American Apparel Has No Good Alternatives

Rumors swirl that ousted CEO may yet helm the company he founded.

Jul 1, 2014 at 10:29AM


Source: Wikimedia Commons.

American Apparel's (NYSEMKT:APP) decision to oust its CEO for alleged "willful misconduct" might just result in the bizarre scenario of Dov Charney back at the helm of the fashion retailer he founded. Without many options open to it to stave off a default that could lead to insolvency or bankruptcy, the fashion retailer may need to issue a mea culpa and take back the executive that put it in this predicament.

There have long been whispers (and some shouts) about the executive's curious idiosyncrasies, which apparently then led to an internal investigation into his supposed shenanigans and then his dismissal earlier this month. Without specifying what exactly he did wrong, the board of directors fired Charney and replaced him with its executive VP and CFO. 

Naturally, Charney denies any wrongdoing and has fired back that he won't go quietly. U.K.-based lender Lion Capital, which owns 12% of the retailer's stock and is said to have been friendly with the CEO, has reportedly refused to waive the accelerated repayment of a $10 million loan that was triggered when the board ousted the CEO. The board has apparently called in its own backup in the form of Capital One Financial, which has debt considerations with the retailer that could be brought into play if Lion doesn't relent, and was reportedly in negotiations with both Lion and the board. A third lender, Cerberus Capital, was also reported to be willing to renegotiate terms of its loans with American Apparel.

Under Capital One's $50 million line of credit to American Apparel, of which $30 million has already been drawn, any default on one loan triggers a default of its credit line. The retailer warned that it risked bankruptcy or insolvency by firing Charney, alluding to the terms of its debt, but still felt it was necessary to let him go. Lion Capital, however, apparently on friendly terms with the executive, was rumored to be miffed at American Apparel's coyness about revealing his offenses.

Additionally, Charney has backing from hedge fund operator Standard General, which filed notice with the SEC that it would attempt to acquire 10% of the retailer's stock and lend it to Charney to gain even greater control of the company. Standard General's maneuver caused the board to adopt a one-year poison pill defense that would prevent someone who owned 15% or more of company stock from acquiring more, which it says isn't designed to preclude a takeover of the company, just to halt "creeping control."

However, Charney surprised everyone this morning, declaring he now owns almost 43% of American Apparel's stock, as the hedge fund bought a tranche equating to 17% of outstanding shares. Standard General bought 27.4 million shares last Thursday and Friday at a price of $0.715 a share, plus an additional 1.54 million shares yesterday at $0.91 per share.

While shares of American Apparel have nearly doubled since the firing, they closed down by nearly 7% yesterday on the possibility that Lion Capital has really called in its loan. Scrounging for cash as it is, the retailer has few options available to pay all the debt back. No one else would lend it money given that the company was already struggling before the drama unfolded, and raising funds via an offering could be difficult, as American Apparel is already approaching the ceiling of its authorized share count. 

While the retailer is putting up a brave front, saying it thinks it still has the resources on hand to pay back Lion Capital, it's rumored the company suggested to Lion over the weekend that they would take Charney back to make the problem go away.

Taking back Charney is an option, but certainly not a desirable outcome. With all the previous accusations of harassment and inappropriate behavior at this point, there would seemingly still be liability attached to his presence that would rule out a speedy acquisition by some potential buyer. And whatever the offense was that the board allegedly uncovered that finally drove them to take this action is still hanging over its head. However, if Charney goes over the 50% ownership threshold -- if he can convince another shareholder to loan him their shares and push him above the limit -- he could go so far as to move to rehire himself!

In short, the board has no one to blame for its predicament but itself. There were plenty of warning signs that its CEO's predilections were more than peccadilloes, and the longer it kept him on, the greater its own liability grew. Now having finally acted, it may have boxed itself into a corner from which it can't be extricated, and Dov Charney may yet become the once and future CEO again.

Leaked: This coming device has every company salivating
The best investors consistently reap gigantic profits by recognizing true potential earlier and more accurately than anyone else. Let me cut right to the chase. There is a product in development that will revolutionize not just how we buy goods, but potentially how we interact with the companies we love on a daily basis. Analysts are already licking their chops at the sales potential. In order to outsmart Wall Street and realize multibagger returns, you will need The Motley Fool's new free report on the dream team responsible for this game-changing blockbuster. CLICK HERE NOW.

Rich Duprey has no position in any stocks mentioned. The Motley Fool owns shares of Capital One Financial.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers