Cherokee Inc. (which may be referred to as we, us, our or the Company) is in the business of marketing and licensing the Cherokee, Sideout and Carole Little brands and related trademarks and other brands we own or represent. We are one of the leading licensors of brand names and trademarks for apparel, footwear and accessories in the world.
We own several trademarks, including Cherokee®, Sideout®, Sideout Sport®, Carole Little®, CLII®, Saint Tropez-West®, Chorus Line®, All That Jazz®, Molly Malloy® and others. As of January 31, 2009, we had eighteen continuing license agreements covering both domestic and international markets. During our fiscal year ended February 3, 2007 ("Fiscal 2007"), we terminated one material licensing agreement (our Finder's Agreement with Mossimo Inc.) in exchange for a one-time payment of $33.0 million during our fourth quarter of that fiscal year. As part of our business strategy, we frequently evaluate other brands and trademarks for acquisition into our portfolio.
In addition to licensing our own brands, we also assist other brand-owners, companies, wholesalers and retailers in identifying licensees or licensors for their brands or stores. For example, during our fiscal year ended February 2, 2008 ("Fiscal 2008") we assisted Norma Kamali in locating Wal-Mart as a global licensee of the Norma Kamali brand.
Cherokee was incorporated in Delaware in 1988. Our principal executive offices are located at 6835 Valjean Avenue, Van Nuys, California 91406, telephone (818) 908-9868. We maintain a website with the address www.thecherokeegroup.com. We are not including the information contained on our website as part of, or incorporating it by reference into, this Annual Report on Form 10-K.
We operate on a 52 or 53 week fiscal year ending on the Saturday nearest to January 31 in order to better align us with our licensees who generally also operate and plan using such a fiscal year. This results in a 53 week fiscal year approximately every four or five years. We do not believe that the extra week in the occasionally reported 53 week fiscal year results in any material impact on our financial results.
As used herein the term "First Quarter" refers to the three months ended May 3, 2008; the term "Second Quarter" refers to the three months ended August 2, 2008; the term "Third Quarter" refers to the three months ended November 1, 2008; and the term "Fourth Quarter" refers to the three months ended January 31, 2009.
Overview of Licensing Business
The Cherokee brand, which began as a footwear brand in 1973, has been positioned to connote quality, comfort, fit, and a "Casual American" lifestyle with traditional, wholesome values. We acquired the Sideout brand and related trademarks, which represent a young active lifestyle, in November 1997. The Carole Little, Saint Tropez-West, All That Jazz and Chorus Line brands and trademarks were acquired by us in December 2002, and are recognized women's brands. Our primary emphasis is domestic and international retail direct licensing. As of January 31, 2009, we had eighteen continuing license agreements covering both domestic and international markets, eleven of which pertained to the Cherokee brand.
Our license agreements are with retailers, wholesalers and global trading companies on an exclusive or non-exclusive basis. Of our eighteen licensing agreements, fourteen are retail direct contracts with domestic or international retailers, one is with a domestic wholesaler, and three are brand representations with third parties who have partnered, or are seeking to, partner with domestic or international retailers. In retail direct licensing, we grant retailers a license to use the trademarks on certain categories of merchandise. We collaborate with our licensees' product development staffs and merchandisers on design direction, packaging, marketing, and other aspects pertaining to the products sold with our trademarks, and in some cases our licensees modify or amplify the designs or create their own designs to suit their seasonal, regional and category needs. In nearly all cases, all products are subject to our pre-approved packaging, graphics and quality control standards, and all marketing campaigns are subject to similar oversight. The retailer is responsible for designing and manufacturing the merchandise. We refer to this practice as our "retail direct" licensing strategy. Wholesale licensees manufacture and import various categories of apparel, footwear and accessories under our trademarks and sell the licensed products to retailers. We plan to continue to solicit new licensees through our executive employees as well as using outside consultants.
