Stepping Out

With the apparel retail sector in a state of flux, Cherokee Global Brands is looking for new ways to secure business with store chains and consumers. The Sherman Oaks brand licensing company took its biggest leap into new markets in October when it acquired FFS Holding Inc., operator of casual footwear retailer Flip Flop Shops. “Of all of the transactions we’ve done, this is one of our most proud transactions because we’ve identified something that really fits well into our global strategy,” said Henry Stupp, Cherokee’s chief executive. Cherokee’s move from licensor of brand names to brick-and-mortar store operator comes at a time when established retailers are retooling. This month Wal-Mart Stores Inc. announced it would close 269 domestic and international locations this year. Macy’s Inc. and Sears Holding Corp. also announced earlier in the month that they would close stores and cut thousands of jobs across the country. Despite the retail landscape, Cherokee has big plans for its new footwear brand. Flip Flop Shops will continue to grow globally using the franchise model, and Cherokee plans to expand the brand further using the shop-in-shops concept that has grown in popularity with its existing large retail customers. The acquisition also gives Cherokee the opportunity to distribute products from its portfolio into stores directly. “Of all of the fashion categories, footwear is the one exceeding expectations. It’s doing much better than apparel so I’m not surprised they went into footwear,” said Ilse Metchek, president of the California Fashion Association in Los Angeles. “The shop-within-a-shop concept is definitely the way to get maximum exposure, (but) it’s also the costliest way because you now assume responsibility for the sale of the merchandise.” Flip flopping? Though Flip Flop Shops is an unusual addition to Cherokee’s portfolio, it’s not the company’s first foray into specialty footwear. Cherokee got its start in 1973 as a footwear designer specializing in hand-crafted “flower-child” wedges that were picked up by Macy’s and Bloomingdales. It wasn’t until 1983 that the brand expanded to apparel. Cherokee’s portfolio includes a variety of brands including Everyday California of La Jolla, which features adult and children’s apparel; Tony Hawk for young men; and Liz Lange, which specializes in women’s maternity clothing. Cherokee acquired FFS Holding for $12 million, half in cash and the remainder in debt from JPMorgan Chase & Co. in New York. On the flip side, FFS Holding was in the market for a strategic partner to help accelerate growth when it was introduced to Cherokee. The two companies deliberated for four months and an agreement was reached with financial advisement from Symphony Investment Partners in Santa Barbara and Meadow Lane Capital in New York. “Cherokee has a lot of credibility and deep history globally with a lot of retailers. With it we stand to gain the acceleration of our growth the right way,” said Brian Curin, president of FFS Holding. “They also have a huge knowledge base, resources, and can take a brand and product from start to finish – from design to manufacture and from marketing to branding.” Flip Flop Shops has more than 90 franchises with locations in Canada, South Africa, as well as the Caribbean and Middle East. About 150 franchises are in development worldwide. The stores are predominantly within malls or stand-alone locations in tourist areas. Greater Valley-area shops can be found in Sherman Oaks, Woodland Hills and Universal City. The retailer carries an assortment of popular brands including OluKai, which specializes in Hawaiian leather sandals; Quiksilver, an Australian surf-wear brand; and Roxy, a specialty women’s fashion and beach-wear brand. Popular brands Under Armour and Puma have been added since the acquisition, and Curin said with Cherokee’s guidance, the stores now have the ability to bring private labels and house brands to the shops. Three months into the acquisition, Cherokee is working to add digital and mobile e-commerce channels to Flip Flop Shops. Currently there’s one over-arching website for all stores, but the next version will allow visitors to customize and purchase shoes from their mobile devices. “We have a methodology based on ZIP codes or radiuses where if someone orders a flip flop and it’s within the radius of one of the stores’ owners, we will share in the revenue stream with that owner,” said Howard Siegel, chief operating officer at Cherokee. Shops in shops For Cherokee, Flip Flop opens the door to geographic expansion. The company is working to identify partners in Europe, Asia and Latin America to expand using both the franchise and shop-in-shops model. “The one thing that Cherokee has been very good at – without pounding our chests – is building a business globally. We have relationships in over 60 countries,” Siegel said. “We have partners around the world that have 50 to 200 locations within a country and our ability to sit down with them and add shop-in-shops is something that is not only intriguing but is going to be a reality.” The goal is to rapidly increase the