Question: Who operates the largest garment factory in the U.S.?

Answer — and be prepared for a surprise: American Apparel.

Not exactly a household name, but hip young adults are flocking to the clothing maker's stores. For one thing, they appreciate the local label.

Indeed, it takes 3,000 workers at the company's downtown Los Angeles headquarters to cut, sew and finish the growing chain's trendy T-shirts and other clothes.

The workers use 2 million pounds of fabric stored at the site for easy turnaround. And all the products feature the “Made in USA” label, an increasingly rare tag.

“In 95 percent of cases, there is no American-made apparel any more,” says Howard Davidowitz, chairman of retail consultant/investment bank Davidowitz & Associates. “Even Levi's closed its last plant in the United States, and Liz Claiborne, our largest apparel manufacturer, has no plants here. Zero! That's why this company is so miraculous.”

Perhaps “miraculous” is a bit of hyperbole. But the chain is most assuredly on to something big. Brand sales have nearly sextupled in four years, climbing to between $230 million and $240 million in 2005, up from $40 million in 2002, when the business was strictly wholesale.

The teen apparel niche is cutthroat, with stores such as Abercrombie & Fitch and Hot Topic marketing like crazy to the same age group. So how can American Apparel, which has never run a TV commercial, be so successful in such an aggressive and constantly changing design business?

First and perhaps foremost, by eschewing vanilla at all costs, say consultants. For instance, not to be outdone by Abercrombie & Fitch's ads with photos of near-naked models, American Apparel features ads with photos of near-naked employees.

Also unusual for retailers: Each store is unique in its marketing approach and product selection, avoiding homogeneity. Store design, though, is cheap, usually costing on average from $100,000 to $400,000, with exceptions costing as little as $30,000 or as much as $800,000 depending on location. Development time from lease signing to ribbon cutting is four months.

The 37-year-old founder Dov Charney, a proud Canadian, likes stores to perform at a level where the gross is about eight to 10 times leasing costs, though he adds that larger-volume stores can make good on a multiple of six or so.

“A multiple of 10 with a $3,000 rental is not as exciting as a multiple of six on a $40,000 rental, because there are economies of scale with a lot of administrative costs tied up in a store,” Charney says.

“So you might get a great rental-to-sales ratio but a lousy payroll-to-sales ratio,” Charney says. “Our Upper East Side is not doing 10 times rent, but it makes more money than a lot of our other stores.”

The moral is that high-rent, high-traffic stores can be hugely profitable. “You yield to the landlord a bit and pay a little more, but the return is extraordinary,” says Charney.

Fit, too, is critical to success. It's been reported that Charney has been known to test styles and sizes in strip clubs, to make sure they flatter women's curvaceous bodies.

And then there are the boasts, “Made in the U.S.A.” and “sweatshop free.”

These resonate in a world in which clothes are mostly made overseas in places where workers get stiffed. Tom Julian, director of trends at McCann-Erickson, says the “sweatshop free” declaration is “salient for youth.”

Inauspicious start

American Apparel was founded in 1998 by Charney, who hawked T-shirts on the streets of his native Montreal when he was still in college. He started another apparel company in 1989 that went bankrupt in 1996 before he bounced back with American Apparel two years later. The retail division started in 2003.

The company makes mostly T-shirts, but also underwear, socks, dresses, baby clothes and — get this — pooch apparel

Charney is as unique as his product. By all accounts, he's edgy, adores women (and lets them know it) and is anything but a corporate suit. He is irreverent, too, and that has gotten him a reputation, according to some, as, well, even a tad depraved. “People think that because I talk about hot ass that I'm some sort of pervert,” Charney told an Inc. reporter. “Hot to me is intriguing, tastemaking.”

The controversial Charney has also been the subject of three sexual harassment lawsuits filed by former employees for alleged offenses from conducting job interviews in his underwear to handing out vibrators. Two of the suits have been withdrawn and the third is ongoing.

He's hot, too, to roll out more stores. He has opened more than 125 in locations that some would discount as undesirable. For example, American Apparel opened a store in flood-ravaged New Orleans on April 2. “The numbers are three times our projections and we are beating all of our Miami stores,” says Tacee Webb, a developer and site scout for the retail chain.

A pioneer of sorts

In New Orleans, Webb is finding low rents and disproportionate numbers of students, a combination she deems perfect “for companies with an ‘indie’ customer base.”

