Danger! American Apparel, Lululemon impale

June 24, 2014: 3:43 PM ET
lululemon american apparel
NEW YORK (CNNMoney)

Company founders have the ability to turn ideas into billion dollar businesses. They can also make that value vanish quickly.

Just look at the controversy swirling around the founders of American Apparel (APP) and Lululemon (LULU).

Dov Charney, the ousted chairman of American Apparel, is known for walking around his factory in his underwear and talking openly about his sex life. The company's sales have plunged in recent years and its stock now trades for 70 cents, down 96% from its high of nearly $17.

Lululemon founder Dennis "Chip" Wilson imperiled his company's brand last year by making snide remarks about overweight customers. Wilson recently stepped down as chairman after Lululemon's share price plunged in half over the past year.

"Sadly in this day and age, some CEOs still think they can act like Ari Gold and get away with it," said Jeffrey Cohn, author of Why Are We Bad at Picking Good Leaders?, referring to the fictional "Entourage" character.

Related: American Apparel CEO hits back

American Apparel is known for its edgy advertising, but even Charney's behavior has become too steamy for that company's board.

Charney, who started American Apparel in 1998, was fired as chairman last week by the board, which is also moving to remove him as CEO.

An American Apparel director told CNNMoney the decision came after the board learned of "disturbing" information that suggested "misconduct" by Charney.

Allegations of misconduct are hardly new for Charney, who has faced countless lawsuits over the years that claimed everything from sexual harassment to assault, battery and even impersonation through the Internet.

While American Apparel rapidly expanded in the early 2000s by appealing to hipsters, the apparel maker struggled to keep the cool vibe. Charney took the company public in 2005 at $8 per share and Wall Street eventually bid it up to nearly $17. In recent years American Apparel has had to fight just to stave off bankruptcy.

American Apparel stock chart

Investors pay the price: Research into the costs of "managerial indiscretions" found that every time an incident involving Charney was disclosed to the public between 2008 and 2011, American Apparel's stock went down, suffering abnormal negative three-day return of -0.7% to -8.8%.

"He's one of the executives we have as a serial repeat offender," said Adam Yore, a professor at Northern Illinois University who co-wrote the research paper with Ralph Walkling at Drexel University and Brandon Cline at Mississippi State University.

Related: How Adidas plans to win the World Cup

Their research found that, on average, there is an immediate 3.8% loss in shareholder value following the disclosure of a CEO indiscretion as well as abnormal declines in the longer run. There also is a higher likelihood of shareholder lawsuits, even for things unrelated to the indiscretion.

The research found that indiscretion incidents are substantially more likely to occur at companies managed by families or founders.

Founders "may not make a distinction between their personal and professional lives," said Yore. "They grew the business themselves and in many cases they are the business."

Charney, who still controls a 27% stake, has signaled he's mounting an effort to keep control of American Apparel's C-Suite.

Related: Lululemon stock does the downward drop

Will American Apparel ditch the racy ads?

Lululemon's volatile founder: The situation isn't nearly as dire at Lululemon, but the yoga apparel maker is also struggling to turn itself around and in the midst of an uncomfortable fight with founder Wilson. The company's Chief Financial Officer dubbed it akin to "our parents are fighting" on a recent call with investors.

The turning point came last year when Lululemon had to recall some of its yoga pants for being too sheer. That hurt the company's reputation and cost millions of dollars. Wilson exacerbated the situation by then seemingly placing the blame on overweight customers, saying: "Some women's bodies just don't actually work" for the pants.

Lululemon traded north of $82 last June before the controversy, but recently dipped below $37. Of course, even with the recent tumble Lululemon shares have surged over 560% over the past five years, creating enormous value for shareholders.

Lululemon stock chart

Can Wilson find a dance partner? After stepping down as chairman last month, Wilson has reportedly hired Goldman Sachs to help him weigh his options, including possibly teaming up with a private equity firm to acquire the rest of Lululemon.

"Based on his comments from last November, which we contend damaged the LULU brand, we believe potential partners may be warded off by Mr. Wilson's volatility," Sterne Agee analysts Sam Poser and Ben Shamsian wrote in a note this week.

Cowen & Co. analyst Faye Landes is less sold on the negative impact to Lululemon's brand, pointing to strong Black Friday sales after Wilson's comments.

"There is still a lot of cachet around the brand," she said.

Lululemon fad is over. It's not Nike!

Ironically, Wilson's chances of finding a dance partner to acquire Lululemon with may have been hurt by the American Apparel drama.

"Funders tend to be conservative individuals working at conservative firms, and, especially after the recent experience of some investment firms with retail founders (cf. American Apparel), we think that funders are likely to shy away from voluble founders," Landes wrote in a note to clients this week.

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