If you ever wondered where some of these crazy stories come from about visionary founders who are just so over the top it takes a special kind of board to keep them on for the long run or wondered what happened when the visionary founder’s other habits interfere with their ability to stay on as CEO, this story about American Apparel is an amazing exampled.
Full disclosure I am long the stock – in part because of the visionary founder.
Where did it start? Well American Apparel $APP is in the clothing business, cheaply made cloths that have high turnover rates allow for quickly adaptations to styles – faster than anyone else. This makes perfect sense of course. The problem is that most retail chains aren’t fully integrated where manufacturing, distribution, and retail are fully integrated and done by a single company. This allows for sourcing the highest quality products and the best fashion products from multiple vendors.
The CEO of American Apparel threw that model out the window with this cheap clothing idea. He saw a vision for a fully integrated clothing company where all of the manufacturing, distribution, and retail was owned and managed by a single company. They could quickly get the right fashions at the right prices to all of their stores in time to be the most trendy and cheapest place to purchase clothing. A brilliant idea of course. That is what visionaries are good at.
After launching the stores and scaling to a significant footprint, American Apparel went public and Dov Charney (the CEO) pushed the company to move to this fully integrated model. They took on some debt and went for it, upgraded their internal systems, upgraded their manufacturing capacity, finished their distribution center strategy, and were fully ready to operate in an integrated fashion. With the huge cost of these changes their earnings were low, their stock price dropped… and I bought in!
Well as anyone would expect, a tanking stock price, an unproven business model, and a lack of immediate improvement scared EVERYONE. The fully integrated operations weren’t fully operational right away and the question came up about the loan terms versus the profitability – would there be enough profits in time to pay off the loans? What about this Dov guy… was he just off his rocker on this one?
The stock market media started digging, the board started digging, and the price wasn’t recovering. Meanwhile the distribution center was still waiting to come online and the real vision hadn’t been put to the test yet. Then this incident gets thrown into the mix….
WARNING NSFW – NUDITY
Yes that is the well hung visionary CEO… Dov dancing naked in his private apartment with a couple of employees filming him (no need to watch if you’d rather not). As you may have guessed – I have no idea if this incident led to the next but this video appeared right after the board announced they would be firing the CEO with cause.
Here we are – we haven’t fully tested the complete vision of this startup apparel business, the behaviors of the CEO (we still don’t actually know which behaviors) get him in hot water with the board, and now the question of those loans comes into play. Will the debtors call the loans due to their change of control provisions?
Of course this CEO who’s been thrown out on the street from the company he started isn’t too pleased with the way things were handled so he isn’t going to take it lying down either. He’s going to get up and dance until all the cloths come off…ok – maybe over the top. But he decides to take his 27% ownership stake and go after more of the company so that he has a little more control in the matters of his company – as a shareholder.
Over this last weekend the board freaks out and adopts a poison pill to protect against any unsolicited takeovers. Could be overboard… but it may be a prudent move as well. Ultimately this problem of the man with the plan and the team to execute the plan need to be reconciled. Perhaps the vision is clear for the team at this point – on the other hand the inspiration of the visionary may still be required to wade through the tough times to see the vision to completion and make the right choices along the way.
This leaves us with a visionary CEO who is exposed, naked on the internet, fighting for every last thread of dignity. A board who is unsure what to do next and scared about how to balance their fiduciary responsibility to shareholders and the future of the company. Some debtors who understand the vision (or else there wouldn’t have been a change of control provision), but need to protect their capital. Of course a story that should be followed by every investor of growth companies and a prime example of a MBA case study in the making.