Retail Direct Licensing Strategy
Our retail direct licensing strategy is premised on the proposition that in the United States and other advanced or developed retail markets worldwide, most aspects of the moderately priced apparel, footwear and accessories business, from product development and design, to merchandising, to sourcing and distribution, can be executed most effectively by large retailers, who not only command significant economies of scale, but also interact daily with the end consumer. We believe that these retailers in general may be able to obtain higher gross margins on sales and increase store traffic by directly designing, sourcing, stocking and selling licensed products bearing widely recognized brand names (such as our brands) than through carrying strictly private label goods or branded products from third-party vendors. We also expect that the enhanced profitability to retailers of private label products and in-store brands, coupled with the substantial marketing costs to establish and maintain a widely recognized apparel brand, will continue to increase the desirability to retailers of well-established brands with broad appeal. Our primary strategy is to capitalize on these trends around the world by licensing our portfolio of brand names directly to retailers, who, working in conjunction with us, develop merchandise for their stores, and to augment that portfolio by acquiring additional brands which have high consumer awareness, broad appeal and applicability to a range of merchandise categories.
Generally, royalty rates on retail direct licenses vary as a percent of the retailer's net sales of licensed products and may decrease depending on the retailer's annual sales of licensed products and the retailer's guaranteed annual sales of licensed products. As an incentive for our licensees to achieve higher retail sales of Cherokee, Sideout, Carole Little or other branded products, some of our royalty agreements are structured to provide royalty rate reductions once certain specified cumulative levels of sales are achieved by our licensees during each fiscal year. The royalty rate reductions do not apply retroactively to sales since the beginning of the fiscal year. As a result, our royalty revenues as a percentage of our licensees' retail sales of branded products are highest at the beginning of each fiscal year and decrease throughout each fiscal year as licensees reach certain retail sales thresholds contained in their respective license agreements. Therefore, the amount of royalty revenue received by us in any quarter is dependent not only on retail sales of branded products in such quarter, but also on the cumulative level of retail sales, and the resulting attainment of royalty rate reductions in any preceding quarters in the same fiscal year. The size of the royalty rate reductions and the level of retail sales at which they are achieved vary in each licensing agreement.
At January 31, 2009, we had eleven ongoing licensing agreements for our Cherokee brand. These were all retail direct licensing agreements. Licensing revenues from our Cherokee brand totaled $34.3 million for our fiscal year ended January 31, 2009 ("Fiscal 2009"), which represented 94.6% of our total revenues.
One of our most significant retail direct licensing agreements is with Target Corporation ("Target") for the Cherokee brand in the United States. The terms of our relationship with Target are set forth in an amended license agreement between Cherokee and Target entered into on November 12, 1997. Effective February 1, 2008, we entered into a restated license agreement with Target (the "Restated Target Agreement"). The Restated Target Agreement grants Target the exclusive right in the United States to use the Cherokee trademarks in various specified categories of merchandise.
During the term of the Restated Target Agreement, in most cases, we must receive Target's consent to enter into additional licensing agreements in the United States with respect to the Cherokee brand. Therefore, our current focus with respect to the Cherokee brand is to continue to develop that brand in international markets through retail direct or wholesale licenses with manufacturers or other companies that have market power and economies of scale in those respective markets.
The term of the Restated Target Agreement continues through January 31, 2012. However, the Restated Target Agreement provides that if Target remains current in its payments of the minimum guaranteed royalty of $9.0 million for the preceding fiscal year, then the agreement will continue to automatically renew for successive fiscal year terms provided that Target does not give notice of its intention to terminate the agreement during February of the calendar year prior to termination. Under the Restated Target Agreement, Target has agreed to pay royalties based on a percentage of Target's net sales of Cherokee branded merchandise during each fiscal year ended January 31st, which percentage varies according to the volume of sales of merchandise.
Royalty revenues from Target were $15.2 million during Fiscal 2009, $17.3 million during Fiscal 2008, and $18.4 million during Fiscal 2007, which accounted for 42%, 41.5%, and 24% (42% if excluding the $33.0 million from the termination of our Mossimo Finder's Agreement), respectively, of our consolidated revenues during such periods. The termination of the Restated Target Agreement would have a material adverse effect on our business (See Item 1A, "Risk Factors").
As of January 31, 2009, we had ten international license agreements for the Cherokee brand (Tesco, Zellers, Comercial Mexicana, Pick 'N Pay, GLS—Al Hokair, Falabella, Shufersal LTD., Grupo Pao de Acucar, Arvind Mills, and Grupo Eroski).
