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American Apparel Nears Bankruptcy

With huge losses and slumping sales, the hipster clothing brand says it "may not have sufficient liquidity necessary to sustain operations."

Photo by American Apparel via Getty Images

DOV CHARNEY Founder of American Apparel

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From cavorting in the company's factory in his underwear to calling his models "sluts," American Apparel CEO Dov Charney has been a whiz at making headlines – but that talent is unlikely to save his company.

The bright, breezy (and slightly sleazy) clothing brand could go bankrupt shortly, according to a company press release. The 2007 Inc. 5000 company announced that slumping sales (down 16 percent), huge second quarter losses (somewhere between $5 million and $7 million), and the likelihood that it will breach the terms of its loan agreement with its main lender "raise substantial doubt that the company will be able to continue as a going concern" and that "the company may not have sufficient liquidity necessary to sustain operations for the next twelve months." The Los Angeles-based retailer – which went public in 2007 -- said its debt had risen to $120.3 million.

The troubled company's auditor, Deloitte, resigned in July in a fight over how to value the stores. A newly appointed auditor, Marcum, is reviewing the accounts, but the New York Stock Exchange was threatening to yank the clothier's listing if its quarterly reports weren't filed by August 16. (Were they filed? "I couldn't tell you," CEO Dov Charney told Jezebel Tuesday, though the reports were indeed filed.)

Charney, 41, turned to entrepreneurship early, importing Hanes and Fruit of the Loom t-shirts into Montreal as a teenager. He moved to the U.S. to attend Tufts University in 1987, but dropped out to pursue his business full time. He moved to Los Angeles in 1997, and in 2003, he opened his first American Apparel shop, quickly building it into an international chain of 280 stores that employs some 10,000 people. (Read an Inc. profile of Charney.)

Over the years, Charney's behavior and speech have often been as colorful as the company's bright wardrobe staples. He's appeared on a video on the company's website in his underwear, and is open about having relationships with women who work for him. "I'm not saying I want to screw all the girls at work," he was quoted as saying in Jane magazine in 2006. "But if I fall in love at work it's going to be beautiful and sexual."

There's been an outcry over the underage-looking girls that appear in provocative poses in American Apparel's ads. Charney once referred to his models as "sluts" and then defended himself by declaring "Some of us love sluts."

Charney blames the company's current financial woes on a police raid on the American Apparel factory in Los Angeles last year, which revealed that one in three employees was in the U.S. illegally. Replacing them has caused a massive disruption. Charney recently boosted the company's campaign for amnesty for illegals under the slogan "Legalize LA."

Charney told Bloomberg BusinessWeek earlier this month: "A lot of assumptions that I grew up with are no longer reality. Those were things that we could rely on: that lenders will always be there, that they'll behave ethically and they'll always have money, that you can trust that as the sun comes up the consumer will be healthy, that we'll always be close to full employment in developed nations. Now there are no certainties."

Last updated: Aug 18, 2010

Inc. contributing editor COURTNEY RUBIN was for five years a London-based staff writer for People magazine. Rubin, a former senior writer for Washingtonian magazine, has written for the New York Times magazine, Time, Marie Claire, and other publications. She is the author of The Weight-Loss Diaries.




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