Charney generally rejects the fancy midtown sites, where rents can top $1,000 a square foot, to focus instead on rents under $200 per square foot. Julian calls those locations “lifestyle streets of local folk who look for the basics.”

College towns interest Charney, too. He is taking the brand to Gainesville, Fla., and East Lansing, Mich., home to the University of Florida and Michigan State University.

“They're taking hot street locations in university towns,” says Jeff Green of retail consultancy Jeff Green Partners. Most youthful apparel retailers, such as Abercrombie and Hot Topic, choose malls, and face costly common charges to get uniform environments.”

Charney favors urban standalones, saying malls don't appeal to him as much. In his view, enclosed centers are undergoing a “generational shift.”

“The young adults we want to reach are in cities,” he says. “We might experiment with malls, and maybe do about 10 percent to 15 percent mall business, but that will never be a major part of our overall strategy.”

One more unusual location is a store set to open alongside eight other shops in an old downtown Houston department store.

“We will open a flagship in the Sakowitz Building in spring of ‘07,” says Webb. “We are opening another small shop in the Montrose neighborhood of the city.”

While in Houston, Webb hopes to use American Apparel as “bait” to get other small retailers financed and believes, “in our own way, we may be providing an answer to the homogenization of America. This was not originally part of our mission as a company. It is happening organically.”

Julian applauds this nonconformist branding approach. “I have watched American Apparel make spaces work for their brand, versus creating branded spaces.”

Buy coastal

Expansion is especially heavy in California (with 20 outlets) and New York (12 so far, with 11 in Manhattan and Brooklyn). “New York is a great place to test retail,” claims Charney, who mostly spots his stores in residential yet hip neighborhoods, typically tying into less expensive real estate.

Charney has chosen some eclectic sites. One store sits at the corner of Houston and Orchard, a block from Katz's deli at the northern terminus of what had been Manhattan's Jewish garment district but is now one of New York's ground zeroes for street fashion; another graces SoHo, now a haven for brand lovers.

American Apparel sits on Spring Street a few doors east of Chanel. Close by are names like Mac (cosmetics), Marc Jacobs (apparel), and Boffi (kitchen and bath furnishings). A third store is located on Broadway, at the crossroads of the East and West Villages, near the New York University campus.

According to Charney, “The Broadway store in New York gets a lot of traffic and is an earlier store with a developed clientele. It's our best performer.”

The stores all look different. A New York store on Broadway is minimalist, with a white epoxy floor. Another, near Columbus Circle is all neon signs and light boxes.

If without module, American Apparel is not without method, for it is a very efficient apparel machine.

If other retailers grow horizontally by going offshore, American Apparel grows vertically by running up garments in downtown L.A. and turning them around on the proverbial dime.

Retail is one side of American Apparel, which draws most revenues from wholesale, largely from selling blank shirts to the nation's cottage industry of silk-screeners.

The company claims some 60,000 wholesale accounts. Says Charney: “It's still true that 80 percent of the garments we make end up at concerts.”

“Our secret is that we don't try and compete with our clients, the printers,” Charney says. “Many people don't get this: One banker we deal with didn't want to give us a full line of credit because he was accustomed to retailers cannibalizing their wholesale businesses.” The company avoids the problem by not printing the shirts itself.

A genuine eccentric, Charney is perhaps his best marketing tool. He's not afraid to offend anyone or, say, walk around wearing only his skivvies.

He spends a considerable amount of time cruising the streets of New York when he's not in Los Angeles, befriending derelict and potential client alike.

Charney is the brand. His personality is reflected in every aspect of his business.

LAUNCHING A BRAND

PROBLEM:

In the crowded youthful clothing market, American Apparel wanted to make a splash. But how could founder Dov Charney differentiate that brand from similar ones?

SOLUTION:

Branding the basic T-shirts and bras and related items with a “Made In U.S.A.” label and advertising an in-house “sweatshop-free” shop environtment to appeal to younger shoppers. Also, it eschews “vanilla” at all costs, perfects fit, uses sales clerks as models and has vertically integrated the manufacturing process.

BUZZ:

The chain's role as a social conscience in the apparel industry is expanding as the company assumes the task of revitalizing blighted downtown neighborhoods, including New Orleans.

DATA:

American Apparel has opened 125 stores in three years. Though still primarily a T-shirt wholesaler, with 60,000 accounts, the apparel maker is aggressively expanding, with 26 stores slated to open in upcoming months.