On August 1, 2001, we entered into a retail direct licensing agreement for the Cherokee brand with Great Britain's Tesco Stores Limited ("Tesco"). Tesco was granted the exclusive right to manufacture, promote, sell and distribute a wide range of products bearing our Cherokee brand in the United Kingdom and Ireland and is obligated to pay us a royalty based upon a percentage of its net sales of Cherokee branded products in those countries. In January 2004, we granted Tesco the rights to certain other countries including South Korea, Malaysia, Thailand, Slovakia, and Hungary, and in 2005, we added the rights to Poland and the Czech Republic. In March 2006, Tesco began to sell Cherokee branded products in the Czech Republic, Poland, and Slovakia, and, in July 2006, Tesco began to sell Cherokee branded products in Hungary. In addition, in February 2007 we added the territory of China to the Tesco agreement. Given the current weak retail environment, it is unclear when or if Tesco will start selling Cherokee branded products in certain Asian territories, including Malaysia, South Korea, Thailand, and China. The term of the Tesco agreement expires on January 31, 2011, and Tesco has several options to extend this term. Royalty revenues from Tesco totaled $15.2 million in Fiscal 2009, $17.1 million in Fiscal 2008, and $13.9 million in Fiscal 2007, which accounted for 42%, 41%, and 18% (32% if excluding the $33.0 million from the termination of our Mossimo Finder's Agreement) respectively, of our consolidated revenues during such periods. The termination of our license agreement with Tesco would have a material adverse effect on our business (See Item 1A, "Risk Factors").
On August 22, 1997, we entered into a retail direct license agreement with Zellers Inc., a Canadian retailer that is a division of Hudson's Bay Company. Zellers was granted the exclusive right in Canada to use the Cherokee brand and related trademarks in connection with a broad range of categories of merchandise. In Fiscal 2007, Zellers renewed their agreement for an additional five year period, beginning February 1, 2007 and continuing through January 31, 2012, and certain of the terms were changed to Canadian Dollars. Under the terms of the renewed agreement, Zellers agreed to pay us a minimum guaranteed royalty of CDN $1.5 million per year (equivalent to approximately US$1.2 million at January 31, 2009) over the new five-year term. Zellers has the option to renew this agreement for two additional five year terms beyond the most recent renewal. Royalty revenues from Zellers totaled $1.5 million in Fiscal 2009, $2.9 million in Fiscal 2008, and $3.7 million in Fiscal 2007.
On January 1, 2007, we entered into a retail direct license agreement with the Mexican retailer, Comercial Mexicana. Royalty revenues from Comercial Mexicana totaled $1.0 million for Fiscal 2009, and $0.9 million for Fiscal 2008. The initial term of the contract with Comercial Mexicana was recently extended for an additional year, and now expires on December 31, 2013. Comercial Mexicana also has the option to renew this agreement for additional terms.
In March 2008, we announced an exclusive international license agreement with Grupo Eroski for the Cherokee brand for the country of Spain. This first term of this contract continues through January 31, 2012, with possible renewal terms thereafter. We expect to continue to solicit additional licensees for the Cherokee brand in Asia, Europe and South America, subject to the rights of Tesco and our other licensees under their respective agreements.
At January 31, 2009, we had two ongoing licensing agreements for our Sideout brand, which does not include our licensing agreement with Mervyn's, which is in the process of liquidating. One of these is a wholesale licensing agreement for footwear worldwide; and the other is an international wholesale and retail licensing agreement for the Sideout brand in China (see Bolderway below). Licensing revenues from our Sideout brand totaled $0.5 million for Fiscal 2009, and $1.0 million for Fiscal 2008, which represented 1.5% and 2.5% of our total royalty revenues.
During Fiscal 2009 our former U.S. licensee for the Sideout brand, Mervyn's, filed for bankruptcy protection and then subsequently announced its intention to liquidate its operations. We have filed a claim for past royalties due in the Mervyn's bankruptcy proceedings, and expect to receive a partial recovery of this claim sometime during fiscal 2010. We are currently in the process of re-marketing our Sideout brand to other potential licensees for the U.S. market. Licensing revenues from our agreement with Mervyns totaled $355,000 in Fiscal 2009, $904,000 in Fiscal 2008 and $1.6 million in Fiscal 2007.
In December 2002, we entered into an international licensing agreement with Shanghai Bolderway, Fashion Inc., a division of Guangdong Bolderway Trading Development Co., Ltd. ("Bolderway"). This multi-year agreement includes various product categories such as men's, boy's and women's apparel and footwear for the Sideout brand. These products launched in China in fiscal 2005, and since that time we have only received the minimum guaranteed payments from this contract. Licensing revenues from our agreement with Bolderway totaled $127,000 in Fiscal 2009, $81,000 in Fiscal 2008 and $57,000 in Fiscal 2007.
