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T-Shirt Lines > American Apparel, What's Next?

American Apparel, What's Next?

Introduction

It goes without saying that American Apparel is a force in our industry. Some would even say it has become the de facto t-shirt for new clothing lines. It is worth the extra money spent because the softness and cut of the AA tee brings a return that is unrivaled. And for the past 6-8 years, we have seen other wholesale brands try to compete but without the same growth and success. Consumers want it, retailers want it, and screen printers can't get enough of it. So can you imagine our industry without American Apparel?

That scenario may soon become a reality. If you haven't heard already, American Apparel is teetering on the brink of financial disaster that could result in bankruptcy. But before I get to that, let's start with the history of American Apparel to create a better understanding of how things got this way.

History

American Apparel ironically was founded in Montreal Quebec by a Canadian named Dov Charney in 1989 after he dropped out of college. His experience in the business came from importing blank t-shirts from the United States into Canada. After taking the traditional first step of outsourcing the manufacturing, he quickly partnered with his manufacturer once the proof of concept took off. The brand moved into its now iconic downtown LA manufacturing plant in 2000 still primarily serving as a wholesale blank t-shirt provider.

In 2006 as the revenue of the company steamrolled into the hundreds of millions of dollars it was purchased for $360 million and ultimately became a publicly traded company by December of 2007. The original founder Dov Charney remained as the majority shareholder. With his financial stake in the company being over 50%, he still had control over the brand and its direction.....especially its advertising. This, by some, can be argued as AA's Achilles' heel while others describe it as the driving force behind the growth. More on the controversies surrounding Dov Charney and his decisions later, but for now let's focus on the growth.

Growth

The blank t-shirts and wholesaling business was simply the vehicle for American Apparel to enter the retail market. The brand had a vision to branch out into retail stores offering an array of items including leggings, leotards, denim, nail polish and even bedding. This was all made possible by the vertical integration of owning and operating a fabric dye house, garment dye house, knitting facility and a 800,000 square-foot production factory. This gave American Apparel the freedom to go from garment idea to garment reality and control each step of the process.

Financially the growth of the company has been exponential. The revenue was in the neighborhood of $80 million in 2003 and incorrectly attributed to the retail stores in a citation by Wikipedia. In a closer look at the cited article, the $80 million was for American Apparel as a whole including the wholesale division and few recently opened retail stores. It was about the time of this revenue benchmark that a more aggressive approach to opening retail stores began.

Since the regulatory filings mandated by becoming a publicly traded company became available in 2005, the year-over-year revenue has seen major increases:

2005 - $201.45 M
2006 - $284.97 M
2007 - $387.04 M
2008 - $545.05 M
2009 - $558.78 M

As we all know though, expenses only tell one side of the story. Since 2003, AA's retail locations have ballooned from just a handful to over 260 storefronts internationally. The capital requirement to establish such an expansive reach is extremely high. While they boast an atypically low amount of cost to open a store, in the range of $100,000-$400,000, the sheer amount of locations creates a high multiplier. This was the fastest retail store rollout in American history and it caused a depletion of the bottom line. (maybe add the video of the interview here) Here is the net income during that period:

2005 - $3.49 M
2006 - $-1.61 M
2007 - $15.48 M
2008 - $14.11 M
2009 - $1.11 M

Many would argue that while the current financial outlook is bleak, if that were the only problem..... the obstacle would not be insurmountable. The darker side to the equation is the fact there is quite a bit of controversy attached to the American Apparel brand.

Controversies

In all of the articles and editorials that I researched while gathering information about this subject, there was always a mention about the controversy surrounding the CEO and founder Dov Charney. Throughout the existence of the brand he has been plagued with sexually related offenses ranging from crude to potentially criminal. There have been numerous sexual harassment cases that have been settled out of court as well as alleged inappropriate sexual encounters. While the salaciousness of the details might make for a good read, we won’t need to go into detail here. The idea is that there is enough history and accusations that arguably have plagued the brand negatively over the years.

For a company that champions higher wages and a better workplace conditions for its workers, it hasn’t received favorable treatment from the government. In 2009 there was a very controversial raid on American Apparel that forced the company to lay off 1800 workers for alleged irregularities in their employment paperwork. This government act has proved devastating in its aftermath as the amount of resources and time spent to hire and train replacements has been extremely taxing.According to CEO Dov Charney, this tragic event is to blame for much of the economic downturn since.

Also, remember when I mentioned before that Charney maintained control by keeping the majority ownership of the shares? When you pair these allegations with one of the most sexual advertising campaigns for a mainstream brand that this country has ever seen, it creates a culture that is considered offensive to many. It creates a very edgy - bordering crude - persona for the brand that is embodied by its CEO. In times of financial strife this can spell doom.

Or maybe not? Isn’t the edgy persona what sets the brand apart from the rest of the crowd? When you are marketing blank t-shirts it is fairly difficult to add sexiness. And if the old adage of “sex sells” has any truth to it then American Apparel is taking it to another level. They routinely have popular porn stars sporting their apparel or scantily clad girls that appear very young and unkept.

