Cherokee’s Pattern of Self-Renewal

One of the most interesting Valley-area business stories to watch in 2017 is taking place at an apparel company in Sherman Oaks. That’s where executives inside the headquarters of Cherokee Inc. are scrambling to offset the loss of their company’s biggest customer. Cherokee has long been a kind of de facto house brand at Target Corp.’s stores, but that relationship will largely end by the close of this month. Target accounts for 43 percent of Cherokee’s sales, according to one analyst. One of Cherokee’s biggest moves came last month when it finalized its purchase of Dutch shoemaker Hi-Tec Sports International. As detailed in an article by Staff Reporter Helen Floersh in the Dec. 12 issue of the Business Journal, that acquisition is particularly interesting because Hi-Tec was a fully integrated company – it designed, manufactured and retailed its products – while Cherokee solely licenses its brands without doing the actual manufacturing or selling. As a result, Cherokee sold off Hi-Tec’s hard assets, earning back some of the purchase money, so as to convert Hi-Tec to a licensing company. The deal was hailed by some analysts. Cherokee gets a greater presence in overseas markets and a leg up in footwear, all without burdening its balance sheet. And Vince Martin, writing in Seeking Alpha, pointed out that because Cherokee bought a Dutch company, there’s a “mini inversion” aspect to the deal that will cut Cherokee’s marginal tax rate by about a third, he conjectured. Will the Hi-Tec move, along with others Cherokee is making, be enough to keep the company thriving? That’s the big question – and the reason Cherokee will be among the Valley area’s most interesting business stories this year. • • • California is enjoying a remarkable economic turnaround. Job creation is up, the unemployment rate is down and elected officials are getting raw hands from all the back patting they’re doing. But there’s one problem a lot of folks are overlooking: Generous public-sector pensions up and down the state remain hugely underfunded. It’s an immense and deepening hole. And we’re only starting to sense the enormity of it. You may have seen the Dec. 30 article in the Los Angeles Times about the little San Gabriel Valley town of El Monte. Thanks to a supplemental pension plan city officials gave themselves in 2000, city workers get a pension from the city in addition to the generous one they get from the state. That means city workers can retire early, with fully paid health care benefits for life, and double dip on pensions. As a result, the former city manager pulls in $216,000 a year. The newspaper pointed out that one quarter of El Monte’s residents live below the poverty line, yet they must pay extra taxes for those pensions. In fact, 28 percent of the city’s general fund budget goes to pensions for city workers. (Most other cities in the country pay less than 10 percent.) As more money is paid for pensions, there’s less money for street repair, police protection and the like. The city of Los Angeles isn’t far behind El Monte. It pays 20 percent of its general fund budget for retirement costs. That’s up from 10 percent in 2005, and it could go to 27 percent in the next five years, according to a column by Jack Humphreville, an LA Watchdog writer for CityWatch. Statewide, the pension shortfall is enormous. Ed Ring, writing in the California Policy Center last May, pointed out that if all the public pension funds in the state lived up to the rosy scenario that they could earn 7.5 percent returns in the markets year after year, it still means taxpayers should be putting $38 billion a year into the various public pension funds instead of the $21.2 billion they did in 2014. And if the returns were more like 5.5 percent a year, it would require a taxpayer contribution of $67.6 billion a year – three times the current amount, he wrote. The trouble is, the longer this situation festers, the deeper the hole gets. Actions could be taken to help, such as raising the retirement age, cutting off the generous pensions to incoming employees and boosting taxpayer contributions to the funds. Those actions wouldn’t be enough to make the pensions whole, but they would help. Yes, California is basking in a warm story about how its economy has improved, and indeed it has. But any headline about that turnaround should include a big asterisk. Charles Crumpley is editor and publisher of the Business Journal. He can be reached at [email protected].