Brand Licensor’s Shares Climb as Dividends Fall

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At just 5 cents a share, the dividend Cherokee Inc. will pay next month is the smallest in the Sherman Oaks company’s history, even though it follows the most profitable quarter in years.

The disconnect highlights a big shift for the apparel licensing firm: from a quiet dividend payer to a company investing in growth. And investors seem to like what Cherokee is up to.

Shares of the company closed Aug. 6 at $17.81, the highest price in three years. Shares picked up 6.3 percent for the week, making Cherokee one of the top gainers on the LABJ Stock Index. (See page 30.)

In the past year, Cherokee’s brands have moved into the Middle East, China, India, Indonesia and other international markets. In addition, the company has been buying more brands. In January, it picked up skateboarding star Tony Hawk’s apparel brand from Huntington Beach’s Quicksilver Inc.

Jeff Van Sinderen, an analyst with West L.A. brokerage and investment bank B. Riley & Co. who initiated coverage of Cherokee a few months ago, said he expects more acquisitions. He sees Cherokee as being in a good position to buy: Apparel retailers have faced slowing sales lately, prompting some to sell off brands at low prices.

“You have more companies struggling and more companies and brands that will come up for sale,” Van Sinderen said. “That plays into Cherokee’s hand.”

Unlike other apparel companies, Cherokee doesn’t own stores, have factories or buy inventory. Instead, it gets licensing payments from retailers that sell its brands, which include Liz Lange, Sideout and its eponymous label. That low-overhead model has made Cherokee one of the most profitable local public companies for years, allowing it to throw off big dividends to shareholders.

But as the company has started to use its extra cash to acquire more brands, those dividends have been slashed. Cherokee paid dividends of $2 a share in its fiscal year ending in January 2010. That fell to just 30 cents for its most recent fiscal year and looks like it will drop more this year.

“They’re becoming a growth company,” Van Sinderen said. “There are ways for them to invest capital and grow rather than invest their free cash flow in dividends.”

The company did not return a call for this article.

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