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Fired CEO Fires Back at American Apparel

Source: Wikimedia Commons.

This is going to be one of those cases where it was damned if it did and damned if it didn't, but American Apparel (NYSEMKT: APP  ) really has no one but itself to blame because it took so long to fire its CEO. While it's said the termination was "for cause," the board of directors didn't go into specifics as to why, and now Dov Charney is firing back, planning to challenge being let go.

That puts the teen retailer in a quandary. Had they kept him around, it's possible it would have invited more lawsuits against the company for the ex-CEO's alleged inappropriate behavior, which is what is speculated caused the termination. But firing him so suddenly after all this time all but assured he'd fight back, and now the retailer has to spend precious capital it doesn't have in defending its action.

Of course, had the board acted sooner, say, after the first half-dozen or so accusations of impropriety, American Apparel wouldn't be caught between a rock and a hard place, but because it didn't, it now needs to battle the marketplace and its rogue executive.

The company is saddled with debt. With just $16 million in cash at the end of the March quarter, but more than $214 million in long-term debt, American Apparel generated slightly less operating cash flow than it was spending in capital expenditures, making it cash-flow-negative. Sales in the first quarter fell 1% as comparable sales tumbled 7% from the year-ago period, and the trend is accelerating from prior quarters.

Source: American Apparel SEC filings.

It may be tolerable up to a point to have an executive involved in alleged shenanigans when the company's producing; when performance runs off the rails and the litigiousness doesn't abate, he becomes a liability.

However, The Wall Street Journal reports that, typical of how boards operate, the retailer gave Charney an ultimatum to quit and receive a $1 million payoff offered in the form of becoming a "consultant" to the company for a period of years, or be fired. Since Charney rejected being ousted, the board voted to strip him of his chairman's position and will fire him from his CEO spot after a 30-day "cure" period, the theoretical time frame Charney has to fix whatever the problem is.

In a filing with the SEC on Monday, Charney said that since he's received support from certain large investors for staying at the helm of the company he founded, he plans on fighting the termination. Complicating the matter is the fact that Charney owns more than 27% of American Apparel's stock.

Although the company's shares got a bounce from the original announcement of the termination, they initially fell back to their previous level and yesterday cratered another 20% as it becomes apparent the retailer is in trouble regardless of who is at the helm. While the management team that was appointed to step in to replace Charney says the company's not for sale -- but wouldn't turn up its nose at a $10-per-share offer (not likely since it's currently trading for well less than $1) -- it's clear the retailer's options are dwindling.

When it publicly announced the news, American Apparel also said it may be violating its debt covenants by firing Charney and is in discussions to forestall that from happening. With sales falling, comps plunging, and persistent losses widening, the crevice it's wedged itself into becomes more difficult to extricate itself from. It's now considering raising more cash to stay afloat.

Considering the seriousness of previous accusations against its CEO and the costs to the company that's entailed -- and may still entail in the future, even if it survives -- American Apparel investors may feel like they've been caught between a hammer and an anvil.

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Rich Duprey

Rich has been a Fool since 1998 and writing for the site since 2004. After 20 years of patrolling the mean streets of suburbia, he hung up his badge and gun to take up a pen full time.

Having made the streets safe for Truth, Justice and Krispy Kreme donuts, he now patrols the markets looking for companies he can lock up as long-term holdings in a portfolio. So follow me on Facebook and Twitter for the most important industry news in retail and consumer products and other great stories.


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9/3/2015 10:57 AM
APP $0.18 Down +0.00 -2.20%
American Apparel CAPS Rating: *