First Reference company logo

Inside Internal Controls

News and discussion on implementing risk management

machine cogs image

Will poor management decisions mean the end for American Apparel?

Image from:

Image from:

You’ve probably heard of American Apparel, the Los Angeles-based clothing manufacturer and retailer that’s so popular with the kids these days, they of the semi-controversial billboard advertisements and almost-certainly-controversial CEO Dov Charney. Well, maybe you haven’t heard just how much many commentators dislike the company.

If it’s not their ads, which may or may not exploit their young female employees, then it’s their practice of hiring only a certain type of person (viz. young, attractive, fit, hip and female) to work and manage their stores. Of course we mustn’t forget the allegations that their “sweatshop-free”, “Made in downtown L.A.” image might be supported by cheap and possibly illegal Mexican immigrant labour, and the company’s ambitious expansion, which sees several stores open in close proximity and proceed to cannibalize sales from one another.

The latter charge is why Jezebel, an online magazine that seems to have a particularly strong distaste for the company, recently claimed “American Apparel’s bankruptcy is inevitable“. The article cites AA’s sales reports, finding that despite overall sales growth, “same-store” sales declined every month in 2009. In other words, while the company’s retail expansion has led to higher sales overall, sales at individual stores are steadily declining. Add in the costs of expansion—building, hiring, marketing, etc.—and Jezebel thinks AA is on a course for ruin.

The company’s former external auditors Deloitte & Touche seem to feel the same way. The auditing firm quit AA after finding “material weaknesses in internal control over financial reporting” and that the company “hadn’t maintained effective internal control over financial reporting” as of the end of 2009.

For the time being, American Apparel is still kicking; I doubt customers have noticed much of this in stores. We’ll just have to wait to see the result of these questionable management practices.

Still, I think companies can learn a number of valuable lessons about running a business from the case of American Apparel:

  • Avoiding lawsuits may be as easy as keeping your pants on
  • Accounting and financial reporting are best left to professionals
  • Sometimes it’s best for executives to stay out of the spotlight
  • Can you say “discriminatory hiring”?
  • Don’t let frivolous initiatives get in the way of meaningful foundational principles (in this case, for example, rapid expansion vs. “Made in USA”)
  • Controversy can work to draw attention to a brand or company, but it’s only an overarching business strategy like poutine is a meal (hint: it’s a side)

Adam Gorley
First Reference Human Resources, Internal Controls and Compliance Editor

Maybe if Mr. Charney had looked through Finance & Accounting PolicyPro (FAPP) from First Reference, he would have made some different decisions along the way. FAPP offers advice and sample policies on everything from General accounting procedures to Internal controls and Reporting. But he might have gotten the most out of the Governance volume which covers Ethics and business conduct, the Role, rights and responsibilities of executive officers, General management, Public relations, Risk management, and much more.

Follow me

Adam Gorley

Editor at First Reference
Adam Gorley, B.A. (Phil.), is a researcher, content provider and editor. He contributes regularly to First Reference Talks and Internal Control blogs, HRinfodesk and other First Reference publications. His areas of focus include broad human resources issues, corporate social responsibility, corporate governance and government policies, information technology and labour market trends.Read more
Follow me

, , , , , , , , , , , , , ,

Comments are currently closed.

2 thoughts on “Will poor management decisions mean the end for American Apparel?
  • Adam Gorley says:

    Now that you mention it Ronny, I’ve noticed the same thing about Shopper’s stinky cosmetics sections: usually the only people I see milling around are employees. Not that I stick around; the overpowering fragrance wreaks havoc on my sinuses. In fact, I think it’s an awful business practice to force customers to enter via the cosmetics section; and it’s a major reason that I try to avoid Shopper’s. It might also contravene Ontario’s accessibility law, since it must make it extremely difficult for persons with environmental sensitivities to enter. But that’s a story for another day.

    Back on the topic, I assume that cosmetics are the highest margin products in the store, and therefore they justify the employee down time that we experience. Also, Shopper’s hasn’t shown any of the reporting irregularities or difficulties, or declining same-store sales, that American Apparel has.

    Anyway, thanks for the comment!

  • Ronny Yaron says:

    Though not a business expert, it seems to me that Shopper’s Drug Mart is another company that is making some bad business decisions ! They have expanded many of their stores to include large cosmetic/perfume departments on very expensive real estate. While there are line-ups in the other part of the store for all other products, sales clerks stand around waiting for customers in the cosmetics section….