Not long ago, it was the undisputed king of hipster cool, churning out simple, understated v-neck shirts and leggings while growing at a breakneck pace. Now, American Apparel is facing an increasingly unruly group of investors and three shareholder class action lawsuits, and analysts are beginning to wonder how much longer the retailer can survive.
It's a stark turnaround for the company that touts itself as the largest clothing manufacturer in the United States. For over a decade, AA was strictly a wholesaler, providing blank T-shirts to retailers across the country. The company went retail in 2003, and has since opened a jaw-dropping 260 locations worldwide -- an expansion that CEO Dov Charney says is the fastest in American history.
AA quickly gained a reputation as exacting and humane, producing simple, high-quality items while refusing to outsource their production. Employees at the company's Los Angeles factory are given full health care plans, paid more than twice the minimum wage, and are permitted to make international phone calls during work hours -- free of charge.
Those liberal policies, paired with tasteful design and eye-catching ads, made AA an attractive alternative to big-name retailers like the Gap and Banana Republic, especially for young shoppers. And the strategy paid off, with AA reporting $545 million in sales as recently as 2008.
But if the retailer's rise was precipitous, its fall is shaping up to be the same.
Last month, Deloitte & Touche, AA's auditor, resigned after reporting "material weaknesses" in the retailer's financial controls, a finding that has sparked a federal investigation.
AA's stock, which reached a high of $16.80 in December 2007, is also not what it used to be. Shares have plummeted 45 percent in the last two weeks alone, from $1.39 on August 16 to $0.76 on Monday. (For comparison's sake, as of Monday, competitors Urban Outfitters and the Gap were trading at $30 and $16 per share, respectively.)
And, as is often the case, that stock decline has sparked a series of shareholder class action lawsuits -- three in the past week alone. One of those suits claims the company "violated federal securities laws by issuing material misrepresentations to the market concerning American Apparel's operations and financial performance."
Worse, the American Stock Exchange has threatened to delist the company -- that is, remove its stock from the market altogether -- if it fails to file its quarterly statement soon. The company originally promised to file the statement by September 15, but now says it might need until November.
The company has even come under pressure over its once-renowned personnel practices: last year, a federal crackdown on illegal immigration forced AA to fire 1,500 workers -- a number that amounted to 15 percent of its workforce.
AA's melodrama is, at least, consistent with its founder's reputation. Charney, who started the company as a college student in 1989, has been a controversial figure for some time. He is known to walk around the company's factory in underpants, and has settled at least three sexual harassment lawsuits brought by female employees.
While it's too soon to say whether American Apparel is destined to go the way of Circuit City and Tower Records, the company's recent actions aren't likely to soothe many stockholders' nerves. In its preliminary quarterly report, AA said it might not be able to continue as a "going concern," suggesting that it is at least considering the possibility of bankruptcy.
A more subtle -- but perhaps equally troubling -- development is the company's planned 180-degree change in style, as it moves away from its mainstay line and begins producing preppier clothes like pleated pants and blazers. Regardless of whether AA ultimately pulls itself out of the fire, it is certain to go down as one of the more unlikely stories in American clothing.