Apparel licensor Cherokee Inc. continues to defy the odds.


While some retail stocks have been caught in the downdraft of Wal-Mart Stores Inc., which reported sluggish same-store sales in November, Cherokee is riding the coattails of high-flying Target Corp., where Cherokee-branded merchandise continues to fly off the shelves.


Shares of Cherokee have jumped 51 percent this year, and last week hit a 52-week high of $32.40. Target shares were also trading near their 52-week high, closing at $51.66 on Dec. 8.


J.P. Mark, senior analyst at Farmhouse Equity Research LLC in Portsmouth, R.I., recently downgraded Cherokee to a "hold" because of its high valuation. But he thinks the stock could get another growth spurt next year from strong sales at the United Kingdom's Tesco stores and the introduction of a new product line called Latina.


"The excitement in their story right now is international," he said.


Van Nuys-based Cherokee doesn't make its own clothing. It licenses its brand names to retailers, who then source the products on their own. Cherokee takes a small percentage of the sales as a royalty. The company also has developed a lucrative sideline representing other brands with the large retailers with whom it has developed relationships.


In the next two years, Cherokee expects further royalty revenues by helping introduce the House Beautiful license in May Department Stores, and Carole Little licenses for TJX Companies Inc.


Aubie Goldenberg, a partner in Ernst & Young's retail group in Los Angeles, said it's too early to tell whether the holiday season will pay off for Cherokee. Part of its success in the third quarter came from Target, where royalty revenues rose 3.1 percent, compared with decreases of 3.9 percent and 6.5 percent, respectively, in the second and first quarters.


Everyday niche


Analysts believe consumers have come to recognize the Cherokee brand as a reliable source of year-round, basic apparel that is not subject to the wild swings of seasonal merchandise.


"The real question for Cherokee, since it has a significant relationship with Target, is how much of the flow-through effect will they feel if the holiday spending is a little softer at discount chains," Goldenberg said.


Last week, Cherokee reported third-quarter net income of $3.3 million, compared with $2.5 million for the like period a year earlier. Sales rose 18 percent, to $7.9 million.


Chairman and Chief Executive Robert Margolis, who founded Cherokee's apparel division in 1980, transformed the manufacturer into a licensor of private label brands a decade ago. That happened just as discount retailers were eliminating apparel middlemen the wholesalers by turning to private labels and designing their own products.


With a handful of well-known brands including Cherokee, Sideout, Chorus Line and All That Jazz, the company has parlayed its licensing expertise into strong royalty earnings from Target, May Department Stores and Mervyn's.


Last year, Cherokee reported $24 million in pre-tax profits on $36 million in revenue, with a large chunk paid in dividends to shareholders. It holds no inventory, is debt-free and throws off enormous gobs of cash despite having just 17 employees.


Since 1997, the company has paid out a total of $9.89 a share in dividends to shareholders. In the past year, with the settlement of a longstanding dispute with Mossimo Inc., Cherokee has paid out $2.09 per share in dividends.


"There's no doubt that the dividend has been a bit of a driver and it also provides a bit of a floor to the stock price," said Russell Riopelle, Cherokee's chief financial officer.


A major downside to the stock is that it is illiquid. Margolis owns 22 percent of outstanding shares while four institutions own another 30 percent. The company is looking at ways to increase its liquidity, said Riopelle.


Cherokee got a big boost in the third quarter from Tesco, the giant U.K. discount chain, which reported a 77.5 percent jump in royalty payments because of strong sales of Cherokee's brands. Cherokee expects further growth in Europe after awarding licenses to Tesco in six countries including Hungary, Korea, Malaysia, Slovakia, Taiwan and Thailand.


Staff reporter Kate Berry can be reached at (323) 549-5225, ext. 228, or at kberry@labusinessjournal.com.

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