BUSINESS

The World's Weirdest CEO

Dov Charney’s antics helped build a retail empire. Now they may be destroying it.

JASON KIRBY,NANCY MACDONALD May 5 2008
BUSINESS

The World's Weirdest CEO

Dov Charney’s antics helped build a retail empire. Now they may be destroying it.

JASON KIRBY,NANCY MACDONALD May 5 2008

The World's Weirdest CEO

Dov Charney’s antics helped build a retail empire. Now they may be destroying it.

BY JASON KIRBY AND NANCY MACDONALD

BUSINESS

Like most people, CEOs generally prefer to keep the particulars of their sex lives out of the headlines. For Dov Charney, the Montreal-born founder of American Apparel, waging a campaign of carnal shock and awe helped transform his company into a global clothing empire. From boasting about testing his clothes on strippers—“You get a cross section of chicks,” he told a reporter once, “big chicks, little chicks, big-assed chicks, little-assed chicks”-to openly talking about masturbation and threesomes with his staff, Charney’s excesses only reinforced the chain’s image among young, urban hipsters. American Apparel became the anti-Gap, and it’s been wildly successful. In just five years the company has opened 187 stores in 15 countries, with sales of US$387 million.

Those were the carefree days, when the Los Angeles-based company enjoyed the relative impunity of being privately owned. In December, American Apparel went public, bringing in tens of millions of dollars to fuel its bold expansion plans. But the move also invited the scrutiny of investors, lawyers and securities regulators. Now American Apparel’s shares are in free fall, and investors are growing frustrated with Charney’s wacky ways. The sudden collapse of confidence in one of retailing’s hottest brands says a lot about the dangers that arise when freewheeling entrepreneurs and straightlaced Wall Street types collide. More than that, though, it begs the question—what in the heck were people thinking when they gave Dov Charney their money in the first place?

If investors didn’t know about the company’s outlandish CEO, they weren’t paying attention. In January American Apparel was in court to fight a sexual harassment suit, the fourth in three years. (Of the previous three, one was dismissed and two others were settled out of court.) A former sales representative alleges Charney once held a meeting with her wearing only a strategically placed sock. The company has denied the accusations, but its insurer has refused to pay any damages that may arise from the case.

Then, last week, Charney was quoted in

the Wall StreetJournal shrugging off various financial concerns, such as the fact that when the company was private, it had to restate its results. What’s more, he called his chief financial officer “a complete loser.” Charney later said he’d been misunderstood, but the damage was already done, and it added to a mounting unease among investors and company watchers who wonder whether Charney is a mad genius of retail, or merely mad. (Charney declined to be interviewed for this story.) Since December, American Apparel’s stock has plunged more than 50 per cent, wiping out nearly US$600 million in market value. “The American Apparel concept has been tested all over the U.S., Canada and internationally, and it works,” says a fund manager who owns shares in the company. “But Dov is really a kooky guy. Our hope is that will be moderated.”

If it seems at all unusual to sing the praises of a business while at the same time express-

ing deep unease about the man responsible for its success, that’s just one of the many contradictions of Charney’s dramatic rise to oddball fashion mogul. Born in Montreal’s tony anglophone enclave of Westmount (his uncle is famed architect Moshe Safdie), as a teenager he’d cart boxes of T-shirts back from the U.S. to hawk on Ste-Catherine Street. After trying, and failing, to get a clothing manufacturer off the ground in South Carolina, Charney set out for L.A. and a fresh start. Somewhere between the beaches of the Carolinas and California, he made a key discovery: girls were wearing boys’ T-shirts in tiny sizes that hugged their figures. At the time, the imprinted apparel industry, which supplies businesses with blank shirts to put their logos on, was pumping out heavy, boxy-looking shirts. So Charney revived the fitted arms and bodice of the seventies, but in softer, lighter fabrics and bright colours. With the backing of a secretive Korean-born businessman, and a

loan from his father Morris Charney, a prominent Montreal architect, American Apparel’s trendy T-shirts were soon in hot demand.

