Sexy Sweats Without the Sweatshop

Dec. 2, 2005 — -- Over the past two years, a new clothing store called American Apparel has been appearing in cities around the country, and the stores are popping up in foreign capitals too, from Montreal to Paris to Tokyo. The company sells simple cotton leisure wear. Much of the apparel is for 20-something "contemporary metropolitan adults" as Dov Charney often calls his market.

"20/20" stopped by an American Apparel store in New York to meet the man who started the company, a fast-talking 36-year-old Canadian, Dov Charney, to learn more about his company.

American Apparel is just a fraction of the size of established retailers like The Gap, but Charney's company has become one of the fastest-growing clothing makers in America. Over the past two years, Charney has opened more than 90 new retail stores. He began by wholesaling just a few styles of blank T-shirts. Now he's expanded his line to include sweatshirts, bathing suits, skirts, jackets and more. Much of it he says appeals to 20-somethings who like their clothes tighter than baby boomers do.

"There's the relaxed fit generation and then there's the next generation," he said. The next generation seems to like their clothing tight, and that's what Charney's giving them. "We like sexy at American Apparel. Absolutely," he said.

He also likes bold colors and has taken a bold approach to how he runs and promotes his company. It's very sexual. He decorates his stores with provocative, sexy images.

Charney says sexiness is all about attitude and style -- and he says he's always on the lookout for people who have it, like Natasha. After he noticed her walking down the street, he jumped out of his limo and asked her to model for his company, which she did. Now she works for American Apparel.

"We walk around the trade shows, looking hot," she explained. "The clothing is tighter. It's sexier. It's that next generation he's talking about," she explained.

Some say Charney's unconventional style is part of what makes the company click. He encourages communication between all levels of his employees, and anyone can walk into the boss's office at any time if they need to talk about a problem or an idea.

Charney's structured his business in a way that allows him to capitalize on it. "We get an idea, you go to a vintage store, snap a picture of a garment that we think is hot and 20, 30 days later, we could have it in the stores," he said.

People like working here, says Charney's creative adviser, Iris Alonzo. "You know, it's like, I wake up in the morning and want to make some crazy sweatshirt and we can actually do it," Alonzo said.

By his own admission, Charney has always been a particularly hyper guy. By the time he got to college, Charney says, he found a way to channel all that energy. He started a business, buying shirts at Kmart, and exporting them to Canada. "I started bringing like 5,000, 10,000 T-shirts at a time, on a U-Haul truck in the summer, and I developed a kind of importing business, from the United States to Canada. That's why it's called American Apparel," he said.

Then, he dropped out of college, borrowed $10,000 from his father and moved to South Carolina to manufacture clothes. But after Charney arrived, the rest of the garment industry had discovered it could make clothing much more cheaply overseas. So they did, and Charney's business crashed.

The business went bankrupt and he filed for Chapter 11 bankruptcy protection. But that didn't stop him. He reorganized his company -- determined to make it work.

"I knew I could do it differently, and I knew I could turn it around. And I knew there was a solution and there was no way, that kind of passion or can-do spirit; I said there's no way I'm stopping now," he said.

"Passion," Charney said, is the key to success.

"When you believe in what you're doing, that's the first thing. And you have to be resilient, because people are going to try to knock you down," he said.

Charney moved his business to California -- and eight years later, his business is now thriving in an 800,000-square-foot factory in downtown Los Angeles. Charney is doing something most other fashion lines have long abandoned: he makes all the clothing right here -- in the United States.

Today, American Apparel has more than 4,000 employees. One of the first to join up was Annabelle Morency, 32, who is now head of manufacturing. "This is the place to be. It's a great ride at American Apparel," she said.

The company's staff is young -- most are in their 20s -- whether they work in product development and design, customer service and sales or graphics and marketing. But when Charney needed someone to reorganize his manufacturing operations he called seasoned clothing maker Marty Bailey, who had been in the garment industry for some 20 years, working for big companies like Fruit of the Loom.

Bailey, now vice president of operations for American Apparel, dramatically improved efficiency by reconfiguring the factory's sewing operation into groups with eight to 10 people each doing a different task on a single garment. Baily calls it "team manufacturing."

"Every nine seconds there's a garment moving from operator to operator. We have teams that are producing 3,000 pieces a day. Right now, I can manufacture a T-shirt from start to finish in 90 seconds," Bailey said. And that's made the business competitive in a way that few other American clothing companies are. "As a result of this system, we're able to compete with China and kick ass the American way," Charney said, adding that the factory now produces 1 million garments a week.

