American Apparel Turns Out to Be Vulnerable After All

Last Updated Jul 14, 2009 8:04 PM EDT

Retailer American Apparel -- no stranger to controversy -- is finding itself in a sales slump that could be tougher to overcome than the other strange dilemmas it seems to face regularly. While the retailer continues to push aggressive expansion plans that have won it plaudits in the past, that won't help its newest problem: Weak store productivity.

The retailer is still opening stores, debuting one each in New Jersey and Japan last month, but now it's turning in a consistently poor sales performance, unlike prior periods of great gains. June same-store sales plunged 13 percent year over year, bringing it down 10 percent for the entire second quarter.
Granted, it's a tough time for apparel in general, with many of the major chains' sales getting hit especially hard in June. But one wonders if American Apparel is simply seeing its shtick run out. Fueled by a supposed "hipster" appeal and an advertising campaign punctuated by half-naked young women, the retailer essentially sells T-shirts, sweatshirts and other basics. They're decent quality products, but are consumers, no matter how hip, really going to pony up for $50 hooded sweatshirts nowadays?

Also at issue is the company's rapid store expansion over the last few years. There are currently about 270 American Apparels in 19 countries, up from 190 a year ago. In some areas, like this part of Brooklyn, N.Y., stores are extremely close together. To its credit, management is cutting back to only 30 new units this year, but American Apparel still grew pretty large awfully fast.

While the sales slide picks up momentum, the negative publicity continues. Earlier this month, the company said the feds found that about 1,600 of its workers were not legally able to work in this country due to their immigration status. That disruption follows a bizarre $5-million court settlement with director Woody Allen, after he sued American Apparel for using an image from his film "Annie Hall" on a billboard advertisement. Prior to the settlement, the company's attorney threatened to bring up Allen's well-publicized past in court.

Aside from these newer flash points, American Apparel's advertising campaign is always one that's stirred things up. Not to mention allegations of founder Dov Charney's sexual misconduct in the workplace, which he's repeatedly denied.

None of those earlier issues impacted American Apparel's sales. But the mantra "all publicity is good publicity" might not work anymore for the retailer, at least on Wall Street, where the stock is hovering around $3 after a 52-week high of $10.25.

As Matthew Wiger, director of research at securities firm Monness, Crespi, Hardt & Co. recently told the Los Angeles Times: "As a concept, American Apparel has the potential to be the next Gap, but there's always some sort of issue. And those issues over time have not helped build management's credibility with investors."

American Apparel probably hopes it doesn't become the next Gap -- a bloated outfit, now far from hip, that over-expanded and reports continually disappointing sales. But AA's recent performance and its testosterone-fueled growth might take it there anyway, bad publicity or not.