From the start, Charney eschewed offshore sweatshops and set up a factory in downtown L.A., paying his mostly Latino workforce twice the minimum wage. With thousands of textile jobs being sent to Mexico and overseas, American Apparel stood out for its retro approach to manufacturing. The move won kudos from anti-sweatshop activists and protectionists like Lou Dobbs. What’s more, it earned the company extensive press coverage, giving the world its first real look at the maverick behind the company—and what a look it was. The scrawny CEO’s sartorial style ran toward big, yellow-tinted aviator glasses, bushy mutton chop sideburns, severe sideparts and other references to the dirty ’70’s. When he talked, it was at a machine-gun clip, in often-rambling elliptical sentences.

Of course, American Apparel’s head honcho could do, and say, pretty much anything he wanted, since he and his business partner owned the company outright. But even then, there were limits, and Charney found ways to gleefully cross them. He often boasted about bedding employees and sang the praises

of open sexuality. “When everyone is doing everyone else,” he once said, “it’s good for [office] morale.” In the minds of many, though,

Charney went from sexual libertarian to pervert in 2004 when he masturbated repeatedly in front of a female journalist, who suggested Charney had also received oral sex from an employee in her presence. Yet, no matter how outrageously he behaved, the company continued to attract legions of loyal customers.

Not content to be a mere middleman in the clothing industry, American Apparel began to roll out its own branded retail stores in 2003. With the company targeting customers directly, he amped up the sexual nature of American Apparel’s advertisements. Charney shoots many of the photos himself, often in a bedroom of his L.A. mansion. And

rather than use airbrushed models, American Apparel ads feature young employees, interns and people he picks off the street. The suggestive and frequently inflammatory ads, showing young men and women, mouths agape and legs akimbo, exude an aura of Polaroid-era, amateur porn. Gradually the anti-sweatshop message got pushed aside. “They had giant posters in their store windows, talking about business ethics and environmental consciousness,” says a former American Apparel employee in Montreal. “That’s what appealed to me. They stopped that as soon as they got big. Sex sells over intellectual arguments every time.”

And sell it does. Five years after making the jump into the world of retail, American Apparel’s logo-free T-shirts, dresses, jerseys and underwear can be found from New York to Tokyo. The company has plans to open another 45 stores this year, with the ultimate goal of blanketing the planet with more than 800 American Apparel outlets. At times Charney has even mused about getting into book publishing, automobile design and anything else that involves divining the sensibilities of young, urban consumers. In short, the company’s flamboyant CEO has become a strut-

With racy ads and retro styles, American Apparel became the anti-Gap

ting contradiction—rebellious entrepreneur or egocentric misogynist? Arbiter of a generation’s cultural tastes, or spastic weirdo poised to derail the empire he created?

Whatever the case, Charney’s financial backers were willing to gamble that his grasp

of fashion trends and marketing savvy outweighed the risks from his outlandish behaviour. But with the stock price plunging, and shareholders growing restless, some think Charney should have kept American Apparel private. “Some people are cut out to run public companies, some people, private companies,” says Howard Davidowitz, chairman of Davidowitz & Associates, a New York investment banking firm that specializes in the retail sector. “Going public is the thing that put him in the s-thouse. When you’re under a microscope, you can’t act crazy. The minute [the company signalled it would go public] I said, that’s the end.”

Charney isn’t the first entrepreneur to struggle once put under the investor spotlight. It takes drive and an oversized ego to bring a thriving business to life. Private businesses need to worry about only one thing: how their products are received in the market. Listing your shares on the stock market opens up a host of new concerns: quarterly financial reports to the public, conference calls with analysts, meetings with fund managers and the scrutiny of regulators. You don’t just have to do well financially, you have to project stability and transparency. Yet Charney made it clear years ago that if American Apparel ever listed its shares, investors should be prepared to put up, and shut up. “I want to do it on my own terms,” he told PBS’s Charlie Rose in 2006, when asked if an IPO was a possibility. Charney assured Rose his company would meet all regulatory requirements, but he had a clear warning for his future shareholders. “I don’t want to be told what to do... If we go public it will be on the right conditions.” Perhaps to drive home the point, the front yard of Charney’s mansion includes a giant concrete fist, middle finger pointed to the sky. But Charney’s decision to go public may have been more a matter of necessity than choice. According to the Wall Street Journal, American Apparel’s lenders had begun to push the company to find additional financing. At least two attempts were made to borrow funds privately, but those went nowhere. At the same time the company is under intense pressure to expand its retail business, say experts. Big garment manufacturers such as Fruit of

