Cherokee Inc. Reports Strong Second Quarter 2014 Revenue and Earnings Growth

• Earnings per share increase approximately 21% year-over-year to $0.23
• Revenues increase approximately 19% year-over-year to $7.5 million
• Launches at Max Stores, the largest value fashion brand chain in the Middle East
• Subsequent to quarter-end launches in Indonesia with leading lifestyle retailer MAP/SOGO

SHERMAN OAKS, Calif.--(BUSINESS WIRE)--Cherokee Inc. (NASDAQ:CHKE), a global marketer of style-focused lifestyle brands, today reported financial results for the second quarter ended August 3, 2013.

Net revenues for the second quarter were $7.5 million, an increase of approximately 19% from $6.3 million in the prior-year period. The increase in revenues was primarily the result of higher revenues from the retail sales of Cherokee-branded products at Target and the addition of the Liz Lange brand to our portfolio. In addition, the Company experienced solid increases with its international licensees partially offset by a year-over-year decrease of Cherokee royalty revenues at Zellers Canada of approximately $0.7 million due to the retailer’s closing during Cherokee’s first quarter of Fiscal 2014.

The Company’s international business also continued to see growth during the quarter, marked by further global expansion into the Middle East and Indonesia, the recent six-year extension of the Company’s partnership in South America with Tottus, and a 47% revenue increase with Tesco on a year-over-year basis. Cherokee saw similarly strong progress in North America, including a 32% increase in Cherokee brand royalty revenue with its exclusive U.S. retail partner Target and early success with the launch of the Cherokee brand with Target Canada.

Additionally, during the second quarter, the devaluation of several foreign currencies, including the Japanese Yen, Indian Rupee, and South African Rand, resulted in an approximately $131,000 unfavorable impact to revenues.

Selling, general and administrative expenses for the second quarter were $4.2 million, or 57% of sales, compared with $3.6 million, or 58% of sales, in the prior-year period. This increase is related to personnel costs that are provided to enhance the Company’s 360˚ approach with its partners including Tesco and increased amortization costs related to the acquisition of the Liz Lange and Cherokee Uniform brands.

Net income for the second quarter was $1.9 million, or $0.23 per diluted share, an increase of 19% compared with $1.6 million, or $0.19 per diluted share, in the prior-year period

“The first-half of Fiscal 2014 has been very productive for the Cherokee Group,” said Cherokee Chief Executive Officer, Henry Stupp. “Revenues for the quarter increased nearly 19% despite the early closing of Zellers Canada and foreign currency devaluations.”

Mr. Stupp continued, “Our successes over the past six months have positioned the Cherokee Group for continued growth throughout the remainder of Fiscal 2014 and into the future. We are pleased with our ongoing refinement of our operating model, and going forward we will continue to execute against our long-term strategic growth plan as well as evaluate new acquisition opportunities to generate value for both our shareholders and retail partners.”

At August 3, 2013, the Company had cash and cash equivalents of $2.8 million, compared to $2.4 million at February 2, 2013.

Conference Call

The Company will host a conference call today at 1:30 p.m. PT / 4:30 p.m. ET. To participate in the call, please dial [phone] (U.S.) or [phone] (International) ten minutes prior to the start time and use conference ID: 417961. The earnings call will also be broadcast live over the Internet and can be accessed on the Investor Relations section of the Company’s Web site at http://www.cherokeegroup.com. A slide presentation will accompany the prepared remarks and has been posted along with the webcast link on Cherokee’s website.

For those unable to participate during the live broadcast, a replay will be available through Thursday, September 19, 2013, at 8:59 p.m. PT / 11:59 p.m. ET. To access the replay, dial [phone] (U.S.) or [phone] (International) and use conference ID: 417961.

About Cherokee Inc.

