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Cherokee Inc. (NASDAQ:CHKE)

F4Q13 Earnings Call

April 30, 2013 4:30 pm ET

Executives

Investor Relations – Director of Investor Relations

Henry Stupp – Chief Executive Officer

Jason Boling – Chief Financial Officer

Analysts

James Fronda – Sidoti & Co.

Jeff Van Sinderen – B. Riley & Co. LLC

Jason Stankowski – Clayton Partners LLC

Operator

Greetings and welcome to the Cherokee Incorporated Fourth Quarter and Fiscal Year 2013 Earnings Conference Call. At this time, all participants are in a

listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Kimberly Esterkin. Thank you Ms. Esterkin, you may begin.

Kimberly Esterkin

Thank you, speaking today will be the company’s Chief Executive Officer, Henry Stupp and Chief Financial Officer, Jason Boling. Before I hand the call over to management please note that on this call certain information presented contains forward-looking statements.

Certain statements contained herein 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 conference call involve risks, known and unknown 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.

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 for Fiscal Year 2012, 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.

This call also includes the discussion of non-GAAP financial measure as the term is defined in Regulation G, including earnings per share excluding the effect of certain tax benefits. 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 earnings press release which is posted on the company's website at http://www.cherokeegroup.com.

And with that, I’ll hand the call over to Cherokee’s Chief Financial Officer, Jason Boling.

Jason Boling

Good afternoon everyone and thank you for joining us today as we review our fourth quarter and fiscal year 2013 results. I am very happy to have recently joined the Cherokee Group and had such an exciting time in the company’s growth and expansion.

While I’ve only been at Cherokee a few weeks, I recognize the hard work and efforts of the company has undergone for the past two years. I look forward to working with my colleagues to execute Cherokee’s long-term strategic plans.

We’re going to approach this earnings call a bit differently than in the past. I will first discuss our financial results for the quarter and for fiscal year 2013. Then I’ll turn the call over to Henry Stupp, our Chief Executive Officer to speaking further detail about our brands, our partners and our plans for growth before we open the call up to your questions.

Turning to the results, net revenues for the fourth quarter of fiscal 2013 were $6 million consistent with the prior-year quarter. For the full-year, revenues totaled $26.6 million, an increase of 3.7% from $25.6 million in fiscal year 2012 mainly driven by increased Royalty revenues from target in U.S., the addition of new retail partnerships such as Nishimatsuya in Japan and the acquisition of the Liz Lange brand late in the third quarter of fiscal 2013. Selling, general and administrative expenses for the three and 12 months ended February 2, 2013 including the amortization of trademarks were $4.3 million and $15.5 million respectively as compared to $3.5 million and $14.9 million in the comparable period last year.

The increase in our SG&A during the fourth quarter and fiscal 2013 was primarily related to increased cost associated with product development. These costs are essential requirements toward re-launching the Cherokee brand at Tesco, increasing the amount of services we offer existing licensees and for solicit in future licensees. Professional fees also increased as a result of cost associated with the work on potential acquisitions. Lastly, we had increased employee stock compensation mixed up with all partially offset by decreases in marketing expenses.

Operating income for the fourth quarter totaled $1.7 million versus $2.5 million from the same period last year. On a fiscal year basis, operating income totaled $11.1 million compared to $10.7 million for fiscal 2012. Our overall operating margins for the quarter were 29% of revenues and 42% of total revenues for the fiscal year, consistent with last fiscal year. For the year-ended February 2, 2013, we recorded a tax provision of $4 million, up from $2.9 million in the comparable period last year due mainly to the tax refund of $1.4 million from the franchise tax board in fiscal 2012.

We ended the fourth quarter with net income of $1.1 million or $0.13 per diluted share compared to net income of $1.5 million or $0.18 per diluted share in the fourth quarter last year. Our fiscal 2013 net income totaled $6.8 million or $0.81 per share compared to $7.5 million or $0.89 per share in fiscal 2012. We attribute this reduction in net income and earnings per share primarily to the FTB tax refund. Excluding FTB tax refund, fiscal year 2012 earnings per share would have been $0.72, therefore on a non-GAAP basis, EPS grew from $0.72 to $0.81 per share or 12.5%.

Turning to our balance sheet and related metrics, total cash and cash equivalents at February 2, 2013 were $2.4 million down from $7.4 million at the end of fiscal 2012, primarily due to the prepayment of all the outstanding principal and interest for our former loan agreement with U.S. Bank.

