Even as the slowing economy prompted consumers to curtail their spending habits in the second half of 2007, Cherokee Inc. managed to repeat as the most profitable public company in Los Angeles for a third straight year.

And with good reason.

The Van Nuys company licenses clothing that sells in Target and T.J. Maxx, and similar discount stores in Brazil, Mexico, India and Europe. It’s high quality but bargain priced and moves off the racks in good times as well as bad.

With a three-year average return on equity of 83 percent as of its last fiscal year, Cherokee beat all other L.A. companies by a wide margin. But there were similarities among the most profitable of L.A.’s 200 largest public companies.

Consumer goods makers and retailers account for many names on the list, with three of the top five performers involved in apparel sales. Aside from Cherokee, they include denim maker True Religion Apparel Co. and offshore apparel factory owner Ever-Glory International Group Inc.

“If you take the consumer, retail and apparel sectors, those companies in the past couple of years have established very fluid supply chains,” said Perry Wong, a senior managing economist at the Milken Institute who specializes in the California economy. “For example, if materials in China get too expensive, they can shift to Vietnam or even Guatemala easily.”

Moreover, L.A. provides the perfect base for these companies, with access to Hollywood fashionistas and manufacturing capability in Asia. Even more important, Wong said, these companies have gone global in terms of selling their product.

Herbalife Ltd., the dietary supplement distributor that ranks second on the list, operates in 65 countries and derives 80 percent of its revenues outside the U.S. Seventh-ranked Peerless Systems Corp., based in El Segundo, makes hardware and software for digital imaging in conjunction with the big optical houses in Japan and China. Even CB Richard Ellis Group Inc., the 10th-ranked company, has weathered the collapse of the U.S. commercial real estate market by building offices in foreign countries.

For L.A. companies in particular, foreign markets offer a buffer against the U.S. economic downturn, because these companies make video games, movies, clothes or personal care products that appeal to youth markets, Wong said. Currently, teen populations and buying power are growing faster in places like Brazil, India and Mexico than in the United States.

Again, consider Cherokee. Though revenues declined in its last quarter and the company projects the U.S. retail market to remain soft into next year, Cherokee expects overseas growth to make up the difference.

“We believe that new revenue streams from our Cherokee brand in Brazil and India will add to our international growth,” said President Howard Siegel.

Slowdown felt

However, a closer look at the numbers shows that the slowing U.S. economy is catching up with L.A. public companies.

More than half of the companies listed saw their three-year average ROE shrink in 2007, with health care and homebuilders showing the largest declines. Overall, 111 companies on the list had positive three-year average ROE in 2007 compared with 124 the previous year.

ROE consists of a company’s net income divided by its shareholder equity (the company’s assets minus its liabilities). For investors, it provides a measure of both profitability and management’s efficiency in using available money.

“Return on equity is a very simple calculation and a good indicator of the right-now profitability of a company,” said Michael Cohn, chief investment strategist at Atlantis Asset Management in New York. “It’s a good metric to weigh against other companies in same sector.”

Mathematically, middle-size public companies tend to have higher ROE because of their smaller asset base. But in practical terms, smaller companies also have an advantage because they are skilled at shifting their assets in response to market.

“The more nimble the company, the better,” said Wong. “The larger the scale of production, the more capital is needed. Small companies can logistically change strategy better than large firms.”

The largest companies on the directory tend to have fairly stable ROE in contrast to the huge fluctuations of smaller companies. Walt Disney Co., ranked at 68, had a three-year average ROE of 12.1 percent, ranging only 3 percentage points above or below that during the last three years. Likewise, Edison International, the large Rosemead-based utility, finished at No. 44 with 16 percent, again within little change from year to year.

Of course, large companies in the home building and finance industries stood out as exceptions to the rule amid the meltdown of the housing and subprime mortgage markets.

Troubled IndyMac Bancorp’s ROE declined to 1.2 percent from 18.1 percent in 2006. Countrywide Financial Corp., which was acquired last month by Bank of America Corp., saw its ROE decline to 12.2 percent from 21.8 percent in 2006. Residential builder KB Home, which in 2006 had an ROE of 25.7, saw that shrink to 4 percent.

Other stragglers at the end of the list include biotech firms such as MannKind Corp. (-73.5 percent ROE) and CytRx Corp. (-237 ROE). Biotechs traditionally can go years without profits before possibly striking gold with a successful drug treatment.

As for next year, if gasoline prices keep climbing, it’s quite likely this year’s ROE champs will finally slide down the list.

“It’s really very simple the retail stocks aren’t going to be anywhere near what they were in the past,” said Cohn. “You’ve got to assume that for K-Swiss, Arden Group and Big Five all based on discretionary spending their profitability next year is probably going to go down.”