Cherokee Inc. is a global marketer and manager of a portfolio of Fashion and Lifestyle brands including Cherokee^®, Carole Little^®, Liz Lange^® and Sideout^®, in multiple consumer product categories and sectors around the world. The Company has license agreements with premier retailers and manufacturers covering over 40 countries around the world including Target Stores (U.S. and Canada), Tesco (U.K., Ireland and certain Central European countries), RT-Mart (People's Republic of China), Pick ‘n Pay (South Africa), Falabella (Chile, Peru and Colombia), Arvind Mills (India and certain Middle Eastern countries), Shufersal LTD. (Israel), Comercial Mexicana (Mexico), Eroski (Spain), Nishimatsuya (Japan), Magnit (Russia), Landmark Group’s Max Stores (certain Middle East and North Africa countries), and the TJX Companies (U.S., Canada and Europe).

Statements included within this news release may contain forward-looking statements for purposes of the safe harbor provided by the Private Securities Litigation Reform Act of 1995. When used, the words “anticipates,” “believes,” “expects,”“may,”“should,” and similar expressions are intended to identify such forward-looking statements. Forward-looking statements included in this press release (including, without limitation, express or implied statements regarding potential future business development) involve known and unknown risk and uncertainties that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such risks and uncertainties, include, but are not limited to, the effect of global economic conditions, the financial condition of the apparel and retail industry, adverse changes in licensee or consumer acceptance of products bearing the Company’s brands, the ability and/or commitment of the Company’s licensees to design, manufacture and market Cherokee, Liz Lange, Completely Me, Sideout and Carole Little branded products, the Company’s dependence on Target for most of the Company’s revenues and the Company’s dependence on its key management personnel. The risks included here are not exhaustive. A further list and description of these risks, uncertainties and other matters can be found in the Company’s Annual Report on Form 10-K/A for Fiscal Year 2013, and in its periodic reports on Forms 10-Q and 8-K. Given these risks and uncertainties, you should not place undue reliance on forward-looking statements as a prediction of actual results. The Company disclaims any intent or obligation to update any of the forward-looking statements contained herein to reflect future events and developments.

CHEROKEE INC. (PRELIMINARY) CONSOLIDATED BALANCE SHEETS Unaudited (amounts in thousands, except share and per share amounts)
	August 3, 2013			February 2, 2013
Assets
Current assets:
Cash and cash equivalents	$	2,810		$	2,424
Receivables	6,734			5,147
Income taxes receivable	—			779
Prepaid expenses and other current assets	538			426
Deferred tax asset	48			48
Total current assets	10,130			8,824
Trademarks, net	21,774			22,131
Deferred tax asset	1,941			1,693
Property and equipment, net	1,091			945
Other assets	54			59
Total assets	$	34,990		$	33,652
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and other accrueds	$	1,407		$	1,125
Short term debt	3,527			3,291
Income taxes payable	78			—
Accrued dividends	—			840
Deferred revenue	102			80
Accrued compensation payable	132			63
Total current liabilities	5,246			5,399
Long term liabilities:
Long term debt	11,465			13,228
Deferred tax liability	1,384			1,316
Other non-current	120			183
Total liabilities	18,215			20,126
Commitments and Contingencies
Stockholders’ Equity
Preferred stock, $.02 par value, 1,000,000 shares authorized, none issued and outstanding	—			—
Common stock, $.02 par value, 20,000,000 shares authorized, 8,401,834 issued and outstanding at August 3, 2013 and 8,400,168 issued and outstanding at February 2, 2013	167			167
Additional paid-in capital	20,778			20,249
Retained earnings (deficit)	(4,170		)	(6,890		)
Total stockholders’ equity	16,775			13,526
Total liabilities and stockholders’ equity	$	34,990		$	33,652

