Does American Apparel's New CFO Mean Adult Supervision Has Finally Arrived?

Last Updated Feb 4, 2011 3:30 PM EST

Two days after American Apparel (APP) anounced it had obtained a waiver from its lenders allowing it to avoid bankruptcy, the company appointed a new CFO: John Luttrell was previously finance chief of Old Navy and Wet Seal, experience which suggests that adult supervision may finally have arrived at the troubled company.

To celebrate the appointment, CEO Dov Charney published another ad featuring a picture originally published in an old porn mag, this one in watercolors (NSFW image below).

The moves come after a stormy few weeks for AA. In addition to the credit waiver, billionaire investor Ron Burkle cut his stake in the company on Jan. 20.

Luttrell is walking into a mess. He replaces Adrian Kowalewski, who presided over a period when the company failed to file its quarterly reports with the SEC first due to "technical" difficulties, and then because AA's accounting firm resigned, and later accused it of hiding data.

AA's problem is simple: It expanded too fast, leaving it unprepared for the recession. It now needs to become a trendier, more exclusive brand to survive, by shrinking its retail footprint and raising its prices. AA's expansion was so poorly conceived that in downtown New York it became almost as ubiquitous as Starbucks (SBUX): It had six stores below 14th Street, a seventh in Williamsburg, and an eighth in nearby Hoboken, N.J. (click to enlarge).

Luttrell's main job will be to squeeze AA's expenses, which Charney has conspicuously failed to do even though the chain has been in financial trouble since 2009. Manufacturing costs and sales and admin costs were all up in Q3 2010, even though sales at AA were falling like balled-up sweat sock heading toward a laundry hamper.

Unfortunately, Luttrell has a lot of responsibility and no power. Lion and BofA relaxed their credit agreement with Charney because the alternative was to demand their combined $121.5 million in debt be paid immediately, which AA cannot do. That would mean Lion and BofA would have to sell or liquidate AA, and be forced to do something they don't want to do: Take cents on the dollars they're owned or become owners of a chaotic fashion advertiser.

What ought to happen is that Lion and BofA should push Charney out of the CEO's office and replace him with an experienced executive. Charney -- who has a genuine talent for picking and marketing new clothes -- could remain as creative director, but he'd have to come under the authority of an operations chief. That won't happen because Charney owns a majority of the company. No one can tell him what to do, no matter how bad things get.

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