American Apparel CEO Finds New Believer Just in Time
Dov Charney has found a new believer, just in time.
The American Apparel Inc. (APP) chief executive officer, facing a debt payment that exceeded his company’s cash on hand, attracted an investment last month from Swiss firm FiveT Capital AG. The infusion gives the unprofitable retail chain more breathing room and represents Charney’s latest success in attracting deep-pocketed investors.
FiveT, a Zurich-based firm run by 35-year-old Johannes Minho Roth, bought about half of the shares in an American Apparel stock offering, helping the clothing chain pay bills and stave off the risk of default. FiveT is now American Apparel’s largest outside investor -- second only to Charney -- with an almost 13 percent stake.
“He’s a visionary,” Roth said by phone. “Dov wants to make it his life goal to make American Apparel into a successful company. I have a very positive view on him.”
Roth, who co-founded FiveT in 2006 and serves as its CEO, joins a long line of investors who have been captivated by Charney and American Apparel’s potential. It’s a list that includes billionaire Ron Burkle and Lyndon Lea, co-founder of hedge fund Lion Capital LLP.
While the chain has racked up about $270 million in net losses since the beginning of 2010, it had been one of the hottest retail brands in the past decade. With its irreverent advertising, U.S.-made goods and tight-fitting clothes, the company almost doubled sales between 2006 and 2008.
In recent years, sales have slowed and losses have piled up, in part because of a costly new distribution center that didn’t perform as expected. That left the retailer facing a cash crunch, with an interest payment of $13.4 million coming in April. Fearing that the company may be headed for default, American Apparel’s bondholders hired advisers to help them strategize, people familiar with the matter said in February.
That same month, the NYSE Amex threatened to delist American Apparel’s stock, citing the chain’s financial state and its inability to meet obligations. The retailer submitted a turnaround plan on March 21. Charney didn’t respond to a request for comment.
Roth, who declined to say how much money his firm manages, had been following American Apparel for about four years and saw a worthy investment. As the shares sank below $1 this year, he became even more interested.
Then he received an unsolicited pitch for the latest stock offering. In the middle of March, he flew to California to see the distribution center and quiz executives, although he didn’t meet the 45-year-old Charney. The visit convinced him that the chain had fixed its logistics, priming it for a turnaround.
The cash raised in the stock offering also should eliminate the risk of a delisting, he said.
“We can’t believe how cheap it is,” Roth said. Especially since “it’s a lot further in the restructuring process than people think.”
Last month’s stock offering raised $28.5 million by selling more than 61 million shares at 50 cents each. FiveT bought 26 million of the shares. Much of the proceeds are going toward covering American Apparel’s April 15 interest payment, an installment on $206 million of bonds issued just a year ago. As of Dec. 31, the company had just $8.7 million in cash.
The move diluted a stock that’s already been battered over the past year. American Apparel fell 22 percent to 59 cents on March 25 when the offering was announced. Since then, it has dropped an additional 18 percent, bringing its 12-month decline to 77 percent. Following Roth’s comments yesterday, the stock rose 6.3 percent to 51 cents as of 10:27 a.m. in New York.
For Roth, that represents an opportunity. He likes that American Apparel’s focus on quality lets it sell clothes at premium prices. And a working distribution center should boost profit margins by lowering costs and put the chain on the path toward Charney’s goal of $1 billion in annual sales, he said. American Apparel posted revenue of $633.9 million last year.
Charney, a Canadian-born entrepreneur, started American Apparel at age 20 and won praise for bucking the industry’s shift to overseas production. Since then, Charney and the company have attracted controversy for relying on sexually suggestive advertising. American Apparel also waged a legal battle with director Woody Allen over the use of his image on billboards. The company paid $5 million to settle that suit.
FiveT Capital mostly invests in small companies and has taken an activist role in troubled businesses. The firm categorizes its stake in American Apparel as non-passive, saying in a filing that it may talk to other shareholders or the company about strategy, management changes and transactions.
Roth said he’s already sharing ideas with Charney. FiveT will focus on helping American Apparel improve its finances, possibly by seeking to lower the interest rate on the retailer’s debt.
One example of FiveT’s past activism came in 2011 when it built a stake in TheStreet Inc. (TST), a money-losing financial news website. It acquired 6.3 percent of the shares and sent a letter to the company calling for a review of its strategy. Around that time, TheStreet CEO Daryl Otte announced plans to step down from the job.
One of FiveT’s funds is still the fifth-biggest investor in TheStreet, at 5.8 percent. Jim Cramer, the host of CNBC’s “Mad Money,” is the company’s co-founder and biggest investor.
In April 2012, FiveT disclosed a 5 percent stake in Plug Power Inc. (PLUG), an unprofitable maker of fuel-cell systems. At the time, the shares traded at $1.29. About a year later, Roth joined the board.
Within a month of that move, Plug Power got a cash infusion from a partner. Then in December it said sales growth would make it profitable this year. The shares have increased more than fivefold since FiveT first made its investment and have surged almost 4,000 percent in the past year.
“It was a similar situation” to American Apparel, Roth said. Both companies “shouldn’t have traded that low.”
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