California Hustlin'

Spend an hour talking to Dov Charney, founder of American Apparel, and he is likely to start yelling: about his passion for his edgy clothing company, for sexy women, for being a "hustler," in the best sense of the word. At some point, Charney--37, single, waifish, styled to resemble a '70s-era porn star, with full facial hair--will offer to show you his underwear, which he designed, and maybe more. "Sex is good. Business is good. I don't see why I should be ashamed," he says. And if he didn't seem so earnest, it would all seem like one very exhausting shtik.

Charney is American Apparel's best asset--and may be its biggest liability. In 1997, with a business partner and a loan from family in his native Montreal, Charney launched a wholesale T-shirt operation in L.A. after an earlier business failed. He opened his first retail store in 2003 and has added 131 since; 60 more are expected by the year-end. Charney says he turned a profit on revenue of $250 million in 2005. To take the business to the next level, he's now seeking an initial $40 million cash infusion to fund his vision: providing urban hipsters with logo-free cotton clothing they don't have to shop for in malls. But so far no takers. Maybe that's in part because Charney says a "sexually free" workplace fosters his company's innovation. It can also foster lawsuits. One former employee accuses Charney of crude language and walking around in his briefs; he's fighting the allegations. Last year he settled a suit accusing him of, among other things, sexually suggestive language. Charney also admits to exposing a body part--not his elbow--eight times to a reporter.

Explicit behavior aside, Charney's business is an industry anomaly that might make investors skittish. "There's a generational disconnect between the financial community and our customer and the way our business works," he says. All of American Apparel's items are made at the plant in L.A. where he started the company. He pays 3,500 people $8 to $18 an hour, making them the world's highest-compensated garment workers. "I had a guy from one of the largest banks in the world tell me, 'We can't get our arms around the fact you haven't gone offshore'," says Charney. The company is test-selling "a few hundred pairs" of Thai flip-flops in a half-dozen stores, but he says the brand's philosophy isn't compromised: "I make a million pieces of clothing in our factory."

Yet, at $15 to $45, American Apparel's clothing is priced competitively for its core customers: young urbanites who want to look effortlessly cool. "We don't design clothes for a 50-year-old; we don't even care about them," he says. Stores are in hip areas like New York's Lower East Side, where Emily Stein, 27, recently browsed: "You get drawn into the whole thing. The colors, the cuts, the price--even the sweatshop-free shtik."

In his investor pitch, Charney stresses vertical integration. Operations are consolidated at the L.A. headquarters. This allows for close control of costs, quality, customer service and flexibility: Charney can design a shirt and have it in stores in a week, he says. Still, one clothing company looking at American Apparel as an investment was turned off by Charney's behavior, says an exec with the potential bidder who didn't want to be named discussing internal talks.

Charney says the "financial guys" will miss an opportunity if they are "offended by superficialities," and some retail analysts agree. Charney's eccentricity is a "very compelling reason why customers do business with him," says Greg Whalin, CEO of Retail Management Consultants. Christine Chen, of Pacific Growth Equities in San Francisco, says the company "has differentiated itself. They are on everybody's radar." Keep an eye on it--and on Charney. You know he wants you to.