the Loom and Montreal-based Gildan Activewear have begun to churn out fashionable Tshirts for the imprint market. And with their low-cost sewing factories in Mexico and the Caribbean, where workers toil for a fraction of what American Apparel pays its staff, competition is fierce. “Wholesale is the backbone that built American Apparel’s business,” says a venture capitalist familiar with the apparel industry. “The question is can they get the new [retail] ship built before the old [wholesale] ship sinks?”

This all puts Charney on shakier ground than he might have hoped. The reverse takeover, in which a publicly traded shell company with gobs of cash but no operations bought American Apparel, injected US$125 million into the business, and left Charney still holding a majority stake. Not surprisingly, investors are beginning to push for Charney to step aside and let a seasoned executive take his place. “Outside management is brought in to run companies all the time, and it would make a lot of sense here,” one investor says. For instance, Charney could assume a creative director roll, while

a name-brand CEO could take over day-today management of the business. “That’s been suggested to him. The question really is ‘will Dov agree to it?’ ”

So far, it’s a no-go, but there are signs Charney has been trying to clean up his act without being seen as selling out. Gone are the outlandish beards and moustaches. According to one news report, the company has stopped displaying copies of porn magazines

like Playboy and Oui in its stores. And he’s been quick to dismiss talk of his sexual exploits as tabloid exaggerations. Charney’s hardly buttoned-down, but it’s not likely he’ll be posing naked in an advertisement for American Apparel, something he did, years ago, in a gay magazine.

There is an argument to be made that investors knew exactly what they were getting when they bought American Apparel shares. Charney has never tried to hide his

Pressure is rising for Charney to step aside: ‘He’s a very brilliant guy,’ says one investor. ‘But I don’t think you need him.’

free-spirited lifestyle. But experts say that won’t matter if the stock continues to fall. Company directors live in fear of shareholder lawsuits. And with Charney’s history of antics, the sexual harassment allegations, and his propensity to thumb his nose at critics, there’s plenty for investors to be upset about. “When a company is so infused with a particular person, there is a risk in getting rid of them,” says John Challenger, CEO of Challenger, Gray & Christmas, a Chicago executive search firm. “But when a stock goes down 55 per cent, any CEO’s days are numbered.”

Which raises the questions: would there be an American Apparel without Dov Charney? It’s difficult to separate the two, conjoined as they are. The company’s own securities filings suggest Charney is irreplaceable, adding the entrepreneur is “intimately connected” to the brand and is the principal driver behind its “core concepts.” But the filings have also noted the company lacks basic expertise in generally accepted accounting principles, which illustrates the central contradiction at the heart of the company, and why it is both a retail phenomenon and a prohibitively risky stock. Even as American Apparel has grown into a business with nearly 7,000 employees, Charney still photographs models himself while taking a lead role in conjuring up new designs. For instance, during a recent conference call, he talked about a year-long project he’s been working on to design a new golf shirt. Yet the company’s frustrated shareholders aren’t buying it. “He’s a very brilliant guy, but I don’t think you need him to grow the business,” says the fund manager. “You call Mickey Drexler [the highly regarded CEO of retailer J. Crew] and ask him, if he bought American Apparel, would he still need Dov Charney? The answer would be unequivocally ‘No.’ ” (Drexler couldn’t be reached for comment.)

As Charney works to rebuild confidence in American Apparel, he has insisted that he is a new type of executive, for a new generation of customers—young, plugged in and urban to the core. Forget the way capitalism was done before. That’s old school. Charney has said he’s pursuing a “hyper-capitalistsocialist fusion,” something, presumably, Wall Street could never hope to understand. But the truth is the people he desperately needs to win over now are his disgruntled investors. And they just happen to be more partial to silk ties and cufflinks than Baby Rib Fitted Short Sleeve T-shirts and organic underwear. American Apparel’s future depends on bringing those two worlds together. The question: is Dov Charney the man to do it? M