How American Apparel's CEO Turned a Crisis Into a Pay Raise

Last Updated Nov 16, 2010 2:53 PM EST

American Apparel (APP) shows no sign of pulling out of its nosedive, according to its Q3 2010 earnings report, which showed a 9.3 percent decline in revenues on increased expenses. The decline of fashion's most brazen advertiser is quickening, not slowing down.

The report brings AA up to date in its filings with the SEC, but that's the only thing going right at the company. Everything else is headed in the wrong direction. Although CEO Dov Charney secured new financing from Lion Capital to tide his company through its crisis, AA has yet to pay off Charney's personal loans to the firm, made when the company first entered its crisis, on which Charney is charging 6 percent interest.

The company made a loss of $9.5 million on sales of $135 million in part because of increased selling expenses -- the budget line for advertising, marketing and store sales staff -- which went up 7 percent to $55.2 million. (AA did not break out its ad expenses specifically this quarter even though it has done in the past.) AA also incurred greater costs following its move away from basics like T shirts and leggings to a more tailored, preppy look. Its profits were negatively impacted by "a shift in mix towards more complex retail styles which have a higher cost of production," the company said.

The sales loss occurred mainly in its stores. Its wholesale and internet business remained steady but retail outlets lost 14.3 percent of their revenues.

Charney has not accrued any of his bonus payments for the year, the company said. The company is performing so poorly that he may well receive no bonus this year. His base salary is $750,000.

But Charney has boosted his income with two loans to the company totalling $8.5 million, according to the 10-Q. He's charging 6 percent interest on that debt, and accrued $70,000 in interest owed this year alone. Last year he earned $206,000 in interest by the third quarter. Without his bonus, that's the equivalent of a 9.3 percent boost to his salary. The loans are due in 2012 and 2013.

AA declined to explain why the company does not discharge the debt and reduce its interest expenses, despite repeated requests for comment.* AA spokesperson Ryan Holiday wrote in an email:
I imagine the company keeping the loan has something to do with the fact that Dov's interest rate is less than half of the terms of Lion's loan--which again, undermines your premise that is now floating around the blogosphere.
Peter Schey, a lawyer for American Apparel, said in an email:
While the company's sales remain disappointing, we are working to increase revenues in several ways, including improving efficiency in the manufacturing process and transportation of goods to retail stores, closing or relocating a small number of stores, and upgrading the interiors of some stores. We remain confident that revenues will show a positive trend in 2011. Regarding CEO Dov Charney's loan to the company, this has not been repaid both because the terms of the loan are more favorable than loans available from other lenders, and the company's current cash flow does not make this the best time to repay the loan.
The $8.5 million Charney is owed is slightly more cash than AA has on its balance sheet, despite taking in $44 million in cash from creditors during the quarter.

*UPDATE: This item has been updated with comments from AA's Schey. Readers should also see Schey's response in the comments section, below.
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