Cherokee Inc. Reports Third Quarter 2014 Financial Results

• Quarterly revenue of $6.7 million; Q3 retail sales of $401 million, up 5.4% year-over-year
• Nine-month revenues increased approximately 8.2% year-over-year
• Announced 1 Million Share Stock Repurchase Program
• Finalized Liz Lange License Agreement in India with Mahindra Retail’s Mom & Me Stores
• Announces new Cherokee brand license agreement in Thailand, Singapore, Malaysia, Vietnam and Myanmar with Apostrophy Inc., a subsidiary of Connectin Asia

SHERMAN OAKS, Calif.--(BUSINESS WIRE)--Cherokee Inc. (NASDAQ: CHKE), a global marketer of style-focused lifestyle brands, today reported financial results for the third quarter ended November 2, 2013.

Net revenues for the third quarter were $6.7 million, consistent with the prior-year period. Revenues associated with Liz Lange and the Cherokee School Uniform brands offset a significant decrease of approximately $525,000 in Cherokee royalty revenues at Zellers Canada. Retail sales of Cherokee branded merchandise at Target U.S., excluding Cherokee School Uniforms, increased despite the tougher retail environment; however, royalty revenue from Target, as expected, declined $400,000 due to the deescalating royalty rate reached earlier this fiscal year as compared to Fiscal 2013.

Additionally during the third quarter, the devaluation of several foreign currencies negatively impacted revenue by approximately $122,000. Despite these currency devaluations, Cherokee’s international business continued to see growth during the quarter. Retail sales at Tesco increased 187% on a year-over-year basis.

Selling, general and administrative expenses for the third quarter were $4.1 million, or 61% of net revenues, compared with $3.4 million, or 51% of net revenues, in the prior-year period. This increase is related to personnel and development costs required to further maximize the 360-degree licensing model. During the quarter, the Company added to its infrastructure in anticipation of further growth in Fiscal 2015 including the launch of Cherokee-branded adult products on Target dotcom and the expansion of the Company’s brand portfolio into new territories.

Net income for the third quarter was $1.6 million, or $0.19 per diluted share, compared with $2.1 million, or $0.25 per diluted share, in the prior-year period.

“The Cherokee Group has seen solid progress year-to-date,” said Cherokee Chief Executive Officer Henry Stupp. “Despite a tough domestic retail environment, continued challenges facing the European economy and the closing of Zellers Canada, revenues for first nine months of Fiscal 2014 increased roughly 8.2% year-over-year. Clearly, the positive impact attributable to the refinement of our operating model combined with the acquisitions of the Liz Lange and Cherokee School Uniform businesses have strengthened the Company and positioned us for future growth and development.

“We are particularly excited about our recent expansion of Liz Lange Maternity in India with Mahindra’s Mom & Me Stores, and are happy to announce today a new brand license agreement for the Cherokee brand with specialty and freestanding stores in Thailand, Singapore, Malaysia, Vietnam and Myanmar with Apostrophy Inc., a subsidiary of Connectin Asia. In addition, our current progress with our namesake Cherokee brand in South America has contributed to our overall success.

“With just over a month and a half remaining in the fiscal year, we remain confident that our brand initiatives, marketing efforts, and increased support and collaboration with our key partners positions the Cherokee Group well for the future. Going forward, we will continue to evaluate ways to expand and enhance our current roster of brands as well as acquire additional brands to generate value for both our shareholders and retail partners,” Mr. Stupp concluded.

At November 2, 2013, the Company had cash and cash equivalents of $3.5 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: 13573027. 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 through Thursday, December 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: 13573027.