Cash flow from operations totaled $9.8 million for the 12 months ended February 2, 2013. Our cash requirements for fiscal 2014 were primarily be for our operations, debt service as we paid dividends as determined by our Board. A quarterly dividend payments of approximately $840,000 or $0.10 per share will be paid on or around June 15 to shareholders of record as of June 1, 2013, and reflects an annualized dividend yield of roughly 3%. Since 1996, the Company has paid approximately $225 million in dividends and distributions to its stock holders.

Thank you for all your time, before I turn the call over to Henry, I’d like to let you know that Cherokee will be presenting at two Celtic Conferences this upcoming May; The B. Riley Annual Investor Conference on May 21 and Citi’s Global Consumer Conference on May 29.

I look forward to meeting many of you in person next month and with that I’ll turn the call over to Henry.

Henry Stupp

Thank you, Jason. We’re very happy to welcome you to the Cherokee family. With the addition of Jason, along with our latest Board member, Frank Tworecke both in fiscal 2013, the Cherokee board management teams have grown into a well rapid group of apparel and financial industry experts with big knowledge of the global retail and licensing market place.

Fiscal 2013 was also the first full-year of implementing our 360 degree approach to generating long-term sustainable growth for our customers, our partners and our shareholders. As a result, we saw consistent branding and product quality across many partner countries and with our tool box of capabilities and enhanced infrastructure, we were able to deploy our strategies faster and in more markets than ever before.

We completed fiscal 2013 with solid revenues of $26.6 million, up roughly 4% over fiscal 2012. This growth was achieved through the efforts of our existing new partners while offsetting a loss in revenues of over $3 million from Tesco and Norma Kamali. I will like to begin my discussion of fiscal 2013 by speaking about our new brands. I will then discuss our retail partners before concluding with a review of our plans for growth.

Starting with new business, this past September Cherokee acquired the Liz Lange Maternity and Completely Me by Liz Lange brand. Through this acquisition we entered into an exclusive, immediately accretive direct retail partnership with Target in the United States and Canada from maternity apparel and bags that dates back over decade. Our Liz Lange contract with Target was recently renewed for an additional three-year period and has been further expanded to include Target Canada.

At present, Liz Lange Maternity is solding over 1,700 U.S. stores and has expanded into Target Canadian stores in addition to Target.com. With two major legacy brands now being marketed by top markets, we will leverage our relationship with mothers and mothers-to-be by developing unique marketing programs that combine the best attributes of the Cherokee and Liz Lange brands. In addition, as with our namesake Cherokee brand, Liz Lange Maternity has extensive international growth potential. We are currently pursuing licensing opportunities in Western Europe, the Middle East, Asia, the Americas and Africa in addition to the development of new product categories. In addition to Liz Lange, this past January, we re-welcomed the Cherokee School Uniform category to our portfolio. We acquiring Cherokee School Uniforms is yet another important milestone to expanding our overall product offering. Through this acquisition, we further strengthen our relationship with Target via a new three-year license plus renewals with separate minimum guarantees and a flat 2% royalty.

Most recently, in February, we entered into a license partnership with international super model and fashion icon Alessandra Ambrosio to market and license our premier lifestyle brand ále by Alessandra. Alessandra brings a decidedly unique perspective to our collection that has global appeal. We expect to debut Alessandra’s collection of fashionable, functional women’s apparel, specialty and department stores in 2014. Cherokee in collaboration with Alessandra and her team is currently in negotiation with potential license fee partners in Brazil, Europe and the Americas.

While the expansion of our brand portfolio was essential to our growth in fiscal 2013, the cultivation of our relationships with each of our retail partners also remained the core driver of our success throughout the year. Today, the Cherokee family of brands are sold in over 40 countries; global retail sales are approaching $2 billion in more than 4,000 locations worldwide.

After mutually renewing our commitment to one in other year-ago and an extensive revamping of our retail partnership including a royalty rate increase from 2% to 4% on retail sales Cherokee branded products, I am very proud to announce that as of first quarter 2014, Cherokee’s enhance premium lifestyle collection is now available at 279 Tesco stores throughout Central Europe and United Kingdom as well as on Tesco.com.

Our in-house design team conceived a debut collection for Tesco with all products purchased directly by Tesco from leading best-in-class manufactures that have been identified through the Cherokee development group. This re-launch of Tesco has been supported by fully integrated multi-channel marketing periodicity campaign. And as you could see on the current slide, our newly designed men’s, women’s, and children’s collections have been properly adopted by the Tesco shopper.

In addition to our recent progress of Tesco, during fiscal 2013, we continued to see solid success with our exclusive North American partner, Target, although December and January sales in US were softer than anticipated due to macro economic condition such as the fiscal cliff, we did see solid growth in Target retail sales for the year. Domestic retail sales of Cherokee branded products have Target for fiscal 2013 grew to almost $1.1 billion or over 17% from 2012.

As a result, Cherokee revenues target also increased to $15 million, an increase of nearly 9% from $13.8 million in fiscal 2012. Target has positioned Cherokee’s one of their premier brands and therefore and we’re now collectively planning our business in a more strategic long-term fashion.

Cherokee children’s wear recently launched its select Target Canada stores and we’ll rollout additional locations over the coming months. Cherokee products recently launched in Target Canada and have been quite simply blowing out, not surprising given the excitement of the Target recent launch in Canada and Cherokee’s positioning as Canada’s number one children’s wear brand.

We look forward to continue growth with Target Canada and we will keep you posted on our progress. Keep in with a similar growth and international expansion, for over six years, Comercial Mexicana has been a very strong partner with Cherokee group.

Beginning this past summer, select Comercial Mexicana stores launched their new in source, shop-and-shop concept, a terrific showcase of the (inaudible) approach brought to life. We’re currently working on the rollout of additional Cherokee branded locations this year. With several months of sales that we branded Comercial Mexicana stores complete, the rebranded locations have demonstrated significant sales increases over the non-branded locations. Fiscal 2013 retail sales of Cherokee brand at products across all Comercial Mexicana stores increased 6% over fiscal 2012.

We are also proud to have announced this past February a multi-year license agreement extension with Comercial Mexicana through December 2019. Comercial Mexicana is a strong supporter of the Cherokee brand Invasion region and will continue to work closely with that retailer to grow Cherokee's presence throughout the Mexican marketplace.

Continuing on, we are in the midst of expanding our Middle Eastern presence, in July, Cherokee entered into an exclusive partnership with Maxx, the largest value based pricing retail chain in Middle East and Africa. Later this year Cherokee Men, Women, Kids, and juniors will be sold in almost 50 Maxx locations with broader store roll out expected over the coming months.

Now turning our attention to China. Sales with our exclusive Chinese partner RT-Mart continue to improve with annual retail sales of Cherokee branded products up over 38% over fiscal 2012. Cherokee has currently sold 221 RT-Mart Stores across Mainland China. In addition beginning this past February RT-Mart now sells Cherokee branded products online via China’s largest e-commerce website Tmall.com.

Cherokee joined the ranks of GAP and (inaudible) many other leading brands that have all open retail store fronts on Tmall.com. So with the launch of our own Cherokee boutique, we've been able to lever the faster e-commerce movement in China.

Fiscal 2013 was a typical year for the Cherokee group, we grew our shareholder base, adding several strong institutional investors, we also expanded our portfolio of brands over 40 countries and invested in the long-term growth of the company by expanding our management team as well as acquiring and partnering with new style focused select store brands. Each of these investments to revitalize and enhance our company and portfolio brand has been carefully considered to ensure the Cherokee Group maintains a strong financial position and generate value for our shareholders.

We are confident that we are well positioned to achieve sustainable growth and profitability with all of our partners. While we have certainly made much progress since past year our work is far from complete.

Throughout fiscal 2014, we will continue to look to expand the reach of our brand as well as strategically investing in our business, in our human capital to drive Cherokee towards further success.

As defined by our long-term strategic plan, our key growth initiatives for fiscal 2014 include, firstly organic growth, while we look to strengthen our current retail partnerships, expand our category offerings, lifestyle footprint and develop long-term flagship partners.

Secondly new retail partners. We will work to continue to harness the full potential of the brand portfolio by expanding into new geographic areas by partnering with innovative retailers and wholesalers in new regions. Recent discussions with potential new partners in Brazil, Western Europe and Australia are underway.

And last but not least strategic acquisitions as with the case in fiscal 2013, we will continue to target style-focused lifestyle brand to our portfolio. Our ideal acquisition candidates will be immediately – this to Cherokee and our shareholders with potential for international market growth and category expansion.

We’ve remained very confident in our brand initiatives, marketing efforts and increase important collaboration with our key partners that positions us well for future growth and development. As always, I would like to thank and acknowledge the efforts of our entire team, our licensees with support of our Board of Directors.

We thank you again for your support over the past year and look forward to continue to share our story with the investment community on next quarter’s call. That concludes our prepared remarks. Operator, please open up the call for questions.

