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Sunday, Jun 4, 2023



Staff Reporter

The Cherokee Inc. that now exists is a shadow of its former self.

In the early ’90s, the Van Nuys apparel maker famous for its Indian-head logo had hundreds of employees, a handful of retail stores, a 110,000-square-foot factory in the San Fernando Valley and annual revenues of $200 million.

Today, Cherokee has no factory, no retail stores and just 14 employees. And its revenues in the latest fiscal year were less than a tenth of what they were at the peak.

But following a leveraged buyout that took the company private, a second public offering and two trips through bankruptcy court, Cherokee, now a licensor of brand names rather than an apparel manufacturer, is again seeing some success though on a much smaller scale.

For the year ended Jan. 30, net income was $6.1 million (70 cents per diluted share), down from $8.9 million ($1.05) the year earlier.

The drop was not due to any poor performance at the top line. In fact, revenues from Cherokee’s licensing agreements increased 58.5 percent, to $19.3 million in fiscal 1998. And selling, general and administrative expenses fell to 33 percent of revenues, from 49 percent a year earlier.

Rather, the drop came as a result of paying down income taxes deferred from the prior year when the company was still trying to turn around from previous losses. Income before taxes was $10.1 million in the year ended Jan. 30 up from $7.3 million a year earlier.

For the first quarter ended May 1, Cherokee had net income of $2.6 million (30 cents), compared with $2 million (23 cents) for the like period a year ago. Revenues were $6.9 million vs. $5.3 million.

“That really shows how well we’re doing,” Chief Financial Officer Carol Gratzke said of the first-quarter results.

Cherokee, with a market capitalization of just $71.3 million, is not covered by equity analysts. Apparel-industry consultants, however, say the company has made a smart move in eliminating its factory and licensing its brand names Cherokee and Sideout, a beach-oriented label it acquired in November 1997 to retailers.

“From a financial standpoint, the ability to license a brand allows the company so much more financial freedom to grow their business,” said Stuart Berman, chief executive of Bregman & Associates, an L.A.-based apparel consulting firm. “And when it comes to licensing, (Cherokee CEO) Bobby Margolis is one of the true geniuses in the business.”

Retailers that are Cherokee licensees include Dayton Hudson Corp.’s Target Stores, which accounted for more than two-thirds of the company’s licensing revenues last year, and Mervyn’s California.

Richard Giss, a partner in Deloitte & Touche LLP’s trade retail services group, said Cherokee is finding success in a growing trend retailers manufacturing their own clothing and placing a well-known label on it. Other examples are The Gap’s clothing lines and J.C. Penney Co.’s line of Arizona-brand jeans.

“Retailers want to be able to offer a brand name at prices people can afford. What Cherokee has done is take a well-known name and then reposition it through mass merchants by licensing it,” Giss said.

Investors, however, have failed to take notice. The stock has fallen from a 52-week high of $11.63 last summer, and last week was trading at around $8.19 where it has been for months. The company’s price-to-earnings ratio is 10.39.

Gratzke attributes the lackluster showing to what else? the market’s fascination with “dot-com” stocks and to a lack of analysts covering the company.

“There are a couple of people interested who are going to follow up with us,” she said. “But I keep talking to different people. You keep beating the bushes and telling your story. And we believe we’re undervalued.”

Timary Koller, a broker at Wedbush Morgan Securities Inc. who both buys Cherokee’s stock for her clients and has it in her own portfolio, said she believes investors have been turned off by the reliance on a small number of retailers. But efforts are being made to diversify the company’s client base and she believes the stock will pick up as it does so.

“I think they’re diversifying, and they’re doing it very quickly,” she said. “I’m not worried about it. At this price and all, I’m willing to ride it out while they do it (diversify).”

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