American Apparel’s Fundraising Weighs on Shares After OusterRenee Dudley and Lindsey Rupp
American Apparel Inc. investors, after cheering the ouster of controversial Chief Executive Officer Dov Charney last week, are starting to get concerned.
The shares tumbled more than 23 percent in the two days after the company announced the hiring of Peter J. Solomon Co., an advisory firm that will evaluate fundraising options in the wake of Charney’s departure. Yesterday’s 21 percent decline was the biggest single-day drop in almost three months, erasing the gain that followed the announcement of the CEO’s firing.
Solomon is exploring the idea of American Apparel using stock offerings, as well as debt, to generate cash, according to a person with knowledge of the situation. That’s raising concern that current shares will be diluted, further battering a stock that has lost almost three-quarters of its value in the past year. American Apparel also hasn’t yet shown what it’s going to do to restore its former glory as a hip clothing brand, said Poonam Goyal, a retail analyst for Bloomberg Industries.
“It’s fallen off a cliff,” she said. “Something’s got to be done outside of recovering from the bad publicity. They really need to fix the brand, which means the product and the marketing.”
Charney, meanwhile, is fighting to get his job back. In an interview with the Financial Times yesterday, he said American Apparel’s board was running a “hateful PR campaign” against him.
American Apparel says it has enough money to meet its most immediate obligation: a loan to Lion Capital. Repayment of that debt may be accelerated because of a clause in the creditor agreement that’s triggered by a management change. There’s enough cash on hand to cover the debt or refinance it, said Allan Mayer, co-chairman of the Los Angeles-based retail chain.
“There’s no need for additional capital,” he said yesterday in an interview.
American Apparel has been seeking a waiver that would prevent it from having to immediately pay off the debt. Mayer said yesterday that Lion hasn’t made a decision about what to do about the loan, which amounts to about $10 million.
“We have enough cash on hand to pay the loan or refinance -- or we may not need to,” he said. Rory King, a spokesman for Lion at MHP Communications in London, didn’t immediately comment.
When the retail chain announced this week that it hired Solomon, the company said it wanted to ensure that it had “adequate access to capital in the future at a reasonable cost.”
“We believe the hiring of a financial and strategic adviser at this important juncture is in the best interest of our stockholders,” John Luttrell, the company’s interim CEO, said in a statement.
The stock tumbled to 53 cents yesterday, sending its market valuation below $100 million. Today, the shares have rebounded 12 percent to 59 cents as of 10:24 a.m. in New York, though they remain well below last week’s levels. After the board announced the plan on June 18 to suspend and then terminate Charney, the stock climbed as much as 22 percent in intraday trading.
Charney’s legal threats also are weighing on the company. Through his lawyer, Patricia Glaser, the former CEO has said that his firing was illegal and violated his contract. Glaser demanded a meeting to resolve the issue by June 23. American Apparel’s board refused the request to meet, the person with knowledge of the matter said.
Charney’s lawyer, a partner at the Los Angeles-based firm Glaser Weil who represents entertainers and public figures such as Miley Cyrus, called for his reinstatement as chairman and CEO and said she was taking legal action against the company if it didn’t agree.
In a separate filing this week, Charney said he has supporters -- including some American Apparel stockholders -- who want him to remain CEO. He has discussed potential changes to the board and management with those parties. Charney, 45, still intends to hold talks with the company, the filing said. American Apparel’s largest shareholder after Charney, the Swiss investment firm FiveT Capital AG, has said it doesn’t currently plan to support his effort to be reinstated as CEO.
The board has been working to persuade investors and creditors that it did the right thing by firing Charney, who has faced sexual-harassment lawsuits over the years and drawn criticism for provocative ads.
The company investigated Charney’s actions this year and found a history of misconduct that ranged from retaliation to misallocation of corporate funds, the person familiar with the matter said. That included buying plane tickets for family members and using corporate housing for friends and himself that wasn’t related to company business, according to the person.
In the end, American Apparel has to focus on its customers, Goyal said. The company’s main selling point -- that its clothes are made in America -- isn’t enough, she said. Many investors may have lost hope in a comeback, prompting them to sell the stock.
“Who wants to own this?” said Goyal, who is based in New York. “At this point, you can either dump it or see if they can somehow turn things around.”