Carole Little Brands
At January 31, 2009, we had one ongoing retail direct licensing agreement with TJX Companies for our Carole Little brands (Carole Little, CLII and Saint Tropez-West) for the United States and certain other countries. Licensing revenues from our Carole Little brands totaled $0.75 million in Fiscal 2009, which represented 2.1% of our total royalty revenues. During Fiscal 2008 we acquired the 45% share of the Carole Little royalties from Studio CL for a total of $4.0 million, comprised of $1.25 million in cash and $2.75 million in shares of Cherokee common stock.
Since December 2002, we have had an exclusive retail direct licensing agreement with TJX Companies. This contract is in its second five-year term, which continues through January 31, 2013, and provides TJX with the option at the expiration of the second term of the agreement to either renew the agreement for an additional five year term or buy the trademarks covered by the agreement from us pursuant to an agreed-upon formula. This contract contains annual minimum guaranteed royalties, similar to our other licensing agreements. We received royalty revenues from TJX of $0.75 million in Fiscal 2009, $1.33 million in Fiscal 2008, and $1.28 million in Fiscal 2007.
Brand Representation Businesses
In addition to acquiring brands and licensing our own brands, we assist other companies in identifying licensees for their brands. Generally, in representing brands, we perform a range of services including marketing of brands, solicitation of licensees, contract negotiations and administration and maintenance of license or distribution agreements. In return for our services, we normally receive a certain percentage of the net royalties generated by the brands we represent and sign to a license agreement. We typically work on several select brand representation opportunities during each fiscal year.
During fiscal 2001, we assisted Mossimo in locating Target as a licensee of the Mossimo brand and entered into a finder's agreement with Mossimo, which provided that we would receive a fixed percentage of all monies paid to Mossimo by Target (the "Mossimo Finders Agreement"). During the fourth quarter of Fiscal 2007, we terminated the Mossimo Finders Agreement in exchange for payment of a termination fee of $33.0 million (plus $900,000 in back royalties due to the Company from Mossimo for the first quarter of Fiscal 2007) in accordance with the terms of the Termination and Settlement Agreement (the "Termination Agreement") between the Company and Iconix Brand Group, Inc. ("Iconix") entered into as of April 27, 2006 in connection with Iconix's acquisition of Mossimo.
As a result of the sale and termination of the Mossimo Finders Agreement in the fourth quarter of Fiscal 2007, we reported $36.8 million in fiscal 2007 (which included the $33.0 million payment), as compared to just $0.4 million of brand representation royalties in Fiscal 2008 and $0.7 million of brand representation royalties in Fiscal 2009.
During Fiscal 2008 we assisted Norma Kamali in locating Wal-Mart as a global licensee of the Norma Kamali brand, and during the latter part of Fiscal 2009 Wal-Mart began offering Norma Kamali apparel in a select number of its stores. During Fiscal 2009 we reported $0.5 million of royalties from our agreement with Norma Kamali, and currently expect that in Fiscal 2010 our royalties will exceed those of Fiscal 2009.
Domestic Licensing Royalties
During Fiscal 2009, we received a total of $17.0 million in aggregate royalties from our United States retail direct license agreements and brand representation contracts, which accounted for 47% of our consolidated revenues during such period.
International Licensing Royalties
During Fiscal 2009, we received $19.2 million in aggregate royalties from our international license agreements, which accounted for 53% of our consolidated revenues during such period.
We hold various trademarks including Cherokee®, Sideout®, Sideout Sport®, Carole Little®, CL II®, Saint Tropez-West®, Chorus Line®, All That Jazz®, Molly Malloy® and others, in connection with numerous categories of apparel and other goods. These trademarks are registered with the United States Patent and Trademark Office and in a number of other countries. We also hold trademark applications for Cherokee, Sideout and Sideout Sport, Carole Little, CLII, Saint Tropez-West, Chorus Line, All That Jazz and Molly Malloy in numerous countries. We monitor on an ongoing basis unauthorized uses of our trademarks, and we rely primarily upon a combination of trademark, know-how, trade secrets, and contractual restrictions to protect our intellectual property rights both domestically and internationally.