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CORPORATE FOCUS — Cherokee Finds Profits, If Not Respect, as a Licensor

For the third year in a row, Van Nuys-based Cherokee Group reported record-breaking revenues and profits in 1999, and in recent months it has announced a slew of new licensing agreements.

Wall Street, however, remains singularly unimpressed. The company’s stock price has been fairly flat over the past year, trading last week at around $7.50 a share after peaking at $9.69 in December.

“We don’t believe we’re on Wall Street’s radar,” lamented Howard Siegel, president of operations and administration.

The company hopes to change that as revenues and earnings start rolling in from its new licensing deals, but as of now, no analysts cover the company.

“There are companies all over the place that do licensing,” said Jeffrey Van Sinderen, an apparel analyst at B. Riley & Co. “To me, it’s a strange model where they have a brand and license it, and that’s it.”

Cherokee was originally a manufacturer of casual clothing and shoes, but in 1995 it reorganized, discontinued its manufacturing operations and transitioned into a licensor of its brand name. It found a big-time licensee in Target Corp. The big discount retail chain contracts with various manufacturers to design and make clothes and accessories, and pays a licensing fee to Cherokee to slap its name on the label.

Cherokee also licenses the Sideout label to five chains nationwide, including Mervyn’s California and Gart Sportmart.

Cherokee has been so successful at licensing that it’s now signing deals as a consultant to help other struggling brands make the transition. Over the last two months, it has announced such consulting deals with Mossimo Inc., Aspen Brand Worldwide and Maui and Sons Inc.

“We want to expand into the role of buying additional trademarks or representing (companies),” Siegel said. “But we’re select in our approach. We look at the company’s equity, its current distribution and how clean the brand is.”

In March, Cherokee helped broker a three-year, $1 billion deal between Irvine-based Mossimo and Target. As part of the deal, Cherokee will get 15 percent of Mossimo’s gross revenues from sales at Target, according to a Securities and Exchange Commission filing.

So far, Wall Street has panned Mossimo’s move. The company’s stock has dropped from about $8 a share in March to under $1 as of May 25, and three of the company’s creditors have filed petitions to force it into involuntary bankruptcy. Mossimo has also announced it will cut 90 percent of its workforce by the end of the year.

Nonetheless, some local apparel observers think Cherokee has a winning model, and its consulting deals will only help profits continue to roll in.

“They are great deal-makers and they have positioned themselves as a licensor giant, as opposed to a manufacturing giant,” Metchek said. “They’ve taken a power brand and made it national, if not international.”

For the fiscal year ended Jan. 29, 2000, Cherokee reported net income of $8.1 million (94 cents a share), up from $6.1 million (70 cents) in fiscal 1999. Revenues were $24.7 million vs. 19.3 million.

That marks a major turnaround from 1994, when Cherokee was a lesson in what not to do in business. At the time, the company had just filed for Chapter 11 bankruptcy protection for the second time in less than 10 years, and its future seemed murky at best.

“It made us take a new and fresh look at the industry and where we perceived growth,” said Cherokee Chief Financial Officer Carol Gratzke.

Management kept the brand name and dropped the manufacturing operations. Instead, the company began licensing its name to Target and other stores in the United States and Canada, and soon Asia. That cut out manufacturing costs and liability for unsold products. In 1997, Cherokee bought the Sideout name from another foundering manufacturer.

Under terms of its agreement, Target and other chains get to determine the style of the clothing and the manufacturer, subject to certain pre-determined parameters, and Cherokee just picks up the licensing checks.

“The traditional wholesale form (of manufacturing and selling product through to retail chains) is getting much harder to compete in,” Siegel said. “Consumers want a great brand at a great price.”

So Cherokee switched into licensing and that decision has dramatically improved its bottom line.

For the fiscal year ended June 3, 1995, Cherokee reported a net loss of $67.75 million ($12.80 a share). Within two years, the reorganized company was back in the black.

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