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California Hustlin'
Urban hipsters love American Apparel's 'sweatshop free' clothes. Can the quirky company find investors?
Jennifer Ordoñez (with Andrew Romano and Joanna Broder)
June 26, 2006

Spend an hour talking to Dov Charney, founder of American Apparel, one of the edgiest U.S. clothing retailers, and the following is likely to happen: he will yell enthusiastically, demonstrating his wild and unapologetic passion for his company—and sexy women. He will defend his right to combine the two as he sees fit and insist he's a "hustler," in the best sense of the word. At some point, Charney—37, single, waifish, styled to resemble a '70s-era porn star, with full facial hair—will offer to show you his underwear, which he designed, and maybe even what's under that. "Sex is good. Business is good. I don't see why I should be ashamed," he says. And if he didn't seem so earnest, it would all seem like one very exhausting shtik.

Dov Charney
Curtain Call: Charney at his L.A. factory

Charney is American Apparel's best asset—and may be its biggest liability. In 1997, with a business partner and a loan from family in his native Montreal, Charney launched a wholesale T-shirt operation in L.A. after an earlier business in South Carolina failed. He opened his first retail store in 2003 and has added 131 since; 60 more are expected by the year-end. Charney says he is turning a profit on revenue that rose to $250 million in 2005 from $20 million in 2001; same-store sales have grown 12 percent in the past year. To take the business to the next level, he's now seeking an initial $40 million cash infusion to fund his vision: providing urban hipsters with logo-free cotton clothing they don't have to shop for in malls. But he's finding that potential investors aren't always hip to his vibe. Maybe that's in part because Charney says a "sexually free" workplace fosters his company's innovation. It can also foster lawsuits. One, filed in L.A. Superior Court by a former employee, accuses Charney of crude language and walking around in (surprise) his briefs; he's fighting the allegations. Last year he settled a suit filed in the same court accusing him of, among other things, sexually suggestive language. Charney also admits to exposing a body part—not his elbow—eight times to a reporter.

Explicit behavior aside, Charney's business is an industry anomaly that might make investors skittish. "There's a generational disconnect between the financial community and our customer and the way our business works," he says. All of American Apparel's items are made at the plant in L.A. where he started the company. He pays 3,500 people $8 to $18 an hour, making them the world's highest-compensated garment workers. Nearly all of American Apparel's competitors outsource manufacturing jobs. "I had a guy from one of the largest banks in the world tell me, 'We can't get our arms around the fact you haven't gone offshore'," says Charney. (He confirmed last week that the company is test-selling "a few hundred pairs" of Thai flip-flops in a half-dozen stores, but says the brand's philosophy isn't compromised: "I make a million pieces of clothing in our factory.") Yet, at $15 to $45, American Apparel's clothing is priced competitively for Charney's core customers: young urbanites who want to look effortlessly cool. "We don't design clothes for a 50-year-old; we don't even care about them," he says. Stores are in hip areas like New York's Lower East Side, where Emily Stein, 27, recently browsed: "You get drawn into the whole thing. The colors, the cuts, the price—even the sweatshop-free shtik. It's a lifestyle choice."

Chic Shtik: A sexy ad for American Apparel swimsuits

In his investor pitch, Charney stresses vertical integration. Operations are consolidated at the L.A. headquarters. This allows for close control of costs, quality, customer service and flexibility: Charney can design a shirt and have it in stores in a week, he says. The speedy turnaround time is credited to Marty Bailey, vice president of operations, who spent 15 years at Fruit of the Loom. His "team manufacturing" system pools the strongest workers to churn out priority orders. Months after he implemented this system, garment production tripled to 90,000 pieces a day, with only about a 15 percent staff increase. Still, at least one clothing company looking recently at American Apparel as an investment was turned off by Charney's behavior, says an exec with the potential bidder who didn't want to be named discussing internal talks. "If the financial guys get offended by superficialities, they can miss a big opportunity," says Charney.

American Apparel has to move many T shirts before it pushes major retailers out of the market. By comparison, Gap Inc.—its 3,000 stores include Old Navy and Banana Republic—rang up $16 billion in revenue last year. But retail analysts say American Apparel could have a formidable future. Charney's eccentricity is a "very compelling reason why customers do business with him," says Greg Whalin, CEO of San Marcos, Calif.-based Retail Management Consultants. Christine Chen, of Pacific Growth Equities in San Francisco, says the company "has differentiated itself. They are on everybody's radar." For now, Charney's focused on a possible denim line. An online retail site that sells vintage products and a lifestyle magazine could both be on the horizon. "Our numbers are not a fad," he says. "But that's hard to prove when a company grows as fast as ours." Keep an eye on it—and on Charney. You know he wants you to.

Patriot Gains
Which items do buyers find most appealing?

Cotton Spandex Boy Briefs
Modeled on Charney's, uh, contours. Turns out that guys like to match their briefs with their T-shirts.
Fine Jersey T Dress
It's a long T-shirt. It's a short dress. It's $26.
Fine Jersey Short Sleeve T-Shirt
Take a plain T-shirt, make it softer and snugger, strip it of logos, and you've got the foundation for a $250 million business.
Interlock Running Short
The late-'70s special returns
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