Question-and-Answer-Session

Operator

(Operator Instructions) Thank you. Our first question is from James Fronda with Sidoti & Co. Please proceed with your question.

James Fronda - Sidoti & Co.

Yeah.

Unidentified Company Representative

Hi James.

James Fronda - Sidoti & Co.

How are you? Was there a portion of the, I guess the Tesco numbers during this quarter? Will that begin to start in the first quarter of fiscal 2014?

Unidentified Company Representative

We launched a little over 3.5 weeks ago. So we’ll start seeing the revenue a little bit in first quarter 2014, but now there is a lack of (inaudible). So starting this second quarter ’14, I’ll we’ll start to see – get some color on the Tesco difference.

James Fronda - Sidoti & Co.

Okay and I guess can you disclose how many stories you’re in right now with Target Canada?

Unidentified Company Representative

Target Canada has – from what we understand; we’re opening our stores in three pockets. So we’re somewhere between 17 to 25 locations right now. They did a soft launch a little over a month ago with relocations recently added another 17 to 20. And I think their next round of opening close in June.

James Fronda - Sidoti & Co.

Okay.

Unidentified Company Representative

Now the good rate for them is about 125 stages fully operational by the end of this year.

James Fronda - Sidoti & Co.

Right, okay. And I guess on the cost side, do you expect, I guess anymore type of management or personnel changes that will hit the SG&A line going forward, do you think that’s kind of behind us?

Unidentified Company Representative

Nothing but we have found out now, obviously as we contemplated the new brands, we have to examine the management team, but we’re pretty satisfied with the (inaudible).

James Fronda - Sidoti & Co.

Okay. Just one…

Unidentified Company Representative

Yeah.

James Fronda - Sidoti & Co.

Yeah. On the revenue side, I guess I was just looking for a little more growth. I guess just what happened with Target, which is heavily weighed during the quarter right in those two months January and February?

Unidentified Company Representative

Well, they were also a little bit overall, we understand that we’re performing quite well, Target has announced that were a little softer, we’re performing quite well.

James Fronda - Sidoti & Co.

Okay

Unidentified Company Representative

As we headed into this year, clearly we see great growth, we see that there is a lot of tailwinds behind us with many of our partners; obviously Tesco is the big turnaround. we have to replace as we’ve had during the call about $3 million of revenue and we’re able to do have a social break with our existing partners.

James Fronda - Sidoti & Co.

Right.

Unidentified Company Representative

So overall, we really want to be better, but we believe we have turned the corner and we’re moving forward.

James Fronda - Sidoti & Co.

Okay. And I guess Las Vegas with the dividend you expect to keep that dividend, right, no changes.

Unidentified Company Representative

Well, as we say in every call, we have dividends really important to survey their shareholders.

James Fronda - Sidoti & Co.

Right.

Unidentified Company Representative

We have the ability to do that in (inaudible), but we do keep in mind that is an important consideration. We publicly announced in the past with Cherokee overall from dividend through the real content, through yield in growth company.

James Fronda - Sidoti & Co.

All right. That’s all I have. Thank you.

Unidentified Company Representative

Thank you.

Unidentified Company Representative

Thank you.

Operator

Our next question is from the line of Jeff Van Sinderen of B. Riley. Please proceed with your question.

Jeff Van Sinderen – B. Riley & Co. LLC

Hi, good afternoon, and let me say congratulations on all your progress, maybe you can just talk a little about any early color, if there is any on the new premium at Tesco, is there anything or is it just too early on that?

Henry Stupp

Well, we’ve only begun for about four weeks, so we are seeing definitely some categories of product that are performing quite well, where are we now, in two weeks ago with 10 degrees and we launched the summer line. So we have mixed results some of it related to that, some of it (inaudible) the new fixtures up and running inside Cherokee. We are excited about what we are seeing in the quality of excellence, the consumer seem to be responding to the premium price points. So we are just a bit earlier by next quarter we will be able to give definitely more insight to the performance.

Jeff Van Sinderen – B. Riley & Co. LLC

Okay, fair enough. And then since you mentioned weather, what do you generally hearing about weather from your retail partners relevant to how it’s been impacting their business in the first part of this year. Are you hearing about any recent improvement over the last couple of weeks, and so it seems like it’s warming up at some regions of the U.S. And then maybe you can also just touch on your thoughts on the promotional levels in the domestic retail market?

