Dabqs

Despite Risks, Cherokee Has the Right Business Model

Steve,
I also considered the concentration of revenues at Target and Tesco a risk for Cherokee, Inc.. As I thought about it, and then spoke with management to understand the business better, I have come to the conclusion that the risk is far less than I had worried about, given that, for example, the agreement with Target precludes the company from establishing a similar agreement with WalMart (brands sold exclusively through Target), however, the agreement with Target and Tesco-- should they not be renewed, allow for Cherokee to immediately establish a new agreement with any other retailer, including, obviously, retailers which compete directly with Target and Tesco. Now, imagine that you are Target, and you have had the Cherokee brands in your stores for years and years, and your customers have come to expect that these brands will be available when they shop your stores. Should these brands not be available due to an end of the Cherokee/Target relationship, how quickly do you think WalMart or another direct competitor to Target would be to establish a new agreement with Cherokee to offer the Cherokee brands which Target's customers have come to expect?

When it comes to something as personal as clothing/apparel, shoppers become very loyal to brands. Should Target end the relationship with Cherokee, Target would likely lose a substantial amount of sales which would follow the brands to a major competitor. And in the ultra competitive retail business, taking such a risk is very unlikely, and would amount to a poor business decision.

In addition, buying Cherokee stock on a pullback where, for example, the dividend yield would be approximately 15% per annum, provides one heck of a cushion--as at 15% per annum, the entire purchase price of the stock is returned to the investor in just under 5 years.

Dabqs