American Apparel: Sticky Changeover?

American Apparel: Sticky Changeover?

Yesterday, American Apparel officially terminated its CEO and founder Dov Charney and replaced him with veteran fashion executive Paula Schneider. But that may not be the end of the beleaguered Los Angeles–based company’s woes.

Schneider, who will take the helm on Jan. 5, has served in senior management roles at both BCBG Max Azria and Laundry by Shelli Segal.

Officially, American Apparel says its board terminated Charney “for cause in accordance with the terms of his employment agreement.” These causes include misuse of company funds, purchasing travel for family members with company funds, sexual harassment lawsuits by former employees and failure “to stop publication of nude photos of a former employee who had sued him for sexual harassment, among other allegations” that Charney's lawyer has called “baseless.” Charney's sexually explicit ad campaigns and store mannequins boasting pubic hair have also drawn fire.

Charney, who founded American Apparel as a wholesale T-shirt company in 1998, was suspended in June for alleged misconduct and violating company policy. Since then, he has served as a paid consultant for the company, continuing to earn his base salary of approximately $800,000, Bloomberg reports.

The final ouster of Charney was determined by the board after it brought in FTI Consulting to conduct an internal investigation.

“Naturally, I am disappointed with the circumstances,” Charney said in a statement. He also vowed, “as [American Apparel’s] largest shareholder,” to maintain “a strong relationship with the company in the years ahead.”

Charney retains a 43 percent stake in the company, although he shares voting rights with hedge fund Standard General.

In response to Charney’s termination, the Los Angeles Times reports that by 10:30 a.m. EST this morning, American Apparel’s shares had already risen as high as 17 percent. That’s after Tuesday’s rise of 3 cents per share from Monday’s close to 58 cents, but remains far lower than its $2-per-share price at its peak in 2013. After going public in 2005, American Apparel reached a market value of $850 million in 2007, but as of today is worth only $101 million, according to Bloomberg.

But while the stock market approves of Charney being replaced by Schneider, a core group of American Apparel executives do not. According to a letter to the company’s board of directors, which was obtained by Bloomberg, if more than 30 Charney loyalists have their way, Charney’s “relationship” with the company could make things difficult for Scheneider.

In the letter, the pro-Charney executives complain that they were not consulted before the decision to terminate Charney was made. They claim that, as “the people in the day-to-day trenches” they “know what this company needs in order to reach its immediate and long-term potential.” Two people associated with American Apparel told Bloomberg that the board tried to settle with Charney rather than fire him, by offering him an advisory role at the company, but he did not accept it.

Meanwhile, Charney’s lawsuit against American Apparel for defamation and breach of contract may intensify. It appears that Schneider has her work in changing the company's work culture and regaining its public credibility cut out for her. And so, apparently, still does American Apparel.

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