CHEROKEE INC. CONSOLIDATED STATEMENTS OF INCOME Unaudited (amounts in thousands, except per share amounts)
	Three Months ended						Six Months ended
	August 3, 2013			July 28, 2012			August 3, 2013			July 28, 2012
Royalty revenues	$	7,495		$	6,306		$	15,548		$	13,821
Selling, general and administrative expenses		4,239			3,644		9,611				7,799
Operating income		3,256			2,662		5,937				6,022
Other income (expense):
Interest (expense)		(123	)		(23	)	(255		)		(73	)
Interest income and other income (expense), net		14			—		5				12
Total other income (expense), net		(109	)		(23	)	(250		)		(61	)
Income before provision for income taxes		3,147			2,639		5,687				5,961
Income tax provision		1,209			1,031		2,127				2,282
Net income	$	1,938		$	1,608		$	3,560		$	3,679
Basic earnings per share	$	0.23		$	0.19		$	0.42		$	0.44
Diluted earnings per share	$	0.23		$	0.19		$	0.42		$	0.44
Weighted average shares outstanding:
Basic		8,393			8,390		8,393				8,389
Diluted		8,405			8,406		8,404				8,396
Dividends declared per share	$	0.00		$	0.20		$	0.10		$	0.40

CHEROKEE INC.
GAAP TO NON-GAAP FINANCIAL METRICS
Unaudited
(amounts in thousands, except percentages and per share amounts)
	Three months ended						Six months ended
	August 3, 2013			July 28, 2012			August 3, 2013			July 28, 2012
GAAP Royalty revenues	$	7,495		$	6,306		$	15,548		$	13,821
Selling, general and administrative expenses:
GAAP Selling, general and administrative expenses		4,239		$	3,644			9,611			7,799
Professional fees*		(105	)		-			958			-
Non-GAAP selling, general and administrative expenses		4,344			3,644			8,653			7,799
Non-GAAP selling, general and administrative expenses as a percentage of revenue		58	%		58	%		56	%		56	%
Operating income:
GAAP Operating income		3,256			2,662			5,937			6,022
Professional fees*		(105	)		-			958			-
Non-GAAP Operating income		3,151			2,662			6,895			6,022
Non-GAAP Operating income as a percentage of revenue		42	%		42	%		44	%		44	%
Net income:
GAAP Net income		1,938			1,608			3,560			3,679
Professional fees*		(105	)		-			958			-
Tax		40			-			(358	)		-
Non-GAAP Net income	$	1,873		$	1,608		$	4,160		$	3,679
Non-GAAP Diluted earnings per share	$	0.22		$	0.19		$	0.50		$	0.44
Weighted average diluted shares outstanding:		8,405			8,406			8,404			8,396
EBITDA:
GAAP EBITDA		3,750			3,736			6,917			3,736
Professional fees*		(105	)					958
Non-GAAP EBITDA	$	3,645		$	3,736		$	7,875		$	3,736
Non-GAAP EBITDA as a percentage of revenue		49	%		59	%		51	%		27	%
Effective Tax Rate:		38.4	%		39.1	%		37.4	%		38.3	%
The table above presents “non-GAAP financial measures” as that term is defined in Regulation G, including non-GAAP SG&A and earnings per share. The most directly comparable GAAP financial measures and information reconciling these non-GAAP financial measures to the Company’s financial results prepared in accordance with GAAP are included in the table. Management believes that the one-time expenses make it difficult for investors to evaluate the underlying performance of the business and that non-GAAP Net Income excluding these expenses and related tax effects provides a useful measure of performance for the quarter and six months as it offers consistency and comparability with past financial performance, facilitates period-to-period comparisons, and enables better comparisons with other peer companies. Cherokee’s management uses these non-GAAP financial measures along with the most directly comparable GAAP financial measures in evaluating Cherokee’s operating performance, capital resources and cash flow. Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information presented in compliance with GAAP, and non-financial measures as reported by Cherokee may not be comparable to similarly titled amounts reported by other companies.   *($105k) and $958 for the three and six month periods ending August 3, 2013, respectively of professional and consulting fees that we believe will not recur and are related to the identification and remediation of weaknesses identified in the Company’s 10-K/A for the Fiscal Year 2013. These fees included audit fees, legal fees and consulting fees to evaluate Cherokee’s control systems and procedures, perform SOX related testing and compliance work, and provide additional analysis around tax provision, expense oversight and reconciliation analysis.