Charney is not the first apparel brand CEO deemed talented yet toxic. Industry experts cited Michael Ball, who grew his Rock & Republic brand into one of the top sellers of jeans that cost more than $200, before it filed for bankruptcy earlier this year.
But others said American Apparel could take a page from blue-jean companies like True Religion, Joe's Jeans and Guess, whose creative founders brought in experienced financial foils as their companies grew.
"That (True Religion) is the case study for how you do it right," said one investment banker. "Bring in the suits."
That banker, who is active in the apparel industry, believes Charney is key to the company, and will not be replaced, but rather complemented by a stronger team.
As analyst Beder explained: "At the end of the day, if Dov has to give up some controls he'll be happier and the company will be more profitable."
Keeping Charney free to create is paramount, say former employees and others who have worked with him, who become almost reverent when discussing what they call his inspiring vision for domestic apparel manufacturing and immigrant rights and passion for his work.
But the unorthodox working culture has its downside.
"I was inspired every time I walked the factory floor but everyone has their breaking point," one former employee said. "The company is built so he can be the king of the castle where all ideas funnel to him."
Former employees said Charney's championing of the blue-collar workers at his factory contrast with the low compensation and high demands placed on the creative staff.
One former staffer said most of the strongest employees have left, leaving Charney surrounded by less experienced staff who don't know how to translate fashion into sales.
"Just like a lot of people in the fashion world, he got sucked into thinking he was a fashion icon," said this source. "I think he has this idea that he can do it all on his own and have a bunch of creative kids around the office."
That may be why the company has veered away from its strength in basics to sell more complicated, higher-priced clothing. At a recent store visit, jodhpurs and embellished blouses were on display, with some items costing as much as $79. Charney recently told analysts it takes up to 40 people to make a pleated pant.
"They're trying to be a fashion brand. And they're having sewers who are good at T-shirts make pants," the former employee said. "They're hard to make and hard to sell to a lot of people. A lace bodysuit isn't for everyone."
Same-store sales -- a measure of strength for retailers -- were negative in 11 out of 12 months in 2009. They were down 10 percent in the first quarter.
But men's trend analyst Tim Bess of The Doneger Group said American Apparel should be well positioned for fall 2010 and spring 2011, given that "very clean, very simple" is in.
"We're going back to a minimalist feeling in color, we're anti-print and we're talking a lot about color. American Apparel comes to mind," Bess said.
LONG TERM SOLUTION?
American Apparel says it is hiring approximately 100 people a week to bring its factory back to capacity and improving productivity at stores, which have doubled since early 2007. The company now operates more than 285 stores in 20 countries, including China.
But spending is capped under the loan agreement with Lion. That deal calls for no more than $27.5 million in capital expenditures per year for 2010 and 2011 and $30 million in each of the following two years.
Lion will still hold American Apparel on a tight leash, even if it gives the company more breathing room. The original agreement called for a 1.70 to 1.00 debt to consolidated EBITDA ratio for the quarter that ended June 30. That was loosened to 1.90 to 1.00 in March, still considered to be strict.
Bankers say a more typical covenant ratio for senior secured debt for public companies is 2.5 to 1.00 or looser.
But as investors await a new deal between American Apparel and its lender, some wonder how long the company can continue to scramble. The deal with Lion was supposed to offer "a long- term solution," as American Apparel announced in March 2009, when Lion refinanced the company's debt.
More than one source interviewed for this story remarked that it would be a shame for American Apparel to fail, given its role as the largest apparel maker in the United States still making its clothes inside the country.
Others see an end to the heady, early days of American Apparel, when workers envisioned "an industrial revolution of sewing."
"Did Dov believe everything he was saying or did we just believe him and it was a good business decision of his?" asked one former employee.
"Maybe he became a megalomaniac and he lost the message." (Additional reporting by Emily Chasan in New York; Editing by Jim Impoco, Bernard Orr and Maureen Bavdek)