US: American Apparel CEO departure will be viewed positively
Dov Charney was the driving force behind American Apparel’s early success
Despite some longer-term concerns about American Apparel's ability to sustain its brand with CEO Dov Charney no longer at the helm, analysts believe investors will view the news of his departure positively.
American Apparel's share price has continued to rise sharply since the clothing firm yesterday (19 June) revealed its board had voted to oust colourful founder and chief executive Dov Charney as investigations into misconduct allegations continue.
Shares climbed more than 20% in the wake of the announcement and this morning were up 6.72% at $0.68 per share before opening.
In recent months, however, investors have been shedding their holdings of the stock, pushing it down over 40% for the year.
Charney was the driving force behind American Apparel's early success, built on controversial but headline-grabbing advertising and an insistence on making its clothing in the US.
But he has come under increasing pressure recently thanks to the company's poor performance and mounting debts, as well as a series of sexual harassment lawsuits from former employees - which he has publicly dismissed.
Last month the company reported net losses of US$5.5m and a fall in sales at its stores of 7%.
Charney is being replaced as chairman by Allan Mayer and David Danziger, and CFO John Luttrell will take over as interim CEO.
Roth Capital Partners analyst Dave King said that it worries somewhat longer-term about the company's ability to sustain its brand with Charney no longer at the helm making certain fast strategy decisions.
However, he added that American Apparel "remains committed to its differentiated sweatshop-free, 'Made in USA' manufacturing philosophy" and that it continues to see "several areas of near-term low-hanging fruit on the expense side".
According to the terms of its loan agreements, the American Apparel said it "may have been deemed to have triggered an event of default", while adding that it was working with its creditors to figure out a solution.
Indeed, King pointed to the credit default, but noted that bondholders seemingly believe American Apparel was mismanaged at the CEO level.
He added: "We believe investors will generally view this news positively, given perceived prior mismanagement and the potential for reduced future headline risk.
"Meanwhile, we believe John Luttrell is generally well respected by the Street. We continue to recommend APP for its broad global appeal and the potential for a rebound in EBITDA through cost reductions now that DC integration issues have subsided."
The ousting of Charney trigged reports yesterday that the company may now be sold. Co-chairman Allan Mayer, however, told Bloomberg the company is "not pursuing any transaction" and that there were no plans to sell the company.
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