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 (Peoples 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.
CONSOLIDATED BALANCE SHEETS
Unaudited
(amounts in thousands, except share and per share amounts)
	November 2,			February 2,
	2013			2013
Assets
Current assets:
Cash and cash equivalents	$	3,462		$	2,424
Receivables	6,131			5,147
Income taxes receivable	—			779
Prepaid expenses and other current assets	365			426
Deferred tax asset	48			48
Total current assets	10,006			8,824
Trademarks, net	21,930			22,131
Deferred tax asset	2,222			1,693
Property and equipment, net	1,201			945
Other assets	52			59
Total assets	$	35,411		$	33,652
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and other accrueds	$	1,428		$	1,125
Short term debt	3,527			3,291
Income taxes payable	245			—
Accrued dividends	840			840
Deferred revenue	74			80
Accrued compensation payable	244			63
Total current liabilities	6,358			5,399
Long term liabilities:
Long term debt	10,583			13,228
Income taxes payable	1,404			1,316
Other non-current	113			183
Total liabilities	18,458			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, 8,403,500 issued and outstanding at November 2, 2013 and 8,400,168 issued and outstanding at February 2, 2013	167			167
Additional paid-in capital	21,073			20,249
Retained earnings (deficit)	(4,287		)	(6,890		)
Total stockholders’ equity	16,953			13,526
Total liabilities and stockholders’ equity	$	35,411		$	33,652

CHEROKEE INC.
CONSOLIDATED STATEMENTS OF INCOME
Unaudited
(amounts in thousands, except per share amounts)
	Three Months ended						Nine Months ended
	November 2,			October 27,			November 2,			October 27,
	2013			2012			2013			2012
Royalty revenues	$	6,684		$	6,730		$	22,232		$	20,551
Selling, general and administrative expenses	4,062			3,404			13,673			11,203
Operating income	2,622			3,326			8,559			9,348
Other income (expense):
Interest (expense)	(116		)	(65		)	(371		)	(138		)
Interest income and other income (expense), net	(2		)	3			3			15
Total other income (expense), net	(118		)	(62		)	(368		)	(123		)
Income before provision for income taxes	2,504			3,264			8,191			9,225
Income tax provision	941			1,187			3,068			3,469
Net income	$	1,563		$	2,077		$	5,123		$	5,756
Basic earnings per share	$	0.19		$	0. 25		$	0.61		$	0.69
Diluted earnings per share	$	0.19		$	0.25		$	0.61		$	0.68
Weighted average shares outstanding:
Basic	8,396			8,397			8,394			8,392
Diluted	8,408			8,436			8,406			8,405
Dividends declared per share	$	0.10		$	0.10		$	0.30		$	0.50

CHEROKEE INC.
GAAP TO NON-GAAP FINANCIAL METRICS
Unaudited
(amounts in thousands, except percentages and per share amounts)
	Three months ended						Nine months ended
	November 2, 2013			October 27, 2012			November 2, 2013			October 27, 2012
GAAP Royalty revenues	$	6,684		$	6,730		$	22,232		$	20,551
Selling, general and administrative expenses:
GAAP Selling, general and administrative expenses		4,062			3,404			13,673			11,203
Professional fees*		-			-			853			-
Non-GAAP selling, general and administrative expenses		4,062			3,404			12,820			11,203
Non-GAAP selling, general and administrative expenses as a percentage of revenue		61	%		51	%		58	%		55	%
Operating income:
GAAP Operating income		2,622			3,326			8,559			9,348
Professional fees*		-			-			853			-
Non-GAAP Operating income		2,622			3,326			9,412			9,348
Non-GAAP Operating income as a percentage of revenue		39	%		49	%		42	%		45	%
Net income:
GAAP Net income		1,563			2,077			5,123			5,756
Professional fees*		-			-			853			-
Tax affect		-			-			(319	)		-
Non-GAAP Net income	$	1,563		$	2,077		$	5,657		$	5,756
Non-GAAP Diluted earnings per share	$	0.19		$	0.25		$	0.67		$	0.68
Weighted average diluted shares outstanding:		8,408			8,436			8,406			8,405
EBITDA:
GAAP EBITDA		2,613			3,775			9,528			10,553
Professional fees*		-						853
Non-GAAP EBITDA	$	2,613		$	3,775		$	10,381		$	10,553
Non-GAAP EBITDA as a percentage of revenue		39	%		56	%		47	%		51	%
Effective Tax Rate:		37.6	%		36.4	%		37.5	%		37.6	%

*$0 and $853 for the three and nine month periods ending November 2, 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.