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American Apparel Hopes Porn Ads Will Save It From Financial Troubles

Last Updated Jan 19, 2011 2:26 PM EST

American Apparel has built a fast-growing empire on some of the most risque, porn-influenced ads ever seen in mainstream media. Those ads appear to have been successful: The chain reported a 3 percent sales gain in December when other retailers tanked; and said it will post a 10 percent same-store sales gain for the full Q4 2008.
But not all is well inside American Apparel. A closer look at the company reveals a heavily indebted organization threatened by multiple lawsuits against its CEO, Dov Charney. And American's own advertising may be the straw that weighs those suits in favor of some of the plaintiffs.

Everyone knows that American Apparel's ads are sexy. They usually feature coy, semi-dressed women lounging on a bed or sofa. The photos, often shot by Charney himself, have a home-made-porn quality to them.

But it's not until you gather a bunch of them together that you realize quite how over-the-line some of them are. You can go here for a NSFW collection of the 30 porniest American Apparel ads. And these two links (here and here) will give you an idea of just how porn-reliant the American brand is.

The problem is that CEO Charney is the subject of at least three sexual harassment lawsuits and a new suit alleging financial mismanagement in Europe. The latter case claims that some female employees were given favorable positions at the company because of their relationships with Charney.

In harassment and discrimination cases, plaintiffs generally have to prove a "hostile environment" existed, and so American Apparel's own ads -- which include shots of porn star Sasha Grey's pubic hair -- could well feature as examples of that environment.

The fact that the stores themselves -- where the employees work, duh -- have porn in their shop displays, allegedly at the direction of head office, will not help matters either. CBC reports that:
The quarterly magazine [in the display], BUTT, focuses on homosexuality, and it is available for sale worldwide. [A mom offended by the store display] said she complained to store staff, who said it was a head-office decision to put the magazine in the display.
Fine. So Charney might have to pay some settlements. So what? The thing is, although American Apparel is growing fast, it doesn't make that much money. Its Q3 sales were $155 million, but it only made $2.3 million in profit. Why? It has staggering operating expenses that eat its revenue at $70 million a quarter, which include the cost of its debt load. Here's a snapshot of that debt:
  • Cash on hand: $14 million
  • Current liabilities: $172 million
You'll note that American Apparel's web site shows its income and balance sheets, but not its cashflow statement. You have to dig around with the SEC for that, and here's the bottom line: In the first nine months of 2008, American Apparel lost $5 million.
The result is that American Apparel's stock has dropped from a high of around $12 last February, and now trades in the $2 range.

So the company's annual report, due any day now, is going to look very interesting indeed. Its cash will go up because of the new loans it has, and so will its debt, and thus its cashflow statement may turn positive for the year. Whether it can keep its operating and debt service expenses down enough to show a profit on paper will be another question. And then there's the issue of whether those numbers are even reliable Here's what WWD and the LA Business Journal have to say:
two former employees -- Bernhard-Axel Ingo Brake, the former managing director of much of American Apparel's European operations, and Robert Hernandez, a former IT worker at the company's Los Angeles headquarters -- ratchet up the charges by including claims of financial malfeasance,
Brake, who was fired in September, said he repeatedly warned Charney that French law prohibits compensating employees in a way that would deliberately lower the company's tax burden. That included compensating employees in cash and in American Apparel clothing, and masking some compensation as reimbursement for expenses.
[Their lawyer] is representing another former male employee of the company's L.A. accounting office who sued last month, claiming Charney attempted to pressure him in 2006 to inflate figures on the company's balance sheet as the company was working to attract investors.
Those porn-based ads may make the company grow, but they will not save it from its the investors, bankers and lawyers.