Cherokee Inc.’s apparel can be found in some of the biggest retail chains across the world. Yet the company does not have an expansive network of plants, distribution centers or sales offices.

In fact, all of Cherokee’s operations are run out of a small office in Van Nuys, where fewer than 20 people work with its retailers on marketing and branding, all while earning licensing payments that are the envy of the industry.

Its lean business model has been so successful that according to Business Journal calculations in July, Cherokee has been the second most profitable company in Los Angeles County over the past three years.

“Essentially, they’re in the business of printing money,” said Jeff Van Sinderen, a retail industry analyst for West L.A. investment bank B. Riley & Co. “They license out the brands and collect checks.”

In the United States, Cherokee clothing can be found prominently displayed in Target Corp.’s more than 1,000 stores, driving sales that have helped Cherokee weather the recession.

And the company’s retail network, which includes TJMaxx and Marshalls, may be getting bigger. In the past few months, Cherokee has announced several new licensing agreements, including one with Jay Franco and Sons Inc., a global distribution firm.

Still, the company has taken its lumps like everyone else during the recession. Quarterly sales, which were as high as $11.5 million in early 2008, have hovered around $8 million recently.

Last week, the company reported a 7 percent dip in its fiscal second quarter revenue to $7.5 million. Net income was off 14 percent to $2.5 million. The company cited exchange rates and slightly lower international royalties as the culprit.

But Van Sinderen said licensing companies such as Cherokee have much less risk in downturns because they do not have to worry about many of the costs associated with apparel design, production and sales.

“It’s been a pretty good business to be in throughout this downturn,” he said. “No one’s been immune to what’s gone on in the retail environment for apparel, (but) if you have low overhead and you’re basically just collecting royalties, your company’s going to be quite a bit more insulated.”

Casual beginning

Cherokee was founded in 1973 as a casual footwear maker. In the height of the disco era, the company expanded into bell-bottom pants and other leisure apparel. The clothing division took off, bringing in annual sales in the nine-figure range.

“The apparel business significantly, dramatically exceeded the footwear business,” said Howard Siegel, Cherokee’s chief operating officer.

In the 1990s, however, outsourcing began to change the apparel industry in dramatic ways. Inexpensive labor in China and other Asian countries led companies to move their manufacturing abroad. Cherokee struggled to hold on to its business.

“The traditional manufacturing model that had the large 30-plus percent margins were getting tougher to achieve,” Siegel said.

The company twice filed for bankruptcy, but through the process it stumbled on to its winning business model. Cherokee is now credited as a pioneer of the so-called retail direct licensing model after signing a strategic alliance with Target in August 1995.

The deal was shepherded by longtime Chief Executive Robert Margolis, who announced Aug. 30 that he will leave his post but remain as executive chairman. He has been succeeded as chief executive by Henry Stupp, the founder of NTD Apparel, a Montreal-based apparel supplier with offices in Los Angeles.

Through the Target licensing deal, the retailer gained exclusive rights to produce and market clothes under the Cherokee name, while Cherokee consults on marketing and branding.

For example, if Target decides it wants a pair of Cherokee-branded khaki pants, it will research and contract with designers and manufacturers, and handle distribution to its stores. Cherokee retains quality control rights, meaning executives can visit the manufacturer and determine if the production meets standards. The two companies collaborate on packaging, graphics, colors, in-store displays and any marketing materials.

Target sets retail price, and as a result, the retailer determines margins and earns any profit on the garments. Cherokee simply receives an undisclosed licensing fee that is based on the retailer’s net sales of the product.

By cutting out manufacturing and related operations, Cherokee has been able to keep overhead costs extremely low. It has no long-term debt and less than $7 million in total liabilities. The streamlined business has not lost money in a quarter since 1996.

However, it’s not a business model that can be easily replicated. Ilse Metchek, executive director of the California Fashion Association, said a company first has to have an established brand that will appeal to retail partners.

“It has to begin with a brand that has some kind of recognition in and of itself,” she said. “You don’t just become a brand holder; you have to start with a brand.”

Other major licensing companies include Perry Ellis International Inc., a Miami company with brands such as Munsingwear, and Iconix Brand Group Inc. in New York, featuring Mossimo and other lines.

Cherokee, which also licenses Sideout sportswear and Carole Little womenswear, is sold in 30 countries, with more than half of revenue coming from international markets. Among its retail partners are Tesco in the United Kingdom and Zellers in Canada.

Steady stock

One drawback to Cherokee’s consistency has been that its stock is not exactly a hot commodity. Shares, which closed Sept. 8 at $17.67, are up from their 2008 low of $11.72, but still off by more than 60 percent from their all-time high of $48.50, hit in mid-2007.

However, the company does spread its stellar profits around to shareholders. Cherokee’s 38-cents-per-share dividend distribution in late July was the company’s 28th consecutive payment. With a dividend yield in excess of 8 percent, Cherokee was named last month by one analyst as an attractive high yield stock.

Analysts are curious whether the change in executive leadership from Margolis to Stupp may also spell some changes in strategy. While Cherokee specializes in its own clothing brands, NTD licenses a number of characters – including the Simpsons, Spider-Man and Hello Kitty – for use on T-shirts and other garments.

Neither Margolis nor Stupp were made available for an interview. However, Van Sinderen said the company could make new strides, including additional brand acquisitions, now that a new leader has taken the helm.

“I’m optimistic that they’ll start to develop some things that will take them in a new direction,” he said.

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