Charney calls it "an Industrial Revolution" because his company is "vertically integrated," meaning everything happens in Los Angeles, from knitting the cotton fabric he uses, to dyeing it, to cutting it -- then the sewers get it and turn the pieces into finished garments.

Charney says this one-stop shop saves him money. "It's less expensive, for me, the way we do business, to manufacture here in the United States. There's a high cost to going offshore. If you're working with a supplier in China, you've got to work months in advance. If you're working with your own factory, you can wake up one morning and say, 'Hey, let's make 10,000 tank tops today,'" he explained. "You know the face of your worker ... engineers and designers and finance people and knitters and dyers and chemists can come together in one location and say, 'How can we do this better?' You can produce products more efficiently than they can be made on an outsource basis."

Most of Charney's factory workers are immigrants -- all of them documented, Charney says. He pays them a base salary of $8 to $9 an hour, but the sewing teams are also paid by the piece. The more the team produces, the more it earns. "We designed the rate in such a way that the average person should be able to make $100 a day, that's our target," Charney said. Currently, he says the average wage for garment workers at American Apparel is $12.75 hour.

Charney says by paying more than other companies he motivates his employees to work harder. The company even posts what the workers earn each time period so they can see how much they are making.

"We want to pay more than the prevailing wages in Los Angeles, because we want to have the happiest work force we can have. It's really important -- $9 dollars an hour versus $12 an hour -- it's like a total lifestyle change," he said.

Charney also offers his workers subsidized lunches and health care benefits. There are free English classes offered throughout the day -- and he's even got five massage therapists on site to relieve the sewers' stress.

It seems Charney's business concepts are working. This year, Charney says, total sales should exceed $200 million -- and he's planning to open another 30 stores in just the next few months. But while he's still building and expanding American Apparel, which is privately owned, Charney says he doesn't really have a big salary like many CEOs. He takes less than $100,000 a year out of the business for expenses -- enough to pay the bills on his modest home, which is located in the same neighborhood where many of his workers live.

Some say a reason for Charney's success is that he makes his employees enthusiastic -- by making his company a casual, open and free work environment. Charney feels free to engage in consensual relationships with his staff. He decorates his stores with shots of the sexy but non-professional models he uses in his ad campaigns; and in some stores vintage sex magazines are used as design elements. He sometimes uses foul language at work and doesn't mind if some of his employees do too.

But some people say Charney's freewheeling style has gone too far.

Three sex harassment lawsuits were filed by former employees, one of them claiming he fostered a "hostile work environment based on her sex." Charney is quick to point out, "None of these plaintiffs are accusing me of having an intimate relationship with them," adding, "I've never had any intimate intentions with these women. I never propositioned them in any way."

Among the charges in the lawsuits, Charney was accused of making "unwelcome, inappropriate comments, suggestive nonverbal signals ... dropping his pants, revealing his underwear."

"All these allegations are false," Charney said. But he added he doesn't see any problem with wearing underwear in the office if it's connected to his work. "I think for a designer to be in his underwear when he's designing underwear is quite common. And I'm in my underwear in my office all the time," he said.

Charney's openness about sex got particularly embarrassing when he agreed to an interview with a reporter from Jane magazine. They became friendly, she went to his New York City residence, watched him engage in sexual activity, and later wrote an article that included details of his sex life.

Charney said it was a "consensual exchange." He added, "I had no idea she was going to write about my personal life in the way she did."

The writer confirmed to us that what transpired was consensual. But the publicity didn't help his cause when, months later, women sued, claiming a hostile work environment.

Charney said he thinks his success in building American Apparel into a $200 million per year business may have made him a target of these lawsuits.

"I think it's about employees that are trying to take advantage of American Apparel and the success of our company to enrich themselves, and I feel these women have contrived their claims," he said.

The women who filed the suits declined our request for interviews. As it stands now, one lawsuit was thrown out and another was settled.

"There's a sexual element to fashion. That's inescapable," Charney said.

But does an environment of freedom in the workplace mean having sex with people who work for you?

"No, I don't think it means having sex with people that work for me. As far as consensual relationships, between various employees, we don't regulate that at American Apparel. ... I think that those relationships can be very healthy and are an important part of living in a free world," he said.

Charney says freedom is everything to him, both in his personal life and how he runs his company -- and says the results are proof that it's working. "I think we're gonna build a great company. ... We want to compete on the merits, and we believe in what we're doing, and we want to build the best apparel company that ever was in America."

John Stossel and Glenn Silber filed this report for "20/20."