Henry Stupp

Well, in terms of our performance we were so balanced domestically and I said it in every call. We are with the best partner in America with Target. They are a retailer that sticks to their fundamentals. They have got very strong brand. And while we may see the odd impact on weather generally all shapes itself out. So we are not seeing any real impact on weather domestically, but we did see a little bit of the weather impact in China over the last couple of weeks, where it’s been very cold there surprisingly cold at this time of the year. But overall, we haven’t ever really we don’t like the bearing weather on results. Retail is more likely to either so, we like it to be little warmer right now, we are taking sales people don’t have going to service more of that, it all generally meeting the excitement.

Jeff Van Sinderen – B. Riley & Co. LLC

Got it. Okay. Thanks very much and good luck for the rest of the quarter.

Unidentified Company Representative

Thank you.

Unidentified Company Representative

Thank you.

Operator

(Operator Instructions) Our next question is from Jason Stankowski of Clayton Partners. Please proceed with your question.

Jason Stankowski – Clayton Partners LLC

Hi guys. Curious if there were any severance charges from the exiting CFO and new CFO, and or any kind of exceptional expenses related to deals or other things in the G&A number, because I know you’ve kept a pretty good handle on that number in the past and have been committed to that. So just curious give any color around it?

Jason Boling

Sure, so this is Jason. So in the SG&A the biggest changes were related to our PD&D, so our product development, we increased some expenses relating to some work and samples. We also have some deal costs in the quarter and in the year, relating to some acquisitions that we had evaluated. And we also had increased stock based comps within the SG&A. As far as severance there, there was no severance in these numbers.

Jason Stankowski – Clayton Partners LLC

Okay, great. And as far as Tesco goes, I know, I was over there and the line looks really good, it was snowing I think a few days before we got there, so it’s definitely tough to get a read. I’m sure but things look good, I’m curious if you feel like you invested a lot of capital, in terms of expense into the Tesco launch for us that would be leveraged elsewhere in your negotiations in Eastern Europe. And just curious how those other international deals are progressing whether they are still in the first ending or you sort of close on any of them?

Unidentified Company Representative

Well, a couple of questions there, I will wrap it up into one. So let me go back, the investment that we’ve made to in the subsequent cash goal is really a corporate decision that was made through the introduction of 360 degree process, which we believe there is a fundamental requirement as a modern thinking brand owner that, where two years ago, we saw declines with every one of our partners on a name shake brand and now we are seeing growth with all of our partners and even we still anticipate cash to (inaudible).

So the lesson learned and the chemo was put into place does have an impact with all of our partners who are starting to adopt different pieces and we intend 360 degree process, whether it’s marketing, or branding or product development, or even buying from our denominated Cherokee development group resources, which we feel are effecting class manufacturers.

So that’s important for all of our existing partners, but we are also looking at is how we leverage the capabilities that have been introduced with our new partners as they determine. And many of our new partners are really interested in working with those based on the level of services, again, (inaudible). You also have to bear in mind that the royalty rates that we’re trying to historically have now increased.

So to wrap it out, yes, we’re spending the money on [PBND], but we are also looking to substantially increase our royalty revenue from 3% to 4% and we have raised the bar on the royalties that will command in this or move our partners and (inaudible) option is based on the leverage of it and support that we’ll able to provide the insight and the knowledge and tool box that we’re bringing to the table, they seem comfortable with rate that we’re charging, so I hope that answers your question and I do want to thank you Jason for taking the time today (inaudible) as you’ll be appreciated you are one of the more involved in that decision, I wanted to put some thank you for heading out there and spend some time with our team.

Jason Stankowski – Clayton Partners LLC

Yeah, absolutely, I was quite impressed with what they are doing and yeah, just any color you can give as well on kind of what earning we’re in and some of the other negotiations. I know, you’ve been talking about them for quite some time in Europe and to investors. I am just curious if you feel like, you’ve gotten to the point where you’ve isolated the best candidate and or it’s still just trying to figure out the strategy for, I guess the number of those countries. Any color you can give and that will be great? Thank you.

Unidentified Company Representative

Yeah, I think we’re intensive with some partners with pretty far down the pipe with that is we’ll hopeful in the next few days we’ll be able to make some announcements on some new territories and also organic growth percent of our decent partners, which we’ll talk about more in next quarters call.

Jason Stankowski – Clayton Partners LLC

Okay, Great. Thank you.

Unidentified Company Representative

Thank you.

Operator

(Operator Instructions). There are no questions at this time. I would like to turn the floor back to management for closing comments.

Henry Stupp

Sounds good, thank you. We’re surely speaking with you about in next quarter which will be early part of June. Thank you very much.

Operator

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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