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CEO Gaffe of the Week: American Apparel

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Last year, I introduced a weekly series called "CEO Gaffe of the Week." Having come across more than a handful of questionable executive decisions when compiling my list of the worst CEOs of 2011, I thought it could be a learning experience for all of us if I pointed out apparent gaffes as they occur. Trusting your investments begins with trusting the leadership at the top -- and with leaders like these on your side, sometimes you don't need enemies!

This week, I plan to put American Apparel (NASDAQOTH: APPCQ  ) CEO and founder Dov Charney on the hot seat.

The dunce cap
We'll get to the main reason that Dov Charney worked his way to this dubious honor in a moment, but first let's take a look at how American Apparel, a branded retail chain of around 250 stores nationwide, could probably have gotten here on its own, without the help of Mr. Charney.

American Apparel's recent same-store sales results might suggest that a rebound is in the offing. Its December same-store sales, released yesterday, showed a 15% boost over the previous year, including a 59% boost in online channel sales. But dig a little deeper and you'll discover a company that's in a serious amount of trouble and is simply fighting for survival through deep discounts and serious cost cuts.

Peers Aeropostale (NASDAQOTH: AROPQ  ) and Abercrombie & Fitch (NYSE: ANF  ) rely on branded merchandise to drive sales, but ran into trouble when consumer spending in the U.S. and Europe fell off a cliff during the recession. American Apparel is in even worse shape. The retailer has responded by closing stores and offering big discounts to move merchandise, which has resulted in some cost savings, but it's done nothing to help its weak margins. Even the more stable Abercrombie & Fitch took until only recently to turn its fortunes around, while Aeropostale is still struggling to rid itself of excess inventory.

To make matters worse, some of American Apparel's peers, like American Eagle Outfitters (NYSE: AEO  ) and Gap (NYSE: GPS  ) are actually thriving. Gap reported a 5% surge in same-store sales for December yesterday, while American Eagle, which doesn't report same-store sales on a monthly basis, has been using its debt-free balance sheet, $545 million in cash, and growing cash flow to expand its presence nationwide. 

American Apparel, on the other hand, is sitting on just $7.2 million in cash while supporting $180.3 million in debt. It hasn't turned an annual profit since 2009 (and even then it was only $0.01), and has burned through about $60 million in cash over the past three years as it attempts to transform its operations in a very weak spending environment.

To the corner, Mr. Charney
Now that we know a little bit about what put American Apparel in the dunce column, let's take a closer look at why Dov Charney deserves a wag of my finger.

Early last month, a former manager of an American Apparel store filed a lawsuit against Dov Charney for wrongful termination. Cited within the suit, the manager, Michael Bumblis, claims that Charney choked him, rubbed dirt in his face, and made derogatory comments to him, and that his then-co-workers were forced to sign confidentiality agreements not to discuss what they'd witnessed. This Jerry Springer-like episode hasn't gone to trial yet, and American Apparel's spokesperson has denied all allegations, so I'll have to pass on rendering my verdict for now. 

But what I can note is that Dov Charney has been sued on at least 25 (that's twenty-five!) previous occasions, as reported by InvestorPlace, by everyone from shareholders in American Apparel to former co-workers claiming sexual harassment. Either Dov Charney is one unlucky person with power, or trouble seems to follow this corporate leader everywhere!

Do you have a CEO you'd like to nominate for this dubious honor? Shoot me an email and a one- or two-sentence description of why your choice deserves next week's nomination, and you just may see your suggestion in the spotlight.

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