After two years of disappointing losses, apparel company Cherokee Inc. is doubling down on what made the business successful in the first place. Cherokee’s business model has historically centered on licensing its Cherokee, Tony Hawk, Everyday California and other brand trademarks to clothing manufacturers and vendors. But as the retail landscape has transformed in recent years, the Sherman Oaks company sought to diversify its business with the acquisitions of brick-and-mortar retailer Flip Flop Shops in 2015 and footwear producer and distributor Hi-Tec, which it purchased for $96 million last year. The moves ultimately proved costly for Cherokee, which reported losses of $7.9 million last year and $10.1 million (excluding a one-time impairment charge) for fiscal 2018. To get back on track, the company has restructured its business operations to focus solely on its core licensing model. “During the first half of this year, Cherokee returned to its original goal of being a licensor with no inventory and light assets,” Cherokee Chief Executive Henry Stupp told the Business Journal. “We were successful in converting all aspects of our business back to a pure royalty generating model.” Flip Flop failure Central to this shift was Cherokee’s sale of Flip Flop Shops to footwear manufacturer Bearpaw Holdings for an undisclosed amount in June. Cherokee originally acquired the franchise — which sells sandals and other casual footwear from brands including Quiksilver, Roxy and Reef — for $12 million in 2015. Stupp said the decision to sell stemmed from the decline of shopping malls in the U.S. and difficulties integrating the chain’s 59 operating franchises into Cherokee’s larger business. Flip Flop Shops annual revenue dipped 34 percent to $3.1 million last year. The other key piece of the company’s transition was converting global distribution for its Hi-Tec footwear brand from an indirect sales business to a full licensing model. Until this year, Cherokee had been selling Hi-Tec products to legacy distributors in Latin America, Asia and Eastern Europe. Cherokee now licenses the distribution to a separate company and earns royalties from the sales. The company significantly restructured its Hi-Tec operations and cut the brand’s staff by 60 percent, a process that was more trying than management expected. “We encountered a lot of difficulties with the integration and transition services we had to perform on behalf of our licensees until they were fully up and running,” said Stupp. “It took twice as long and cost nearly twice as much as what we had forecast.” In a September quarterly earnings report, the company stated it incurred $5.6 million in one-time charges related in large part to the move. Steve Brink, Cherokee chief financial officer, said the company has streamlined global operations across business segments to focus on signing new licensing partnerships, developing new products and investing in marketing its core brands. In fiscal 2018, the company cut sales and administrative expenses by 37 percent. “We now have an efficient structure that’s organized on a global basis – one marketing team, one finance team and one legal team managing our business around the world, regardless of where they sit on your system,” he said. Cherokee currently maintains license agreements with retailers and manufacturers in around 80 countries and 20,000 retailers worldwide. In April, the company announced a licensing deal for its namesake Cherokee brand with German discount supermarket chain Lidl, which has more than 10,000 store locations in Europe. The agreement includes an integrated marketing campaign featuring in-store branded signage, social and digital media and consumer-focused promotions. Debt stablization Ilse Metchek, president of the California Fashion Association in Los Angeles, believes that despite Cherokee’s recent struggles, apparel licensing remains a strong business model — especially as the market for licensed apparel products hit $40 billion last year, according to the International Licensing Industry Merchandisers’ Association. But to be successful as a licensor, she said, apparel companies must pay close attention to changes in consumer tastes. “They have to hang their hat on the right brands,” she said. “If you take the model of Supreme or the Kardashian brands, it’s all about licensing.” Metchek added that Cherokee is smart to invest in developing new products and marketing. But the company still faces significant challenges if it hopes to attain the status of the Kardashian family’s popular clothing and makeup lines. In 2017, Target Corp. ended its U.S. licensing partnership with Cherokee’s namesake brand to make room for its own signature apparel line. Target accounted for more than 40 percent of Cherokee’s total revenue, which has forced the company to pursue new smaller licenses with wholesalers and manufacturers. As a result, Cherokee brand revenues were cut in half in fiscal 2018, down to $11.1 million from $23 million the previous year. Total revenue for the most recent quarter were also down 10 percent year-over-year, which the company attributed to the transition to the new licenses. In addition, the Cherokee recognized a $35.5 million impairment charge on last year’s earnings report related to its Tony Hawk, Liz Lange, Flip Flop Shops and Everyday California trademarks. The non-cash accounting charge stemmed from the expiration of licenses and lower-than-expected brand growth, Brink said. In the quarterly filing, Cherokee also disclosed that it was in danger of insolvency. The company, which also conducts business as Cherokee Global Brands, stated it had substantial liquidity issues and may be unable to pay down its long-term debt, raising “significant doubt as to the ability of Cherokee Global Brands to continue as a going concern.” To address its financial instability, the company refinanced its debt with a $40 million loan in August. The loan, from Boston-based Gordon Brothers Finance Co., increased the company’s overall liquidity by $5.5 million and raised its long-term debt from $45.2 million to $53.5 million. “We improved our position by refinancing the business in August,” said Brink. “We have a vendor who’s much more of a business partner than the previous lender.” With the refinancing deal in place, Stupp believes the company is poised for a turnaround. “We believe that the worst is behind us, and now we’re focusing on a return to a profitable business,” he said.