franchise’s unit count, increase brand visibility by piggy-backing off big-box retailer’s foot-traffic and ultimately generate an additional revenue stream. Stupp said Cherokee is now negotiating with partners in several countries to get Flip Flop Shops into retailers. The company will announce new partnerships in the first half of the year. “Shop-in-shops is now becoming much more intriguing to big box (retailers), or what I call big retail, because there are great success stories out there for us to look at – like what Sephora did with JCPenney or Sunglass Hut with Macy’s,” Stupp said. Shop-in-shops started picking up momentum in the early 2000s. And now that brick-and-mortar locations are suffering amidst ample e-commerce competition, the model has become an added cushion, giving big-box stores access to brands not otherwise available. J.C. Penney Co. launched an exclusive partnership with Sephora in 2006 bringing the makeup retailer to what is now more than 500 stores. This mirrors similar agreements Macy’s reached with Luxottica Group’s Finish Line and Sunglass Hut. “We know that many of the brands under a Flip Flop Shops banner are open to the concept of shop-in-shops,” Stupp said. Target replacement Even as Cherokee works to build on acquisitions, including Everyday California, a brand it acquired early last year, it’s also working to fill the hole left by Target Corp.’s decision to discontinue its license deal with the Cherokee brand for U.S. stores beginning in 2017. The license and existing royalty payments will remain in effect until February 2017. By that time, Cherokee plans to have another licensee on board. Still, Target’s U.S. stores will continue to carry Cherokee’s Liz Lange brand. “New management at Target in the U.S. has decided to go down a different merchandising path and that resulted in decisions for them not to renew a relationship with Cherokee,” Stupp explained. “While we still have other businesses operating with them, the Cherokee brand will now be open for the first time in a number of years to retail in the U.S.” Though Stupp is confident Cherokee will get the brand back on store shelves before Target’s contract expires, California Fashion Association’s Metchek is wary that the company will be able to secure a deal with another big-box retailer in the future seeing as those companies are more interested in acquiring brands than paying a license fee. “They’ve been aggressively looking for a replacement for their Target Cherokee business, and that’s going to be hard to replace. I think they’re just going in a different direction,” she said. “A Target kind of relationship with a single brand is not going to happen anymore. Target is making its own deals. That was a deal (likely) left over from 20 years ago and it’s just run its course. I don’t think Target or any of the big-box retailers will link itself with a single brand unless it’s their own brand.” An example of that trend is JCPenney’s acquisition of Liz Clairborne Inc.’s brands for $267 million in 2012. JCPenney had been the exclusive licensee for all Liz Claiborne merchandise since 2010 before the acquisition. Still, that’s not a universal consensus. Jeff Van Sinderen, an analyst with brokerage B. Riley & Co. in Santa Monica, said he’s confident Cherokee will find another agreement to replace the loss of its Target revenue. In a September report, Van Sinderen noted that Target’s decision not to extend its license, originally entered into in 1995, had nothing to do with the success of the Cherokee brand. “We believe that with the interest that potential licensees have shown in the Cherokee brand over recent years, Cherokee Global Brands is likely to sign a much better, more comprehensive deal for the U.S,” Van Sinderen wrote. Van Sinderen listed JCPenney and Walmart as potential licensees and reiterated his “Buy” rating. “Although disruptive in the short-term, this event should prove to be a longer-term positive,” the report stated. For its fiscal third quarter ended Oct. 31, Cherokee reported a $600,000 loss on revenue of $8.1 million, compared to the $8.7 million it reported the year prior. The poor results stemmed from the bankruptcy of Target Canada, Cherokee’s former primary licensee in Canada, which announced it was exiting the market in April and closing 133 Canadian stores. Taking that into account, Cherokee quickly inked a deal with Sears Canada, which it announced at the end of April. The multi-year agreement includes a range of Cherokee brands and will launch this spring. The company also terminated its relationship with British retailer Tesco, which it announced in its second quarter earnings. That relationship was replaced by a licensee agreement launched in July with Home Retail Group’s Argos, a catalog retailer in the United Kingdom and Ireland. “The nature of retail is that there are always going to be shifts, and the measure or testament of who you are as a company is how you address these shifts,” Stupp said. “There will always be challenges – some we will see coming, others we won’t. Having a structure that’s balanced allows us to address each challenge as it occurs.”