The Future

So what does this mean for the future of American Apparel? Since there is no crystal ball with a definitive outlook, there are a couple of scenarios that have been tossed around by those watching from the sidelines. Here are a few situations that have been speculated:

Leave Wholesale Business, Focus on Retail

This would be the worst possible outcome for the screen printing and independent t-shirt line industry. However, as a play for AA it would raise margins but inevitably lower overall revenue. This sounds like a solution that would “cut off its nose to spite its face”. I am certainly biased on this solution but the only other perceivable benefit would be that of reigning in the brand by suppressing supply to boost exclusivity. This move could potentially bolster the brand’s image of high quality t-shirts you can’t get anywhere else but doesn’t provide a defensible position since their marketing pushes an edgier persona.

Leave Retail, Focus on Wholesale

This would take the company back to its roots and simplify operations while reducing marketing costs. However, this move also neglects a major audience in the everyday consumer that is willing to pay for American Apparel. It would also require a major markdown in outstanding debt that could cripple the company during restructuring.

Dov Charney Steps Down

A new CEO with retail/apparel experience and the bottom line in mind could right the ship. This is a very common solution with a flailing business in the corporate world. Dov has lasted longer at the CEO position than most founders do...especially after a buyout. Someone with high level executive experience in the industry, an enormous rolodex of contacts and a clean image could create a whole new outlook for American Apparel. Dov could remain at a board position and maintain his vested interest while still having a vote in the future direction of the company.

Business As Usual, Markets Turn Around

Isn’t everyone’s business hurting a little right now and has been for a while? This recession is one of the worst climates for growth and AA began a hyper-growth stage before the unpredictable downswing in the markets. The consumer markets have been one of the worst hit. Maybe the eventual climb from the depressed bottom and increased consumer spending will be just what American Apparel needs to get back in the black.

Conclusion

Let me make this clear - the intention of this article wasn’t to convey bad news and predict the eventual demise of American Apparel. In fact quite the contrary, the general consensus of my research concluded a positive outlook under the assumption of the markets improving. There are many other strong businesses that have fallen victim to these hard times but it appears that for most that have made it this far....there is light at the end of the tunnel.

It goes without saying that our industry needs American Apparel and hopefully the feeling is mutual. They have pioneered the extremely soft t-shirt and the trendy styles that provided the proof of concept needed for other brands to take the risk and compete in that space.

If you are a fan of AA and don’t want to see them go away, then do your part and buy their apparel. For those that want alternatives, we have put together a list of similar brands that are comparable to American Apparel.

Alternatives to American Apparel

Alternative Apparel

Founded in 1995, Alternative Apparel offers high quality vintage style apparel. It is widely known for its fashionable styles and it extremely soft feel. Alternative Apparel is a great wholesale option for retail quality.
Alternative Apparel

Canvas

The Canvas brand is the men’s line from Bella, a global brand with over 10 years of experience. Bella offers one of the widest array of options for women in the wholesale printables industry and recently released the Canvas line. While a newcomer in the fray, Canvas has come on strong by offering distribution through the same wholesalers that Bella already had existing relationships with.
Canvas Apparel

Royal Apparel

Royal Apparel has been around since 1992 offering trendy styles for men, women and kids. They also offer a 100% organic line for the eco-conscious.
Royal Apparel

Hanes Lightweight Tees

What? Hanes? Yes, while Hanes more popular for their standard tees, they have recently started offering lightweight versions of their tees as a cheaper alternative to options mentioned above. The lightweight tees are in the 4.3-4.5 oz. range and are cut in a slimmer fit than their regular tees.
Hanes Lightweight Tees

Resources:

http://en.wikipedia.org/wiki/American_Apparel
http://www.huffingtonpost.com/2010/08/17/american-apparel-bankrupt_n_685065.html
http://www.stylelist.com/2010/10/05/american-apparel-saved-bankruptcy/
http://www.bnet.com/blog/retail-stores/why-american-apparel-has-a-bright-post-bankruptcy-future/1289
http://www.guardian.co.uk/business/2010/aug/25/rise-fall-american-apparel
http://www.bnet.com/blog/retail-stores/how-american-apparel-lost-its-ass-and-how-it-can-get-back-on-its-feet/542
http://www.bnet.com/blog/retail-stores/american-apparel-8217s-financial-bailout-just-a-finger-in-the-dike/757
http://www.bnet.com/blog/retail-stores/american-apparel-gets-the-perfect-investor-creepy-savvy-billionaire-ron-burkle/744
http://www.nypost.com/p/news/business/item_8bshzEq8NooYkNyYbzyYFI
http://www.dailyfinance.com/financials/american-apparel-inc/app/ase/income-statement
http://americanapparel.net/presscenter/articles/20040322dnr.html
http://blogs.laweekly.com/informer/2010/08/american_apparel_dov_ceo.php
http://www.nytimes.com/2009/10/01/opinion/01thu2.html?_r=1
http://www.alternativeapparel.com/about-alternative/
https://www.royalapparel.net/about.php
http://www.bella.com/Why-Bella.html