with it, American Apparel chose a less conventional route to becoming a public company. In late 2006 American Apparel was sold to Endeavor Acquisition Corp., a specified purpose acquisition company (SPAC), for about 32 million shares of Endeavor stock valued at approximately $288 million plus the assumption of $110 million in debt. Public companies, SPACs were often called "blank-check" firms because investors were not entirely certain what they were buying into when the SPAC went public, basing their investment in large part on the person behind the company. In the case of Endeavor it was Jonathan J. Ledecky, the 1994 founder of U.S. Office Products, which he expanded quickly through more than 250 acquisitions. After he left, however, the company filed for bankruptcy protection in 2001. He established Endeavor in December 2005, went public, and gained a listing on the American Stock Exchange.

KEY DATES

1997:: Company founded as wholesale T-shirt manufacturer.
2002:: Consumer sales added.
2003:: First retail stores open.
2006:: Company acquired by Endeavor Acquisition.

American Apparel completed 2006 with sales of about $300 million and net income of $30 million. It entered 2007 with ambitious plans to expand its retail chain and to use the corporate shell created by Endeavor to become a public company under its own name and make offerings of stock to fund that growth. The deal with Endeavor brought $120 million in cash, half of which Charney used to buy out his longtime silent partner, Sang Ho Lim. Charney would be left with a 50 percent stake in the business, as would Endeavor, and both parties would be able to appoint four directors. A ninth, essentially a tie breaker, would be mutually agreed upon.

Ed Dinger