American Apparel Said to Be Open to Keeping Charney

Former American Apparel CEO Dov Charney
A file photo shows Dov Charney, founder of American Apparel Inc., standing for a portrait in a company retail store in New York, on July 29, 2010. Photographer: Keith Bedford/Bloomberg

American Apparel Inc.’s board is increasingly open to keeping controversial founder Dov Charney at the clothing company, though not as chief executive officer, according to people familiar with the matter.

The retailer, which ousted Charney as CEO almost four months ago in an acrimonious split, is considering giving him a new role, said the people, who asked not to be identified because the deliberations are private. In the meantime, Charney is serving as a paid strategic consultant.

Reaching an agreement with Charney would help stave off a legal fight and preserve continuity at the company, which he founded in 1998. His cause has been helped by Standard General LP, a hedge fund that shook up the board in July and spurred the retail chain to take a second look at the executive.

Charney was removed as CEO on June 18 by the board, which accused him of violating the sexual-harassment policy and misusing corporate funds. He vowed to get his job back and hired Patricia Glaser, a lawyer for celebrity clients such as Paula Deen, to fight the firing. She called the allegations “baseless.”

Despite the feud, Charney has stayed active at the chain, including giving instructions to staff and visiting stores, according to some of the people. Charney has done this even though he wasn’t given supervisory authority over any employees in the agreement that laid out his consulting role. His involvement has led many employees to believe that Charney may remain at American Apparel in some capacity, the people said.

Allan Mayer, co-chairman of Los Angeles-based American Apparel, declined to comment, as did Charney.

Standard General

American Apparel’s stock fell 4.9 percent to 78 cents at the close in New York. The stock has declined 37 percent this year.

Charney, 45, embarked on a campaign to be reinstated at American Apparel in June. He teamed up with Standard General that month and amassed an ownership stake of more than 40 percent. Standard General, which also provided a financial lifeline to the unprofitable company, pushed American Apparel to replace most of its board.

A subcommittee of three directors was then tasked with deciding whether Charney should stay, based in part on information by a new investigation by FTI Consulting Inc. Charney recently made his case in a presentation to the committee, and a decision is expected by the end of next week, according to one of the people.

Interim CEO

American Apparel added another wrinkle this week when it named Scott Brubaker, a turnaround consultant, as its interim CEO. Brubaker replaced John Luttrell, American Apparel’s chief financial officer, who had stepped into the temporary CEO role after Charney’s exit.

Until June, Charney was the only CEO that American Apparel ever had, giving him unique knowledge as to how the company operates. Before his ouster, he had taken on even more responsibilities, including reviewing almost every check the company issued.

Charney’s long-time lieutenants remain at the company, meanwhile, and some have increased their power. As part of the management changes announced this week, the chain promoted executives Patricia Honda and Nicolle Gabbay to the positions of president of wholesale and president of retail, respectively. The company also hired a new CFO from the outside: Hassan Natha, who previously worked at Fisher Communications Inc., Jones Soda Co. and Nike Inc.

CFO Departs

Luttrell’s departure this week also could make it easier for Charney to come back, according to some of the people familiar with the matter. When Luttrell had served as CFO under Charney, the two executives butted heads, they said.

Brubaker, the new interim CEO, also has been communicating with Charney, one of the people said. Brubaker’s consulting firm, Alvarez & Marsal, was hired by American Apparel last month to help with its comeback effort.

The board subcommittee that will decide Charney’s fate has been weighing the evidence of the FTI investigation, trying to assess the validity of the reasons given for his removal in June. Among the allegations: that Charney failed to prevent an employee from creating a website that defamed a former worker, which led to an arbitrator finding that the company acted in malice. Charney also charged the company for personal expenses, the board said in its termination letter in June.

Turnaround Needed

If Charney does stay, he’ll be working to turn around a company that racked up $290 million in net losses since 2010 and has struggled to increase sales. However, there were signs of recovery in its most recent results. The chain, which has more than 240 stores, posted $14.6 million in adjusted earnings before interest, taxes, depreciation and amortization in the quarter ended June 30. That was almost double the Ebitda from a year earlier.

Charney has made a big bet on returning to the company. He borrowed about $20 million from Standard General to boost his ownership to about 43 percent. He also gave up his voting rights to the firm, which then pushed American Apparel to replace most of its board in exchange for $25 million in financing. While hammering out that agreement, Standard General didn’t take a public stance on whether Charney should stay.

Mayer and David Danziger, the board’s co-chairman, are the only remaining directors who voted for Charney’s dismissal. The other five members were replaced in July as part of the Standard General deal. Danziger also is one of the three directors deciding Charney’s suitability to return, along with Colleen Brown and Thomas Sullivan.

Lion Capital LLP, a longtime ally of Charney, exercised its right to name a director to the American Apparel board in August, bringing the total to eight. Lion picked Robert Mintz, a meat-industry executive who has known Charney since childhood.

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